4. The larger firms in an industry have market shares of 20%, 10%, 5%, 18%, 8% and 12%. The largest firm has now acquired the smallest of these firms. What is the four-firm concentration ratio after this acquisition
Answer: A
The four-firm concentration ratio after the acquisition is 72.
After the largest firm acquires the smallest firm, we need to sum the market shares of the four largest firms. The new largest firm will now have a market share of 20% (its original) plus 5% (the smallest firm's share), resulting in 25%. Adding the shares of the next three largest firms (10%, 18%, and 12%) gives us a total of 72%.
A) 72
This option is correct because it reflects the new total market share of the four largest firms after the acquisition. The calculation is as follows: 25% (largest firm after acquisition) + 20% (second largest) + 18% (third largest) + 12% (fourth largest) = 72%.
B) 68
This option is incorrect as it underestimates the total concentration ratio. It does not account for the additional market share gained by the largest firm after acquiring the smallest firm, which leads to a higher concentration ratio than 68.
C) 65
This option is also incorrect because it similarly fails to account for the correct aggregation of market shares after the acquisition. The concentration ratio should reflect the new market shares accurately, and 65 is less than the actual total of 72.
D) 60
This option is incorrect as it significantly underrepresents the concentration ratio. The calculations show that the four-firm concentration ratio is much higher than 60, given the largest firm's acquisition of additional market share.
Conclusion
The four-firm concentration ratio is definitively 72 as it accurately reflects the new market dynamics after the acquisition. All other options fail to consider the increased market share of the largest firm, leading to a lower concentration ratio than what is actually calculated. Thus, option A is the only correct and logical choice based on the given market shares.