Exercise 2: Pricing with the Lerner Index Consider a market with demand given by Q = 30p-2 . A firm has a constant MC = 5 with no fixed costs. Use the Lerner Index rule to answer the following questions. (Hint: Use the index! Do not try to solve the problem brute force. Using the index is much easier and the point of this exercise is to help you understand it) a) (10 points) Suppose the government grants this firm an exclusive monopoly in this market. Find the price- cost margin (the mark-up) and the profit maximizing price. Econ 4631-Industrial Organization HW 1 b) (10 points) Suppose that, in addition to the firm's output, the government also produces Qc = 5p-2, where p is the price charged by the firm. Obtain the firm's residual demand (very easy) and show that the presence of the government in the market does not change neither the market price nor the market quantity. How is the market split between the firm and the government (what is the market share of each one)