Question

Suppose that the most popular car dealer in your area sells 2 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

a) The most popular car dealer sells 2 of the total cars , while the other dealers sell either less or the same number of vehicles this means that the maximum percent of cars one dealer would sell is 2%.

a) Given is dealer can have maximum of 2% of the total share there would be 50 such dealers to get maximum percentage as 100.

So a 2% of each of the 50 dealers would give us the Herfindahl index as 50(2%)² ie the sum of squares of all percentages. Since the percentages taken here are equal, we have multiplied the percentage by 50 which is the number of dealers in the market.

HI= 50(4)=200

b) 4 Firm concentration ratio is given by 4*(share of top 4 firms) which is 2% for each. The maximum would be 2% for the top 4.

So 4 firm concentration ratio is 4(2%)=8%

(You can comment for doubts)