Question

g efg manufacturing has a product that sells for $15 per unit, and the marginal cost is $5.00. a. compute the lerner index for efg manufacturing. b. if this index indicates market power, under what condition(s) will this market power last in the long-run

Answer 1

Answer:

(a) 0.667 (b) The Lerner index helps in estimating of the market power of a firm. it measures the percentage markup that a firm is able to charge.

The conditions where this market power last in the long-run are; the pricing power, Factor mobility, Barrier to entry or exist.

Explanation:

Solution

Given that:

(A) The Lerner index is computed below:

Lerner index = (P-MC)/P

Thus,

($15-$5.00)/$15

=10/15

= 0.667

(B) The Lerner index assist in measuring of the market power of a firm. it measures the percentage markup that a firm is able to charge.

Index spans from a low value (0) to a higher value of (1)

When a firm has a higher value of index, it is able to charge over it;s marginal cost and thus has a greater monopoly power

Other conditions where market power last in the long run is as follows:

• The pricing power
• Factor mobility
• Barrier to entry or exist