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