Which of the following statements is (are) TRUE?
I. The Lerner index is zero for a perfectly competitive firm.
II. If P = $80 and MC = $60, the Lerner index = 0.25.
III. If the price elasticity of demand is 1.25, the Lerner index is 0.80.
IV. A higher price elasticity of demand leads to a higher price markup over marginal cost.

Question

Quizplus · Accepted Answer

The Lerner index is zero for a perfectly competitive firm (I is true). The Lerner index is calculated as (P - MC) / P, so if P = $80 and MC = $60, the index is 0.25 (II is true). If the price elasticity of demand is 1.25, the Lerner index is 1/1.25 = 0.8, which is incorrect (III is false). A higher price elasticity of demand leads to a lower price markup over marginal cost (IV is false).

Which of the Following Statements Is (Are) TRUE