In 2009, the price of Amazon's Kindle 2 was $430 in today's dollars, while iSuppli estimated that its marginal cost was $191 in today's dollars.

a. What was Amazon's price/marginal cost ratio?

b. What was Amazon's Lerner index?

c. What price elasticity of demand did it face if it was engaging in short-run profit maximization?

Solutions

Expert Solution

We have the following information

Price (P) = $430

Marginal cost (MC) = $191

Part a) Price-Marginal Cost ratio = 430/191 = 2.25

Part b) Lerner Index = (P – MC)/P

Lerner Index = (430 – 191)/191

Lerner Index = 239/191

Lerner Index = 1.25

Part c) Lerner Index = (P – MC)/P = – 1/Ed

Ed = Elasticity of demand

(430 – 191)/191 = – 1/Ed

239/191 = – 1/Ed

1.25 = – 1/Ed

Elasticity of Demand = – 0.8

Rahul Sunny answered 1 year ago

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