DEGREE OF MONOPOLY POWER

July 2016, Paper-II
Question
Which of the following measures the degree of monopoly power? Here symbols have their usual meaning.
a) AR−MR/AR
b) AR/AR−MR
c) MR/AR−MR
d) AR−MR/MR

Answer A
The Lerner index, formalized in 1934 by Abba Lerner, describes a firm’s market power.
Lerner’s index of monopoly power = P−MC/P
Since, in equilibrium, MC=MR and P=AR
Hence,
P−MC/P = AR−MR/AR