Suppose a monopolistically competitive industry has five firms; the two largest each have a 30 percent share of the market and the remaining three firms each have a 20 percent share of the market.If the two largest firms merge,the Herfindahl-Hirschman Index increases by ________ points to ________.

Question

Quizplus · Accepted Answer

To calculate the change in Herfindahl-Hirschman Index (HHI), we need to first calculate the initial HHI:

HHI = 30^2 + 30^2 + 20^2 + 20^2 + 20^2 = 2,600

After the merger of the two largest firms, their combined share will be 60%, and the HHI will be:

HHI = 60^2 + 20^2 + 20^2 + 20^2 = 4,800

The change in HHI will be the difference between the new and old HHI:

ΔHHI = 4,800 - 2,600 = 2,200

Therefore, the correct answer is C, 1,800; 4,800.

Suppose a Monopolistically Competitive Industry Has Five Firms; the Two