Question

1. An industry having a four-firm concentration ratio of 85 percent:

a. is an oligopoly.

b. is monopolistically competitive.

c. is a monopoly.

d. approximates perfect competition.

2. Industry Y is dominated by four large firms that hold market shares of 15, 20, 30 and, 35. If all the firms in industry Y merged into a single firm, the Herfindahl Index would become:

a. 100

b. 10,000

c. 100,000

d. 1,000

Answer 1

Q1) Concentration ratio is the ratio which shows the size of the firms in relation to their industry. A low concentration ratio means that there is greater competition among the firms whereas a high concentration ratio or a ratio of 100% means that there is monopoly in the industry. This ratio basically tells about the characteristics of the industry as to whether it is characterized by few large firms or a single firm or many firms. The ratio ranges from 0% to 100% .

In this question, the concentration ratio of four firms is 85% which means that the industry is characterized by few large firms. This in turn means that the industry is an OLIGOPOLY as the rule says that there exists an oligopoly when top firms in the market account for more than 60% of the total market sales. So, the answer is oligopoly.