Question

Part 1 Lerner Index: -0.147 Part 2 Lerner Index: 0.40 1. Compare the Lerner index values...

Part 1 Lerner Index: -0.147

Part 2 Lerner Index: 0.40

1. Compare the Lerner index values from parts 1 and 2. In your opinion, which method is more accurate? Why?

2. Interpret the Lerner index you chose in question 1. What percentage of the supermarket's price is their profit margin?

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Answer #1

Lerner index measures the competitiveness in the market. For a value of close to zero there is very close competition and for a value close to one there is very limited competition. The value of lerner index lies between 0 and 1. The correct choice is part 2 where lerner index is 0.40

The lerner index of 0.40 indicates that there is close competition but companies have market power as the index value is not close to zero but close to 0.5.

Profit margin is 40% because lerner index is given by (P-MC)/P and therefore the Supermarket is able to earn 40% of its price.

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