The market demand for another product you are considering selling is Q(p) = 100 ? (1)p and as the 2
only producer of this product your production costs would be C(Q) = 40Q.
(a) Given these market characteristics, what is the Lerner Index equal to (as a function of quantity)?
b) Solve for the profit maximizing quantity and profits. Show your work.
c) Given the optimal quantity in part (b) and the general form of the Lerner Index in part (a), what is the actual Lerner Index?
d) What is the market price elasticity of demand at the optimal quantity?
e) You learn of a second firm wishing to enter this market. If you were to perfectly collude with this new firm, what would be your profits?