Question

A firm has $2,100,000 in sales, a Lerner index of 0.6, and a marginal cost of $45, and competes against 800 other firms in its relevant market.

Required:
a. What price does this firm charge its customers?
b. By what factor does this firm mark up its price over marginal cost?

Answer 1

Answer: See explanation

Step-by-step explanation:

A. What price does this firm charge its customers?

This will be calculated by using the formula:

P = (1 / (1 - L))MC

where,

L = Lerner index = 0.45

MC = Marginal cost = $45

P = [(1 / (1 - 0.6)] × 45

P = (1/0.4) × 45

P = 2.5 × 45

P = 112.5

B. By what factor does this firm mark up its price over marginal cost?

Mark up factor = 1 / (1 - L)

= 1 / (1 - 0.6)

= 1/0.4

= 2.5

Therefore, the charged price will be 2.5 times the marginal cost.