45. Which Herfindahl-Hirschman Index (HHI) reflects an industry that is composed of 10 firms, each with 10% of the market
Answer: C
The Herfindahl-Hirschman Index (HHI) for this industry is 1,000.
The HHI is calculated by squaring the market share of each firm and summing the results. In this case, with 10 firms each holding 10% of the market, the HHI is 10 firms × (10% × 10%) = 1,000.
A) 10,000
This value would imply that there is a single firm with 100% market share, as the HHI is the sum of the squares of market shares. Since no single firm dominates this industry, 10,000 is incorrect.
B) 40
An HHI of 40 would suggest an extremely competitive market with very small market shares. Given that each of the 10 firms has a significant share of 10%, this option does not accurately reflect the market structure.
C) 1,000
This is the correct calculation of the HHI for this industry, where each of the 10 firms holds 10% of the market. The formula yields 10 × (10^2) = 1,000, indicating a moderately concentrated market.
D) 100
An HHI of 100 would suggest a much lower level of concentration, which does not fit the scenario of 10 firms each holding 10%. This option underestimates the actual concentration level present in this industry.
Conclusion
The correct answer is 1,000, as it correctly represents the concentration of the market given that there are 10 firms with equal 10% market shares. Other options either miscalculate the contributions of the firms or misrepresent the competitive dynamics of the industry. Hence, 1,000 accurately reflects the industry's structure as defined by the HHI.