We defined the Lerner Index as LI = 1/μ where μ is the absolute value of the elasticity of demand. We also showed that LI can be alternatively expressed as (P − MC)/P. Use these relationships to show...

We defined the Lerner Index as LI = 1/μ where μ is the absolute value of the elasticity of demand. We also showed that LI can be alternatively expressed as (P − MC)/P. Use these relationships to show that LI can never exceed 1. What does this imply is the minimum demand elasticity we should ever observe for a monopolist?

Q11:

Let the cost function be C = 100 + 4q + 4q². Derive an expression for average cost. Derive an expression for marginal cost. Is there any range of production characterized by scale economies? At what production level are scale economies exhausted?

Q12:

An urban rapid-transit line runs crowded trains (200 passengers per car) at rush hours, but nearly empty trains (10 passengers per car) at off-peak hours. A management consultant argues that the cost of running a car for one trip on this line is about $50 regardless of the number of passengers. Hence, the consultant concludes that the per passenger cost is about 25 cents at rush hour but rises to $5 in off-peak hours. Consequently, the consultant advises that it would be better to discourage the off-peak business. Is the consultant a good economist? Why or why not?

Q13:

Consider the following cost relationships for a single-product firm:

a. Derive average and marginal cost for all integer outputs less than or equal to 7.

b. What are the average and marginal cost for all outputs above 7?