-The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal
A) 1.
B) 1/3.
C) 1.5.
D) 3.

Question

-The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal
A) 1. 
B) 1/3. 
C) 1.5. 
D) 3.

Quizplus · Accepted Answer

The Lerner Index is a measure of a firm's market power and is calculated as (P - MC) / P, where P is market price and MC is marginal cost. In the context of a monopoly maximizing profits, the firm will produce where marginal revenue (MR) equals marginal cost (MC), and then it will charge the price (P) that corresponds to this quantity on the demand curve. The slope of the demand curve (which can be inferred from the price elasticity of demand) and the difference between price and marginal cost at the profit-maximizing quantity are crucial for calculating the Lerner Index. Without specific numbers or a graph to refer to, the correct answer relies on understanding the concept. Given the options, 1/3 could be a plausible value for the Lerner Index, indicating some degree of market power but not perfect monopoly power (which would be closer to 1 or higher).

-The Above Figure Shows the Demand and Cost Curves Facing