$$\begin{array} { | c | r | }
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
-If Bank 1 is acquired by Bank 3, what is the impact on the market's HHI?
A)An increase in the HHI of 1600.
B)An increase in the HHI of 624.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.

Question

$$\begin{array} { | c | r | } 
\hline \text { Bank } & \text { Asset Size } \
\hline 1 & \text { \$100 million } \
\hline 2 & \text { \$200 million } \
\hline 3 & \text { \$500 million } \
\hline
\end{array}$$
-If Bank 1 is acquired by Bank 3, what is the impact on the market's HHI?
A)An increase in the HHI of 1600.
B)An increase in the HHI of 624.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.

Quizplus · Accepted Answer

The HHI is calculated as the sum of the squared market shares of all firms in the market. If Bank 1 is acquired by Bank 3, the market share of Bank 3 will increase from 500 million / (100 million + 200 million + 500 million) = 0.5 to (500 million + 100 million) / (200 million + 500 million + 100 million) = 0.6. The squared market share of Bank 3 will increase from 0.5^2 = 0.25 to 0.6^2 = 0.36. The HHI will increase by 0.36 - 0.25 = 0.11. The HHI is currently (0.5^2 + 0.25^2 + 0.25^2) = 0.375. The new HHI will be 0.375 + 0.11 = 0.485. The increase in the HHI is 0.485 - 0.375 = 0.11. The HHI will increase by 1100.

-If Bank 1 Is Acquired by Bank 3, What Is