The following three FIs dominate a local market and their total assets are given below.
$\begin{array}{lccc}
\text {Institution }& \text { Asset Size}\
\text {Bank A}&\$ 50 \text { million}\
\text {Bank B}& \$ 60 \text { million}\
\text {Bank C}&\$ 90 \text { million}\
\end{array}$
If Bank A acquires Bank B,what is the new Herfindahl-Hirschman Index (HHI)?
A)60.
B)100.
C)5,800.
D)5,050.

Question

The following three FIs dominate a local market and their total assets are given below. 
$\begin{array}{lccc}
  \text {Institution  }&  \text { Asset Size}\
  \text {Bank A}&\$ 50    \text { million}\
  \text {Bank B}& \$ 60   \text { million}\
  \text {Bank  C}&\$ 90  \text {  million}\
\end{array}$
 If Bank A acquires Bank B,what is the new Herfindahl-Hirschman Index (HHI)?
A)60.
B)100.
C)5,800.
D)5,050.

Quizplus · Accepted Answer

The HHI is calculated by squaring the market share of each firm and summing the results. After the acquisition, Bank A and Bank B become one entity with assets of $110 million. The market shares are: Bank A+B: 110/200 = 0.55, Bank C: 90/200 = 0.45. HHI = (0.55^2 + 0.45^2) * 10,000 = 5,050.

The Following Three FIs Dominate a Local Market and Their