According to one estimate, the parts for a Segway Human Transporter—which has five gyroscopes, two tilt sensors, dual redundant motors, ten microprocessors, and can travel up to 12.5 mph—cost at least $1,500 (Eric A. Taub, “Segway Transporter Slow to Catch On,” San Francisco Chronicle, August 11, 2003, E4). Suppose that Segway’s marginal cost is $2,000. Given that the Segway’s price is $5,000, calculate the firm’s price/marginal cost ratio, its Lerner Index, and the elasticity of demand it believes it faces (assuming that it is trying to maximize its short-run profit).
The price/marginal cost ratio is 5000/2000 = 2.5. The Lerner index is (5000 − 2000)/5000 = 0.6. Hence, Segway believes it faces a demand elasticity of −1.67.