Question

A firm has $1.5 million in sales, a Lerner index of 0.57, and a marginal cost of $50, and
competes against 800 other firms in its relevant market. (LO1)
a. What price does this firm charge its customers?
b. By what factor does this firm mark up its price over marginal cost?
c. Do you think this firm enjoys much market power? Explain.

Answer 1

(A). Lerner index = (price - marginal cost)/price

==> 0.57 = (price - 50)/ price

==> 0.57 * price = price - 50

==> 0.43 * price = 50

==> Price = $116.28

So, the firm charges $116.28 to its customers

(B). The mark-up factor = [1 / (1 - L)]

                                      = [1 / (1 - 0.57)]

                              = [ 1 / 0.43 ]

                              = 2.3256

(C).The firm enjoys market power . Because the Price is above MC by 2.3256. Price should equal to MC.