Question

If there are only three firms in an industry with 50 percent, 40 percent, and 10 percent of the market share, respectively, the Herfindahl-Hirschman Index is ____.

a. 33
b. 4,200
c. 100
d. 40
e. 200

Answer 1

The Herfindahl-Hirschman Index (HHI) for an industry with firms with market shares of 50%, 40%, and 10% would be calculated by squaring each percentage and summing them up to get a total of 4200(option b.) This represents the combined market concentration of these firms.

Step-by-step explanation:

The Herfindahl-Hirschman Index (HHI) is used to measure market concentration and competition among firms within an industry. To calculate the HHI, we square the individual market shares of all the firms in the market and then sum these squared figures. Regarding the given scenario with firms holding 50 percent, 40 percent, and 10 percent market shares respectively, the calculation would be:

• (0.50² = 0.25 or 2500 when expressed as points)
• (0.40² = 0.16 or 1600 when expressed as points)
• (0.10² = 0.01 or 100 when expressed as points

Adding these up: 2500 + 1600 + 100 = 4200. Therefore, the Herfindahl-Hirschman Index for this industry is 4200, which corresponds to option b.