Magic Cigarette Company produces packs of cigarettes at a marginal cost of $2 per pack.If they currently sell their product at $5 per pack,what is the value of the Lerner index of monopoly power?

Question

Quizplus · Accepted Answer

The Lerner index is calculated as (P-MC)/P, where P is the price and MC is the marginal cost. Therefore, the Lerner index for Magic Cigarette Company is (5-2)/5 = 0.6. This means that they have some degree of monopoly power as they can charge a price above their marginal cost.

Magic Cigarette Company Produces Packs of Cigarettes at a Marginal