Which of the following values of the Lerner Index indicates the greatest amount ofmarket power?

A. 0.313.

B. 0.625.

C. 0.375.

D. 0.6.

B. 0.625

Explanation:

Lerner index: The price-setting power or market power of the monopolist

Faced with a negative slope demand curve, the monopolist has the power to determine the selling price MR = MC (marginal revenue = above marginal cost). However, there is a limit. For example, in the case of substitutes of goods or perishable goods such as flowers and perishable consumer goods, monopoly strength may be reduced. The price determination power of the monopolist is measured by the ″ Lerner Index ... The index can be derived from the equilibrium conditions of the monopolist.

This index was found with MR = MC equation.

Index is calculated with the formula of L = P-MC / P

P-MC / P is called the → Lerner index.

The index takes values between zero and one. (0≤Le≤1)

If the coefficient is found to be zero, there is no power to set monopolistic prices. In other words, full competition conditions apply.

If the coefficient is found to be 1, the price-setting power for the monopolist is complete. So there is a monopoly. As seen in the Lerner formula, there is an inverse relationship between monopoly power and price elasticity of demand. As demand price increases, monopoly strength decreases. When flexibility is infinite, monopoly power is zero. P = MC, ie perfect competition conditions apply.

That's why in order to determine the greatest amount of market power, we need to take the amount which is nearest to 1 and this is 0.625