The Lerner Index is

Question

The Lerner Index is

BlackTom AI · Accepted Answer

When evaluating the Lerner Index, we need to recall its formal definition and what it measures in monopoly pricing. 
Option 1: 'equal to (P – MR)/P.' This expression uses marginal revenue, which is not the Lerner index. The Lerner index links price to marginal cost, not price minus MR, so this option misidentifies the underlying relationship between price, marginal revenue, and markup.
Option 2: 'a measure of product differentiation.' While product differentiation can influence market power, the Lerner index itself is a specific numeric measure of market power in pricing, defined by the gap between price and marginal cost relative to price. Saying it measures product differentiation misstates its purpose.
Option 3: 'equal to P/MC.' This would imply the price is a multiple of marginal cost directly, which ignores the deviation accounted for by the markup above marginal cost. The Lerner index is not simply a ratio of price to marginal cost; it captures the portion of price not explained by marginal cost as a fraction of price, i.e., the markup over MC divided by price.
Option 4: 'equal to (P – MC)/P.' This is the standard formula for the Lerner index: it expresses the markup of price over marginal cost as a fraction of price, reflecting the degree of market power. It increases as the gap between price and MC widens and decreases as MC approaches price, aligning with the concept of monopoly pricing power.
In summary, the other options either misuse components (like MR) or mischaracterize what the index measures (product differentiation or a simple P/MC ratio). The expression (P – MC)/P directly defines the Lerner index and captures the intended concept of pricing power in relation to marginal cost.

ECON_104B_001_25S Chapter 11 Practice Problems -- Multiple-Choice

The Lerner Index is

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