Suppose that there are two industries, A and B.There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively.There are 4-firms in industry B with equal sales of $2.5 million for each firm.The HHI for industry A is

Question

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To calculate the HHI for industry A, we need to first calculate the market share of each firm in the industry by dividing their sales by the total sales of the industry.

Total sales of industry A = $10 million
Market share of firm 1 = $5 million / $10 million = 0.5
Market share of firm 2 = $2 million / $10 million = 0.2
Market share of firm 3 = $1 million / $10 million = 0.1
Market share of firm 4 = $1 million / $10 million = 0.1
Market share of firm 5 = $1 million / $10 million = 0.1

Next, we square the market share of each firm and add them up to get the HHI for industry A.

HHI = (0.5)^2 + (0.2)^2 + (0.1)^2 + (0.1)^2 + (0.1)^2
HHI = 0.25 + 0.04 + 0.01 + 0.01 + 0.01
HHI = 0.32

Since the HHI for industry A is below 1,800, we can conclude that the industry is not concentrated. Therefore, we can rule out choices C and D. Only choice A is the best option as it correctly calculates the HHI for industry A.

Suppose That There Are Two Industries, a and B