Question

The four-firm concentration ratios for industries X and Y are 75 percent and 67 percent, respectively, while the corresponding Herfindahl-Hirschman indexes are 2,700 and 1,800. The Dansby-Willig performance index for industry X is 0.79, while that for industry Y is 0.65.

Based on this information, which would lead to the greatest increase in social welfare: A slight increase in industry X output, or a slight increase in the industry Y input?

a) A slight increase in industry Y's output or

b) A slight increase in industry X's output

Answer 1

Correct Answer:

A

Explanation:

The value of four firm concentration ratio and HHI index show that industry X is highly concentrated, meaning firms are more dominant and able to fix the price and output in the market and less efficient, in comparison to industry Y. Here, industry Y was as less concentration and it means that industry is already operating that is near to the efficiency level. Further, it is Dansby Willing performance index that shows a higher index Value for the industry X than that of Y. It means that slight increase in output can help consumers get products at a lower price and social welfare will increase relatively more, in comparison to the industry Y where the industry is already less concentrated and prices are already low, making output to be higher. Hence, increasing the output in industry Y, will not affect significantly to the consumers, making industry X to be the best choice where government can work to increase output.