As the ratio of price to marginal cost decreases,the Lerner index
A) stays the same.
B) increases.
C) decreases.
D) can increase or decrease depending upon the shape of the demand curve.

Question

Quizplus · Accepted Answer

The Lerner Index, which measures the degree of market power, is defined as (Price - Marginal Cost) / Price. As the ratio of price to marginal cost decreases, this indicates that price is getting closer to marginal cost, reducing the numerator in the Lerner Index formula, thus leading to a decrease in the Lerner Index.

As the Ratio of Price to Marginal Cost Decreases,the Lerner