Enter the market price of the product and the marginal cost of production into the calculator to determine the Lerner Index. This calculator can also evaluate any of the variables given the others are known.
Lerner Index Formula
The following formula is used to calculate the Lerner Index.
LI = (P - MC) / P
Variables:
- LI is the Lerner Index
- P is the market price of the product ($)
- MC is the marginal cost of production ($)
To calculate the Lerner Index, subtract the marginal cost of production from the market price of the product. Then, divide the result by the market price of the product. The Lerner Index measures the market power of a firm. A higher value indicates greater market power.
What is a Lerner Index?
The Lerner Index is an economic measure used to determine a firm’s level of market power. It is calculated by subtracting the marginal cost of production from the market price and then dividing by the market price. The resulting value ranges from 0 to 1, with 0 indicating perfect competition and 1 indicating a monopoly. A higher Lerner Index suggests that a firm has more market power and can set prices above marginal cost, thus earning higher profits.
How to Calculate the Lerner Index?
The following steps outline how to calculate the Lerner Index.
- First, determine the market price of the product ($), denoted as P.
- Next, determine the marginal cost of production ($), denoted as MC.
- Next, use the formula LI = (P – MC) / P to calculate the Lerner Index.
- Finally, calculate the Lerner Index.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Market price of the product ($), P = 50
Marginal cost of production ($), MC = 30
