Final answer:
The Lerner Index of 0.8 indicates the firm's price is 80% above marginal cost and the calculated markup factor is 5, meaning the firm prices its good at five times the marginal cost.
Step-by-step explanation:
The Lerner Index is a measure of a firm's market power based on its ability to set prices above marginal costs. A Lerner Index of 0.8 suggests that the firm's price is 80% above its marginal cost. The markup factor is the ratio of the price to the marginal cost (P/MC), and it can be calculated from the Lerner Index using the formula:
Markup Factor = 1 / (1 - Lerner Index)
So with a Lerner Index of 0.8, the markup factor would be:
Markup Factor = 1 / (1 - 0.8) = 1 / 0.2 = 5
Thus, the firm's markup factor is 5, meaning the price is set at five times its marginal cost.