A market is composed of three firms. If the bigger two firms' market shares are 45 and 30 percent, what is the Herfindahl index for the industry?
A) 3,000
B) 3,550
C) 5,200
D) 6,250

Question

Quizplus · Accepted Answer

The Herfindahl index is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For the given market, the shares are 45%, 30%, and 25% (since the total must sum to 100%). Squaring these and summing gives: $45^2 + 30^2 + 25^2 = 2025 + 900 + 625 = 3550$.

A Market Is Composed of Three Firms