Suppose that econometricians at Hallmark Cards determine that the price elasticity of demand for greeting cards is - 2.
a. If Hallmark's marginal cost of producing cards is constant and equal to $1.00, use the Lerner index to determine what price Hallmark should charge to maximize profit.
b. Suppose that Hallmark Cards wishes to know the price elasticity of demand faced by its archrival, American Greetings. Hallmark hires you to estimate it. Hallmark provides you with an educated guess concerning the marginal cost of producing a greeting card, which they estimate to be constant and equal to $1.22. A quick trip to the store tells you that American Greetings is selling its cards for an average of $3.25. Using these numbers and assuming that American Greetings is maximizing its profit, calculate the price elasticity of demand faced by American Greetings.