Attempts Keep the Highest 3 3 The HerfindahlHirschman inde S

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.

Solution

3)

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

Pricing mechanism

Quantity

Price

Profit

Long-Run decision

Profit Maximization

5000

60

200000

Continue to operate

Marginal- Cost pricing

16000

10

-160000

Shut down

Average- Cost Pricing

15000

20

0

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.

Pricing mechanism	Quantity	Price	Profit	Long-Run decision
Profit Maximization	5000	60	200000	Continue to operate
Marginal- Cost pricing	16000	10	-160000	Shut down
Average- Cost Pricing	15000	20	0	Operate.