Depending on the type of industry, a firm may face stiff competition or very little or even no competition.

Two popular measures of competition in an industry which have been proposed are the Four-Firm Concentration Ratio and the Herfindahl-Hirshman index.

(a)Use the following data on the sales of the firms in the tattoo industry to calculate the four-firm concentration ratio for the industry and use the ratio to describe the structure of the tattoo industry (i.e., perfect competition, monopoly, monopolistic competition or oligopoly).

Firm Sales (dollars per year)

Bright spots 450

Freckles 325

Love Galore 250

Native Birds 200

(Other 15 much smaller firms each of 800

which has sales less than 200 dollars

per year)

(b)Now use the following data on the market shares of the firms in the chocolate industry to calculate the Herfindahl-Hirshman index for the industry and use the index to describe the structure of the chocolate industry (i.e., perfect competition, monopoly, monopolistic competition or oligopoly).

Firm Market share (percent)

Truffles, Inc. 25

Magic, Inc 20

Mayfair, Inc 15

All Natural, Inc. 15

Gold, Inc. 15

Bond, Inc. 10