Economics · Microeconomics and Market Power
In microeconomic theory and the study of market failure, the Lerner Index is a fundamental analytical tool used to quantify the degree of monopoly power or market control exercised by a firm. It provides a formal relationship between a firm's pricing strategy and the sensitivity of consumers to price changes. Which of the following best describes the Lerner Index as a measure of monopoly power?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1It calculates the total loss triangle of consumer and producer surplus that occurs when a monopolist maximizes profit at the point where MR equals MC.
- 2It is a corrective instrument set equal to the marginal external cost to internalize the spillover effects of industrial pollution.
- 3It represents the vertical summation of individual marginal willingness-to-pay curves for goods characterized by non-rivalry and non-excludability.
- 4It measures the proportional markup of price over marginal cost, which is equal to the negative inverse of the price elasticity of demand.✓
Correct answer
It measures the proportional markup of price over marginal cost, which is equal to the negative inverse of the price elasticity of demand.
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