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 C,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 C,what is the new Herfindahl-Hirschman Index (HHI)?
A)60.
B)100.
C)5,800.
D)5,050.

Quizplus · Accepted Answer

The initial HHI is calculated as follows:

HHI = 50^2 + 60^2 + 90^2
    = 4900

If Bank A acquires Bank C, their combined asset size will be $50 + $60 + $90 = $200 million. Therefore, the new HHI is calculated as follows:

HHI = (50 + 60)^2 + 0^2
    = 5000

Therefore, the new HHI is $5000, which is higher than the initial HHI of $4900. This implies that the market concentration has increased further with the acquisition of Bank C by Bank A. The correct answer is choice C.

The Following Three FIs Dominate a Local Market and Their