Question

Suppose that the most popular car dealer in your area sells 2 percent of all vehicles.

Instructions: Enter your answers as whole numbers.



a. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl


index could possibly take for car dealers in your area?



b. In that same situation, what would the four-firm concentration ratio be?

Answer 1

a)the largest Herfindahl index possible = 200

b)the four firm concentration ratio = 8%

Explanation:

a) from the question, it follows that the largest share any dealer can have is 2% and the sum of all dealer shares must equal 100% of the market.

We therefore have a maximum number of firms to be 100%/2% = 50.

Since we now know that the maximum number of firms is 50,thus;

At a maximum concentration share of 2% for all firms, the largest Herfindahl index possible = number of firms x percentage squared for each firm = 50 x (2)² = 200

b) In the same logic above, the four firm concentration ratio = 4 x share of the market = 4 x 2% = 8%