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Author Question: For profit-maximizing monopolies, explain why the boundaries on the Lerner Index are 0 and 1. ... (Read 61 times)

yoooooman

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on: Jul 1, 2018
For profit-maximizing monopolies, explain why the boundaries on the Lerner Index are 0 and 1.
 
  What will be an ideal response?

Question 2

Explain why shutting down and going out-of-business are different concepts.
 
  What will be an ideal response?
Microeconomics ¦ Perloff ¦ 8th Edition
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SAUXC

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Reply #1 on: Jul 1, 2018
Answer to Question 1

The Lerner Index equals (p - MC)/p. Because marginal cost is greater than or equal to zero and the optimal price is greater than or equal to the marginal cost, then 0  p - MC  p. So, the Lerner Index ranges from 0 to 1 for a profit-maximizing firm. As price gets higher, the Lerner Index approaches 1. As price gets lower, the index approaches zero.

Answer to Question 2

Shutting down means that the firm seizes production with the option of starting up production any time in the future. Going out-of-business is equal to exiting the industry. This involves reducing the amount of (the fixed input) capital to zero, which is not possible in the short run.


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