What value does the Lerner Index take when the firm is a monopolist? 1 (23 point

Question

What value does the Lerner Index take when the firm is a monopolist?

1 (23 points) Suppose a monopolist can purchase Labor at a price w = 1 and can purchase Capital at a price r = 9, The monopolist's production function is given by Q = L1/2K1/2. The demand facing the monopolist is given by P- 78-60. c) (9 points) Ilustrate the above situation using a graph. Your graph should include the Demand Curve, eMarinal Revenue curve, the Marginal Cost curve, and you Price and Ouantity, and the Perfectly Competitive Price and Quantity. Make sure your graph is drawn neatly and accurately, and is correctly labeled

Explanation / Answer

Lerner Index = (P-MC/P)

= (42-6)/42

=0.857143

A 0.86 means that the firm is dominant and has great market power.

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