DVDs can be produced at a constant marginal cost, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. If the Lerner indices for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5, what is the constant marginal cost of producing both DVDs?

Question

Quizplus · Accepted Answer

The Lerner index measures the degree to which a firm can mark up its price over marginal cost. It is calculated as (P - MC) / P, where P is the price and MC is the marginal cost.

We are given that the Lerner index for Rambeau 17 is half of the Lerner index for Schreck 10:

(P_R - MC) / P_R = 0.5 * (P_S - MC) / P_S

Simplifying, we get:

(1 - MC/P_R) = 0.5 * (1 - MC/P_S)

Substituting the given prices, we get:

(1 - MC/20) = 0.5 * (1 - MC/30)

Solving for MC, we get:

MC = $15

Therefore, the constant marginal cost of producing both DVDs is $15.

DVDs Can Be Produced at a Constant Marginal Cost, and Roaring