An industry is made up of five firms.Three of the firms make up 20% of the total market sales, one firm makes up 25% of the total market sales, and the remaining firm makes up 15% of the total market sales.What is the HHI for this industry?

Question

Quizplus · Accepted Answer

We can use the Herfindahl-Hirschman Index (HHI) formula to calculate HHI for this industry: 
HHI = sum of (market share of each firm)^2 
HHI = (0.2)^2 + (0.2)^2 + (0.2)^2 + (0.25)^2 + (0.15)^2 
HHI = 0.04 + 0.04 + 0.04 + 0.0625 + 0.0225 
HHI = 0.1925 
HHI is measured on a scale from 0 to 10,000, so we need to multiply this result by 10,000 to get the final answer. 
HHI = 0.1925 x 10,000 
HHI = 1,925 
Therefore, the best choice is C, 2,050, as it is the closest to our calculated result.

An Industry Is Made Up of Five Firms