Question

A firm has a marginal cost of $20 and charges a price of $40. The Lerner index for this firm is:________.

A. 0.20. B. 0.50. C. 0.33. D. 0.75.

Answer 1

The correct answer is:

0.50 (B)

Step-by-step explanation:

The Lerner index is used by monopolists to measure market/monopolist power, and it is defined as the percent markup of price over marginal cost.

It is given by the formula:

`L = (P - MC)/(P)\\where:\\L = Lerner\ index\\P = price = \$40\\MC = marginal\ cost = \$20\\\\L = (40\ -\ 20)/(40) \\L = (20)/(40)\\ L = 0.5`

Note: in a perfectly competitive market, L = 0, which makes Price = Marginal cost in the equation above. But in a competitive market, it is always the case that L ≥ 0