Question

If a firm has a Lerner index equal to 0.6, what is the firm's mark-up factor?

1) 0.4
2) 0.6
3) 1.4
4) 1.6

Answer 1

The firm's mark-up factor is 0.6.

Step-by-step explanation:

The Lerner index measures the market power of a firm and is calculated as the difference between the price and the marginal cost of production, divided by the price. The formula for the Lerner index is:

L = (P - MC) / P

Given that the Lerner index is 0.6, we can substitute this value into the formula:

0.6 = (P - MC) / P

Rearranging the equation to solve for the mark-up factor (P - MC) / P, we get:

(P - MC) / P = 0.6

Since the mark-up factor is equal to (P - MC) / P, it is equal to 0.6.

Therefore, the firm's mark-up factor is 0.6, which corresponds to option 2).