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3. What is the Lernerís index of market power? How do we measure it? 4. Perfect...

3. What is the Lernerís index of market power? How do we measure it?

4. Perfect competition vs. monopolistic competition:

(a) What is the difference between perfect competition and monopolistic competition?

(b) Suppose the only long-run adjustment is free entry or exit of firms. What is the difference between the short-run

equilibrium conditions faced by a perfectly competitive firm and a monopolistically competitive firm? How about

the long-run equilibrium conditions?

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Answer #1

3. Lerner's Index was given by British economist Abraham (Abba) Ptachya Lerner in 1934 to denote the market power of a firm.

Learner's Index is calculated using the following formula:

Learner's Index = (P - MC)/P

In which P is price and MC is the marginal cost of the firm. The value of the Lerner's Index ranges from 0 to 1. The higher the value of the index, the higher is the market power of the firm. A pure monopoly has absolute market power and its Learner's Index is 1. On the other hand, a perfectly competitive firm has no market power and its Learner's Index is 0.

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