Question

1) The Herfindahl index Suppose that three firms make up the entire tire manufacturing industry. One has a 50% market share, and the other two have a 25% market share each.

The Herfindahl index of this industry is _________.

2) Tread Tough, one of the firms with a 25% market share in the tire manufacturing industry, leaves the market.

This would cause the Herfindahl index for the industry to _________.

3) The largest possible value of the Herfindahl index is 10,000 because:


a) An index of 10,000 corresponds to 100 firms with a 1% market share each.

b) An industry with an index higher than 10,000 is automatically regulated by the Justice Department.

c) An index of 10,000 corresponds to a monopoly firm with a 100% market share.

Answer 1

0.375 = 37% = 3700

Increases

c) An index of 10000 corresponds to a monopoly firm with 100% market share

Step-by-step explanation:

The HHI index is found by summimg the square of the concentration ratios of firms

(0.5) ^2 + (0.25)^2 + (0.25)^2 = 0.25 + 0.0625 + 0.0625 = 0.375 = 37% = 3700

If a firm leaves the industry, the hhi index increases because the market power would exist between only two firms.

If HHI is equal to 10,000, it means that the firm is a monopoly. It means the firm has 100% of the market share.

I hope my answer helps you