Question

A firm has a marginal cost of $20 and charges a price of $40. The Lerner index for this firm is:________.

Answer 1

Answer:

The correct answer is:

0.50 (B)

Explanation:

The Lerner index is used by monopolists to measure market/monopolist power, and it is defined as the percent markup of price over marginal cost.

It is given by the formula:

$L = \frac{P - MC}{P}\\where:\\L = Lerner\ index\\P = price = \ 40\\MC = marginal\ cost = \ 20\\\\L = \frac{40\ -\ 20}{40} \\L = \frac{20}{40}\\ L = 0.5$

Note: in a perfectly competitive market, L = 0, which makes Price = Marginal cost in the equation above. But in a competitive market, it is always the case that L ≥ 0