Question

Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. Instructions: Enter your answers as whole numbers.
a. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers in your area?

b. In that same situation, what would the four-firm concentration ratio be?

Answer 1

Answer:

1.  Herfindahl index = 400

2. 40%

Explanation:

1. Remember, the Herfindahl index is an index used to determine the level of market concentration in an industry. Assuming the total car dealer firms are four in number, we can derive the largest value that the Herfindahl index could possibly take for car dealers in the area using the formula:

$HHH=S1^{2} + S2^{2} + S3^{2} + S4^{2} +... Sn^{2}$

Thus, the HHH =  $10^{2} + 10^{2}+ 10^{2} +10^{2} = 400$

2. The four-firm concentration ratio is calculated by summing the individual market share percentage; 10% + 10% + 10% + 10% = 40%