Attempts: Keep the Highest: /3 3. The Herfindahl-Hirschman inde Suppose that thr

ID: 1144305 • Letter: A

Question

Attempts: Keep the Highest: /3 3. The Herfindahl-Hirschman inde Suppose that three firms make up the entire bicycle manufacturing industry. One has a 60% market share, and the other two have a 20% market share each. The Herfindahl-Hirschman index of this industry is A new firm, Abe's Bikes, enters the bicycle manufacturing industry and immediately captures a 20% share of the market. This would cause the Herfidahl-Hirschman index for the industry to Why is the largest possible value of the Herfindahl-Hirschman index is 10,000 An industry with an index higher than 10,000 is automatically regulated by the Justice Department. An index of 10,000 corresponds to a monopoly firm with 100% market share. An index of 10,000 corresponds to 100 firms with a 1% market share each.

Explanation / Answer

= (60)2 +(20)2 +(20)2 = 3600+400+400 = 4400

Pricing mechanism

Quantity

Price

Profit

Long-Run decision

Profit Maximization

5000

200000

Continue to operate

Marginal- Cost pricing

16000

-160000

Shut down

Average- Cost Pricing

15000

Operate.

Under profit maximization Profit maximizing condition is MR = MC.

Under Marginal Cost Pricing firm will charge price = MC.

Under average cost pricing firm will charge price = AC.