The tobacco industry has a Lerner index of 0.76.Based on this information, compute the optimal markup factor.

Question

Quizplus · Accepted Answer

The optimal markup factor is equal to 1 over the Lerner index. Therefore, the optimal markup factor in this case is 1/0.76 = 1.32. This means that the tobacco industry prices their products at 4.17 times their marginal cost (1 + markup factor = 1 + 1.32 = 2.32; 2.32 x marginal cost = price). Therefore, the correct answer is B, as this is the closest option to 4.17 times marginal cost.

The Tobacco Industry Has a Lerner Index of 0