A2: If the computed Lerner Index for a firm is 0.60 while that firm\'s marginal

Question

A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215). A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215). A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215). A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215). A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215). A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215). A2: If the computed Lerner Index for a firm is 0.60 while that firm's marginal cost is $25 per unit.
What is the:
unit price? Implied markup factor What does your computations suggest about the market structure in which the firm operates? Which industry is this one most like in table 7-5 (pp. 215).

Explanation / Answer

Lerner index is given by L = P - MC / P so we have

0.60 = P - 25 / P

P = 25/0.4 = 62.50

Hence the price is 62.50

Markup is P - MC/MC = 62.50-25/25 = 1.5

The required market structure is oligopoly because the Lerner index is greater than 0.5 but not close to 1. It has market power to charge a price greater than its marginal cost.

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