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The Lemer Index in the paper industry is 0
The Lemer Index in the paper industry is 0.58. Based on this information, a firm charging $3.25 per ream of paper should have a marginal cost of:
A) $0
B) $1.365
C) $1.885
D) $3.25
Expert Solution
The answer is B).
The Lerner Index is computed as:
- (price - marginal cost) / price
If the price is 3.25, and the Lerner Index is 0.58, the we have:
- (3.25 - marginal cost) / 3.25 = 0..58
- marginal cost = 3.25 - 3.25 * 0.58
- marginal cost = 1.365
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