52. Which Herfindahl-Hirschman Index (HHI) and concentration score reflects an industry composed of four firms, each with 25% of the market
Answer: B
HHI of 2,500 and concentration ratio of 100
An industry composed of four firms, each holding 25% of the market, results in a Herfindahl-Hirschman Index (HHI) of 2,500 and a concentration ratio of 100. This reflects a highly concentrated market where the total market share of the largest firms is significant.
A) HHI of 100 and concentration ratio of 100
This option is incorrect because an HHI of 100 indicates a very low level of concentration, which does not correspond to the scenario described where four firms dominate the market with equal shares. The concentration ratio of 100 is accurate in terms of total market share but does not align with the HHI calculation.
B) HHI of 2,500 and concentration ratio of 100
This is the correct option as the HHI is calculated by squaring the market shares of each firm and summing them. With four firms each holding 25% market share, the calculation is (25^2 + 25^2 + 25^2 + 25^2) = 2,500. The concentration ratio of 100 reflects that these four firms account for the entire market.
C) HHI of 100 and concentration ratio of 25
This option is incorrect because an HHI of 100 implies a very low concentration level, which does not match the fact that there are four firms holding significant shares of the market. Additionally, a concentration ratio of 25 does not accurately reflect the market composition given that all four firms together account for 100% of the market.
D) HHI of 2,500 and concentration ratio of 25
While the HHI of 2,500 is correct, the concentration ratio of 25 is incorrect in this context. The concentration ratio should be 100 since the four firms collectively hold the entire market share of 100%. Therefore, this option does not accurately represent the market structure as described.
Conclusion
The correct answer, HHI of 2,500 and concentration ratio of 100, accurately captures the market dynamics of four firms each holding 25% of the market. Other options fail to align with the fundamental calculations of market concentration, with several providing incorrect HHI or concentration ratios that do not reflect the industry structure described.