Final answer:
Activity ratios measure how effectively a company uses its assets, involving revenue in the numerator and assets in the denominator. The four-firm concentration ratio and Herfindahl-Hirschman Index are used to measure market competition by analyzing the market shares of the largest firms.
Step-by-step explanation:
The question incorrectly describes activity ratios. Activity ratios, also known as turnover ratios or efficiency ratios, are financial metrics used to assess how effectively a company is using its assets. Contrary to the definition given in the question, activity ratios do not have a measure of profit in the numerator but typically involve some measure of revenue or sales. An example of an activity ratio is the inventory turnover ratio, which uses the cost of goods sold in the numerator and average inventory in the denominator.
When discussing market competition, tools like the four-firm concentration ratio and the Herfindahl-Hirschman Index (HHI) are utilized. The four-firm concentration ratio adds up the market shares of the four largest firms within an industry to measure competition, while the HHI squares the market shares of all firms in a market and sums them up. Both ratios help to understand the level of competition and the potential presence of monopoly or oligopoly power, which can be significant for regulators and policymakers concerned with market efficiency and consumer welfare.