An unregulated industry has a Lerner index of zero.These numbers:

Question

Quizplus · Accepted Answer

The Lerner index measures the degree of market power of a firm or an industry. A Lerner index of zero means that the price is equal to marginal cost, which is the characteristic of a perfectly competitive market where firms have no market power. Therefore, answer (C) is the best choice, which is consistent with the industry being perfectly competitive. Answer (A) is incorrect because if the industry is already perfectly competitive, there is no need to regulate the firms to improve social welfare. Answer (B) is also incorrect because monopolistic competition implies a positive Lerner index, which means that the firms have some market power to set their prices above marginal cost. Answer (D) is incorrect because regulating the firms in a perfectly competitive market will not affect social welfare since the market is already efficient.

An Unregulated Industry Has a Lerner Index of Zero