Question

Suppose that there are two industries, A and B. There are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively. There are four firms in industry B with equal sales of $2.5 million for each firm. The four-firm concentration ratio for industry A is:

A. 0.9.
B. 1.0.
C. 0.8.
D. 0.7.

I don't understand why the answer is 0.9 can someone explain to me.

Answer 1

Concentration Ratio

Concentration ratios are used to determine the market structure and competitiveness of the market. The concentration ratio indicates whether an industry is comprised of a few large firms or many small firms.

Now the four-firm concentration ratio is the ratio of the four largest firms sales to the total sales of all the firms in the industry.

Four-Firm concentration ratio = Four largest firms in respect of sales / Total Sales

In the above question, there are five firms in industry A with sales at $5 million, $2 million, $1 million, $1 million, and $1 million, respectively.

So four largest firms are $5, $2, $1, $1 because they are highest among all five

Four-Firm concentration ratio = Four largest firms in respect of sales / Total Sales

Four-Firm concentration ratio = (5 + 2 + 1 + 1) / (5 + 2 + 1 + 1 + 1)

Four-Firm concentration ratio = 9 / 10

Four-Firm concentration ratio = 0.9 or 90%

We can also calculate by adding each share with respect to total sales of four largest firms

As four largest firms are $5, $2, $1, $1 because they are highest among all five

5 / 10 = 0.5

2 / 10 = 0.2

1 / 10 = 0.1

1 / 10 = 0.1

Adding all

0.5 + 0.2 + 0.1 + 0.1 = 0.9

Four-Firm concentration ratio = 0.9