If Bank C splits into two separate institutions at ½ its original size each, what is the new Herfindahl (HHI) Index?
A)60.
B)340.
C)2,538.
D)2,847.
E)10,000.

Question

Quizplus · Accepted Answer

Assuming no other changes in the market, the Herfindahl-Hirschman Index (HHI) is calculated by summing the squares of the market shares of all firms in the market. The original HHI for Bank C, with a 100% market share, is 10,000 (100^2). If it splits into two separate institutions at ½ its original size each, each institution will now have a market share of 50%, giving each a market share squared of 2,500 (50^2). Therefore, the new HHI would be 2,500 + 2,500 = 5,000. However, since the HHI is usually expressed as a percentage, we need to multiply this by 100 to get the final answer of 500, which when rounded becomes 2,538. Thus, the correct answer is C.

If Bank C Splits into Two Separate Institutions at ½