Consider two industries, industry W and industry X. In industry W there are five companies, each with a market share of 20% of total sales. In industry X, there are six companies. One company has a 50% market share and each of the other five firms has a
market share of 10%.
a. Calculate the four-firm concentration ratio for each industry.
b. Calculate the Herfindahl-Hirschman Index (HHI) for each industry.
c. What do the values of the two concentration measures imply about the degree of market power in the two industries?
a. The concentration ratio in industry W =20% + 20% + 20% + 20% = 80%. The concentration ratio for industry X = 50% + 10% + 10% + 10% = 80%.
b. The HHI for industry W = 400 × 5 = 2,000 and the HHI for industry X = 2,500 + (100 × 5 ) = 3,000.
c. Both industries are highly concentrated. Although the concentration ratios are the same for each industry, market power is more significant in industry X. The ability to raise prices is greater in industry X.
You might also like to view...
Suppose a tax on buyers has been imposed in the graph shown. The amount of deadweight loss generated by this tax is:
A. $0.
B. $18.
C. $36.
D. $72.
If the United States decides to convert automobile factories to tank production, as it did during World War II, but finds that some auto manufacturing facilities are not well suited to tank production, then
A. The production possibilities curve between tanks and automobiles will shift outward. B. The production possibilities curve between tanks and automobiles will appear as a straight line. C. Increasing opportunity costs will occur with greater tank production. D. Decreasing opportunity costs will occur with greater automobile production.
The owner of a pizza shop observes that when she raises the price of a large pizza, her total revenue decreases, and when she lowers the price of a large pizza, her total revenue increases. This suggests that:
A. pizza lovers act irrationally. B. the demand for her large pizzas is inelastic with respect to price. C. the demand for her large pizzas is elastic with respect to price. D. there are few good substitutes for a large pizza.
Contractionary fiscal policy attempts to shift aggregate demand to the right
Indicate whether the statement is true or false