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Lerner Index

Lerner Index. We saw in Monopoly P is higher than in Comp. P > MR MR = MC is where monopoly produces. Therefore, P > MC. In Comp we saw P = MR, MR = MC is where Comp firm produces. Therefore, P = MC. . Lerner Index Li = (P – MC)/P. This is a measure of the exercise of monopoly power.

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Lerner Index

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  1. Lerner Index

  2. We saw in Monopoly P is higher than in Comp. P > MR MR = MC is where monopoly produces. Therefore, P > MC. In Comp we saw P = MR, MR = MC is where Comp firm produces. Therefore, P = MC.

  3. Lerner Index Li = (P – MC)/P. This is a measure of the exercise of monopoly power. In Comp. the Li = 0 because P = MC. For a pure single price monopoly we know it produces where MR = MC. SO, Li = (P – MC)/P = (P – MR)/P, and since P > MR the LI is < 1. Without proof we see Li = 1/(the elasticity of demand). If LI < 1, then the elasticity of demand must be > 1.

  4. Elasticity and MR P Elastic range MC Inelastic range D Q MR

  5. Since MC is always positive for a monopoly, the MC will equal the MR only in the elastic range of demand. This is the point we made two slide before. The Lerner Index = 0 in competition and is larger for Monopoly situations. The term P – MC is often called the Monopoly mark-up.

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