Question

The following relates to the Lerner Index.

Which of the following statements is (are) true?

I.	Firms have less power to take advantage of consumers in a market when consumers are very price sensitive.
II.	If P = $100 and MC = $60, the Lerner index = 0.40.
III.	If the price elasticity of demand is -2.0, the Lerner index is 0.50.
IV.	A monopolist has more mark-up power if | Ed| =0.25 rather than if | Ed| =10

	A.	II and IV
	B.	I, II, III, and IV
	C.	III
	D.	I, II, and III

The inverse demand curve for a monopolist changes from

A) P = 75– 5 Q to
B) P = 50 – 5 Q

while the marginal cost of production remains unchanged at a constant $20. After the change in the demand curve, the price changes from _____ to _____ and the output changes from _____ to _____.

	A.	$45.50; $35.00; 5.5 units; 3 units
	B.	$47.50; $35.00; 5.5 units; 3 units
	C.	$47.50; $35.00; 6 units; 2.5 units
	D.	$50.50; $20.00; 1.5 units; 3.5 units

A monopolist that produces a computer software program packages has an inverse demand curve of P=150-5 Q and a marginal cost of 5 Q where P is the price per program package and Q is the number of software program package.

The firm earns a producer surplus that is ____ dollars higher as a monopolist versus if it were in a perfectly competitive market.

	A.	$225
	B.	$212.50
	C.	$187.50
	D.	$167.50

Answer 1

Q) Which of the following statements is (are) true?

Answer) I ,II , III and IV

Lerner Index = (P - MC)/P = 1/e

e - elasticity

I) is true because the more price sensitive ( more elastic ) a consumer's demand will be the tougher it will be for firms.

II) (100-40)/100 = 0.4

III) Lerner Index = 1/2 = 0.5

IV) Mark Up power is shown by Lerner index , 0.25 has igher Lerner index

Q)

Answer ) $47.5 ; $35.00 ; 5.5 units ; 3 units

MC = $20A) P = 75– 5 Q
B) P = 50 – 5 Q

A)

MR Old = 75 - 10Q

MR Old = 20

75 - 10Q = 20

Q = 5.5 (Old Quantity)

P = $47.5 (Old Price)

MR New =  50 – 10Q

MR New = 20

50 - 10Q = 20

Q = 3 (New Quantity)

P = $35 (New Price)

Q)

Answer) C) $187.5

P = 150 - 5Q

MC = 5Q

Perfect Compeitition

P = MC

150 - 5Q = 5Q

150 = 10Q

Q = 15

P = $75

Profit = producer's surplus = PQ - Cost = 1125 - 2.5Q² = 1125 - 2.5(225) = $562.5

Monopoly

MR = 150 - 10Q

MC = 5Q

MR = MC

150 - 10Q = 5Q

150 = 15Q

Q = 10

P = $100

Profit = producer's surplus = PQ - Cost = 1000 - 2.5Q² = 1000 - 2.5(10)² = $750

Monopoly profit - Perfect comepitition profit = 750 - 562.5 = $187.5