If Bank 1 is acquired by Bank 2, what is the impact on the market's HHI? $$\begin{array} { | c | r | }
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
A)An increase in the HHI of 1600.
B)An increase in the HHI of 625.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.

Question

If Bank 1 is acquired by Bank 2, what is the impact on the market's HHI? $$\begin{array} { | c | r | } 
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
A)An increase in the HHI of 1600.
B)An increase in the HHI of 625.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.

Quizplus · Accepted Answer

The HHI is calculated as the sum of the squares of the market shares of all firms. Before the merger, the market shares are 10%, 20%, and 50%. After the merger, Bank 2's market share becomes 30%. The change in HHI is calculated as (30^2 + 50^2) - (10^2 + 20^2 + 50^2) = 625.

If Bank 1 Is Acquired by Bank 2, What Is