What price does this firm charge its customers?

A FIRM HAS $1.5 MILLION IN SALES, A LERNER INDEX OF 0.57, AND A MARGINAL COST OF $50, AND COMPETES AGAINST 800 OTHER FIRMS IN ITS RELEVANT MARKET.

DATA

Total Sales Revenue (TR) = $1500000

Learner Index (L) = 0.57

Marginal Cost (MC) = $50

Number of Firms in Industry= 800

WHAT PRICE DOES THIS FIRM CHARGE ITS CUSTOMERS?

P= (1/1-L)MC
=(1/1-0.57)50
Price Charged by the firm=$116.28

BY WHAT FACTOR DOES THIS FIRM MARK UP ITS PRICE OVER MARGINAL COST?

Mark-up= (1/1-L)
= (1/1-0.57)
=2.3256

Here is the mark-up factor that is being used by the firm to mark-up the price at the marginal cost

It means that the price which is being charged by the firm is 2.3256 times, which is necessary to keep the profit level.

DO YOU THINK THIS FIRM ENJOYS MUCH MARKET POWER? EXPLAIN.

Yes, in my opinion, the firm enjoys market power. The reason behind is that the mark-up factor is 2.3256 times, which is being used by the firm for its price over marginal cost, on the other hand, 800 firms are in the industry, so it is clear that there is no high price competition for the firm in the industry, so this firm enjoys market power.

The important point here for consideration is that in the situation of perfect competition if the mark-up factor is 1, it means marginal cost and price are equal for the firm. The Learner Index has a variation between 0 and 1. If the index is higher than 1, it indicates that the firm has market power. There will be no power in the case of the zero index. In short, the firm has market power as its mark-up factor is away from 1 on higher side (Samuelson).

Work Cited

Samuelson, Paul A. Economics. 19. Tata McGraw-Hill Education, 2010.