1. What is the Lerner Index?

The Lerner Index is a measure of a firm's market power. It compares the difference between price and marginal cost to the price. The index ranges from 0 (perfect competition) to 1 (monopoly).

2. How Does the Calculator Work?

The calculator uses the Lerner Index formula:

Where:

• \( P \) — Selling price (USD)
• \( MC \) — Marginal cost to make the product (USD)
• \( LI \) — Lerner Index (decimal between 0 and 1)

Explanation: The index shows what portion of the selling price represents market power rather than production costs.

3. Importance of Lerner Index

Details: The Lerner Index helps assess market competition levels, pricing power, and efficiency. It's widely used in economics and antitrust analysis.

4. Using the Calculator

Tips: Enter the selling price and marginal cost in USD. Price must be greater than cost. The result will be a decimal between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What does a Lerner Index of 0.5 mean?
A: An index of 0.5 means half of the selling price represents market power (price is double the marginal cost).

Q2: What's a typical Lerner Index value?
A: In competitive markets, values are close to 0. In monopolies, values approach 1. Most real-world markets fall between 0.2-0.8.

Q3: How is this different from profit margin?
A: While related, profit margin considers total costs, while Lerner Index focuses specifically on marginal cost.

Q4: Can the index be negative?
A: Normally no, as price shouldn't be below marginal cost in sustainable markets. Negative values indicate data errors or temporary situations.

Q5: Why use this for children's economics?
A: The simple calculation makes it ideal for teaching basic concepts of market power and pricing.