Which of the following is true of the Herfindahl index?

Question

It measures the size of a market in terms of total dollar sales.

It is another name for the four-firm concentration ratio.

It measures the degree of concentration in an industry.

It determines the degree to which average variable cost is higher than average fixed cost at every level of output.

Answer 1

The correct statement about the Herfindahl index is:

It measures the degree of concentration in an industry.

The Herfindahl index (HHI) is a measure used to assess market concentration and is calculated by squaring the market share of each firm in the industry and then summing those values. Higher values indicate a higher degree of concentration, which can imply less competition in the market. The other statements provided are incorrect in the context of the Herfindahl index.