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    Measures of Concentration and Herfindal Index

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    Answer the following questions, which relate to measures of concentration:

    a. What is the meaning of a four-firm concentration ratio of 60 percent? 90 percent? What are the shortcomings of concentration ratios as measure of monopoly power?

    b. Suppose that the five firms in industry A have annual sales of 30, 30, 20, 10 and 10 percent of total industry sales, For the five firms in industry B the are figures are 60, 25, 5, 5 and 5 percent. Calculate the Herfindahl index for each industry and compare their likely competitiveness.

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    Solution Preview

    a. The concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This ratio reflects the percentage of market output generated by the largest firms in the industry. Thus a four-firm concentration ratio of 60 percent means the largest ...

    Solution Summary

    This solution explains the measures of concentration in 224 words.