The Lerner Index A firm has $1 Million in Sales, a Lerner Index of 065 and a marginal cost of $35 and competes against 1,000 other firms in its relevant market   a What price does the firm charge it customers? Show formula to explain how do this b By what factor does this firm mark up its price over marginal cost? c Do you thinkthis firm enjoys much market power? Explain your findings   Show how the Lerner Index is important in this problem?

a)

The Lerner Index is a positive number (L ≥ 0), increasing in the amount of market power. Economists use the Lerner Index to measure monopoly power, also called market power. The index is the percent mark-up of price over marginal cost.

Lerner index would be anywhere between 0 and 1, 0 indicating competitive market and 1 indicating absolute market power.

Lerner Index = (P – MC)/P

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

P = (1/(1-0.65)) * 35

P = 1/0.35 * 35

P = 2.857 * 35 = $100

b)

Factor = 100 /35 = 2.857

This marks up its price at factor 2.857 over marginal cost.

c) Yes, this firm enjoys market power because they are able to price their product 2.857 times that amount which it costs them to produced (MC= $35). Lerner index of 0.65 shows that there are few firms in this industry competing for the same customers