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. By what factor does this firm mark up its price over marginal cost? Do you think this firm enjoys much market power? Explain.

By definition, the Lerner Index = (Price - marginal cost) / price = 1 - marginal cost / price = 0.57. This implies that marginal cost / price = 1 - 0.57 = 0.43. It follows that price / marginal cost = 1 / 0.43 = 2.33. In other words, the firm marks up 1.33 times above its marginal cost.

Because the firm charges a price above its marginal cost, the firm enjoys market power.