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MARKET POWER AND ELASTICITY. Market power is higher when a firm faces demand with a lower...

MARKET POWER AND ELASTICITY. Market power is higher when a firm faces demand with a lower price elasticity (Ed) and this relationship can be written as a simple formula called the Lerner Index (L).

15. [10 points] The formula for the Lerner Index (L) is

A. L = P-MC/MC

B. L=MR-MC

C. L=Ed

D. L = (1-Ed) E. None of the above

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Homework Answers

Answer #1

If we talk in simple terms then market power and elasticity is expressed in terms of Lerner index

It is the ratio of difference of price and marginal cost to the price.

Lerner index is never equal to price elasticity of demand

So option C is neglected

The value of lerner index vary from 0 to 1

It is used to measure the firms market power

Ifthe value of learner index is zero it means the firm has no market power

For example,in perfect competition its value is almost zero

It is also not the difference of marginal revenue and marginal cost

Its value is inverse of price elasticity of demand.

So the only correct answer here is option E

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