Difficulty: Easy

Average Score: 100%

Which Herfindahl-Hirschman Index (HHI) and concentration score reflects an industry composed of four firms, each with 25% of the market

Rationale

HHI of 2,500 and concentration ratio of 100.

In an industry with four firms, each holding 25% of the market share, the Herfindahl-Hirschman Index (HHI) is calculated by squaring the market shares of all firms and summing them, resulting in an HHI of 2,500. The concentration ratio, which measures the total market share held by the largest firms, totals 100% in this case.

A (HHI of 100 and concentration ratio of 100) YOUR ANSWER

This choice incorrectly states the HHI value. The HHI is a measure of market concentration calculated by squaring the market shares of each firm; thus, with four firms each at 25%, the HHI would be 2,500, not 100. The concentration ratio is correctly stated as 100, but the HHI is not accurate.

B (HHI of 2,500 and concentration ratio of 100) CORRECT

This choice correctly reflects the calculations for both the HHI and concentration ratio. With four firms each holding a 25% market share, the HHI is 25² + 25² + 25² + 25² = 2,500, and the concentration ratio, which is the total market share of the top firms, is 100%.

C (HHI of 100 and concentration ratio of 25) YOUR ANSWER

This choice inaccurately presents both the HHI and concentration ratio. The HHI of 100 suggests a much lower concentration, which does not apply to this scenario where each firm has a significant market share. Additionally, a concentration ratio of 25% is incorrect as it does not account for the total of the four firms’ market shares.

D (HHI of 2,500 and concentration ratio of 25) YOUR ANSWER

While this option correctly states the HHI as 2,500, it incorrectly presents the concentration ratio. The concentration ratio should reflect the total market share of the firms involved, which is 100%, not 25%. Hence, this choice contains an error despite the correct HHI.

Conclusion

The Herfindahl-Hirschman Index is a crucial measure of market concentration, and in this case, with four firms each possessing 25% of the market, the HHI accurately calculates to 2,500, indicating a highly concentrated market. The concentration ratio also correctly sums to 100%, emphasizing that all market share is accounted for. Thus, choice B encapsulates the correct values for both measures.

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