Suppose a firm's inverse demand curve is P = 150

Question

Suppose a firm's inverse demand curve is P = 150 - 5Q, its Lerner index is 0.875 at the profit-maximizing quantity, and its marginal cost is constant at $10. The profit-maximizing price is $____.

Quizplus · Accepted Answer

The Lerner Index is defined as (P - MC) / P, where P is the price and MC is the marginal cost. Given the Lerner Index is 0.875 and the marginal cost (MC) is $10, we can set up the equation 0.875 = (P - 10) / P. Solving for P gives us P = 80, which is the profit-maximizing price.