Question

The Firm’s price elasticity of demand = –0.80

Firm’s marginal cost: $5

Market’s price elasticity of demand = –0.60

and the Firm’s selling price of output: $25.

What is the Rothschild index and the Lerner index? It suggests the firm is what?

-- 1.33, 1.00, a monopoly

-- 0.025, 0.002, perfectly competitive

-- 0.75, 0.20, monopolistic competitive

-- 0.75, 0.80, an oligopoly

-- 0.25, 0.002, perfectly competitive

Answer 1

As we know that, Rothschild index is a measure the sensitivity to price of a product group as a whole relative to the sensitivity of the quantity demanded of a single firm to a change in its price.

R = ET / EF where ET is the elasticity of demand for the total market and EF is the elasticity of demand for the product of an individual firm.

= -0.60 / -0.80

= 0.75

Lerner index as we know is the measure of the market power of the firm. The lerner index is obtained by following formula.

Lerner index = p-mc / p

= 25-5 / 25

= 20 / 25

= 0.80.

The correct option is (c).

0.75 , 0.80 (an oligopoly).

Hope you got the answer.

Kindly comment for further explanation.

Thanks ?