The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market shares of each firm in the industry and summing the results. For instance, in a monopoly where one firm controls the entire market, the HHI equals 1. Conversely, in a market with M firms of equal size, the HHI is (1/M). The HHI does not account for demand elasticity or the potential for new entrants, making options B and C incorrect.