Deck 8: Competition and Strategy

Question 1

If the demand curve for a commodity faced by sellers is highly elastic, buyers have greater ability to substitute away from it.

Answer 1

True

Question 2

Investment in a new facility is likely to increase the annual profit of a fertilizer producer by $85.The producer will purchase the facility only if it requires an annual investment of $90.

Answer 2

False

Question 3

A person with no competitive ideas can earn above market average returns at low risk by investing in a diversified portfolio of stocks.

Answer 3

False

Question 4

Food retailers usually do not compete on which of the following factors?

A)Price
B)Variety
C)Location
D)Packaging

Question 5

Assume that the adoption of a new technology costing $8 per year lowers the marginal cost of producing Good X from $7 to $3.The firm will adopt the new technology if it expects annual profit to increase from $14 to $18.

Question 6

Innovative ideas often exist in an environment of uncertainty, and their probabilities of success usually cannot be determined in an objective way.

Question 7

Temporary discounts offered to customers by competitive retailers usually reflect:

A)output rationing.
B)a rise in market demand.
C)price discrimination.
D)a fall in input prices.

Question 8

If an economic change lowers the production cost of a commodity but does not reduce its market price, economic value will be created.

Question 9

If the seller of a good gets less than his/her opportunity cost and the buyer pays more than his/her valuation of the good, economic value is created.

Question 10

If Electro is a retailer of ductile iron pipes manufactured by Steelfact Corporation, an agreement between these two companies will be called a horizontal agreement.

Question 11

When an innovation spreads among producers, the earlier adopters enjoy longer-lived streams of profit before the market reaches its new long-run equilibrium.

Question 12

Ezybuy is a newly opened chain of departmental stores that offers its customers free home delivery for purchases above $100.If this promotional policy increases the cost borne by the seller by $10 for every transaction, while each customer values this service at $3, it can be said to generate economic value.

Question 13

A seller with market power has greater command over product price compared to a perfect competitor and is thus less enthusiastic in devising new ways to create economic value.

Question 14

Suppose Melita is willing to pay a maximum of $30 for a pair of normal sunglasses and $36 for the same pair with a double UV-protection filter.If the unit cost of upgrading a product is $6, the seller will upgrade the product if Melita pays at least $35 for it.

Question 15

One possible reason for Wal-Mart's success is that centralized-decision making provides economies of scale that allow it to aggressively bargain down wholesale prices of standard consumer goods.

Question 16

Which of the following facts about competitive ideas is true?

A)A successful competitive idea should be big in terms of investment.
B)A competitive idea is usually built on a foundation of other ideas.
C)A competitive idea should necessarily be scientific.
D)A successful competitive idea must be original.

Question 17

Assume that a product upgrade strategy adopted by a microwave oven manufacturer increases his marginal cost by $1.50.If the strategy also increases the demand for the product by $3.50 per unit, total economic value will increase.

Question 18

Wal-Mart's store managers have the authority to stock items and price them to satisfy localized demand.Which of the following properties of this retail store is illustrated here?

A)Relationship with employees
B)Regional relationships
C)Centralized decision making
D)Decentralized decision making

Question 19

Which of the following is a reason behind Wal-Mart's success?

A)Absence of unionization and encouragement of merit-based promotions.
B)Complete control over the market price.
C)Presence of regional managers in the field rather than at headquarters.
D)Centralized control and inspection over the functioning of store managers.

Question 20

Large firms that invest in specific assets which cannot easily be redeployed to other uses or locations, may be able to protect their profits for longer than if they do not make such investments.

Question 21

The figure given below represents a firm in a market characterized by many buyers and one seller.MC represents the initial marginal cost, MR the initial marginal revenue, and D the initial demand curve of the firm in equilibrium.Further, MC', D', and MR' represents the revised marginal cost, demand, and marginal revenue respectively after the firm adopts the strategy discussed below.
Figure 8-1

Refer to Figure 8-1.If the firm purchases a new machinery which produces fewer defective units of output using the same variable inputs as before, which of the following changes will be observed? (Assume that consumers suffer losses from defective units that they cannot otherwise recover.)

A)The marginal cost curve will shift upward from MC to MC'.
B)The marginal cost and demand curve will shift upward to MC' and MR' respectively.
C)The marginal revenue and demand curve will shift upward to MR' and D' respectively.
D)The marginal cost and marginal revenue will shift upward to MC' and MR' respectively

Question 22

Under a _____, the assets of two firms that operate in the same market are put under a single ownership.

A)vertical merger
B)horizontal merger
C)vertical acquisition
D)horizontal acquisition

Question 23

The difference between opportunity cost of the sellers and the valuation of the buyers is known as:

A)social cost.
B)economic value.
C)deadweight loss.
D)consumer surplus.

Question 24

The figure given below represents a firm in a market characterized by many buyers and one seller.MC represents the marginal cost, MR the marginal revenue, and D the demand curve of a firm.The firm is initially in equilibrium producing 6 units of output at a price of $10 per unit.
Figure 8-2

Refer to Figure 8-2.Suppose the adoption of a new technology lowers the cost of production while the buyer's valuation remains unchanged.Which of the following changes will be observed by the firm?

A)The demand curve for its product will shift to the left.
B)The marginal cost curve will shift downward.
C)The equilibrium output of the firm will fall below 6 units.
D)The marginal revenue curve will shift downward.

Question 25

In the figure given below, Panel A represents preexisting firms which are in long run equilibrium at price P₀ and output q₀.MC and AC represents the marginal cost and the average cost of the preexisting firms.Panel B represents a market where every seller has the smallest ability to affect prices.The market is in equilibrium at price P₀ and output Q shown by the intersection of the long-run supply curve (LRS) and market demand (D).
Figure 8-4

Refer to Figure 8-4.Suppose some of the preexisting firms adopt the cost effective technology of the innovator while non-adopters that are incurring losses shut down.The high cost sellers produce the rest of the market output.What will happen to the equilibrium price level?

A)The price level will fall below P0 but remain positive.
B)The price level will remain at P0.
C)The price level will rise above P0.
D)The price level will fall to zero.

Question 26

If two small perfectly competitive firms merge, the merged firm will be:

A)a price-taker.
B)a market leader.
C)a price-discriminator.
D)an oligopoly.

Question 27

The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.
Figure 8-3

Refer to Figure 8-3.Determine the profit maximizing price and output when MC' is the marginal cost of the seller and the transaction cost incurred by the buyer is $2.

A)Output = 2.5 units and price = $8.25
B)Output = 2.5 units and price = $6.5
C)Output = 3 units and price = $9
D)Output = 3 units and price = $6.5

Question 28

Which of the following is an example of a one-time investment made by a seller to reduce the transaction cost on all units of output?

A)Providing customers a wide range of products
B)Hiring a distribution agency
C)Merging with its rival brand
D)Creating a brand name which signals quality

Question 29

In a market characterized by many buyers and one seller, investment in informative advertising by a seller can ____ the price of a commodity to customers and lower their _____ cost of acquiring information.

A)decrease; sunk cost
B)increase; transaction cost
C)increase; sunk cost
D)decrease; transaction cost

Question 30

In the figure given below, Panel A represents preexisting firms which are in long run equilibrium at price P₀ and output q₀.MC and AC represents the marginal cost and the average cost of the preexisting firms.Panel B represents a market where every seller has the smallest ability to affect prices.The market is in equilibrium at price P₀ and output Q shown by the intersection of the long-run supply curve (LRS) and market demand (D).
Figure 8-4

Refer to Figure 8-4.If a preexisting firm adopts a new cost effective technology (which reduces production costs).Which of the following changes will be observed?

A)The price level in the market will shift upward.
B)The market demand curve will shift to the right.
C)The LRS curve will shift upward.
D)The MC and AC curves of the innovative firm will shift downward.

Question 31

Under which of the following situations would a seller prefer to incur the cost of improving the product quality?

A)If the increase in buyer's valuation for the improved product is higher than the cost of improving it.
B)If the increase in the seller's opportunity cost of improving the product is higher than the price of the product.
C)If the product improvement lowers the producer surplus.
D)If the product improvement allows the seller to a break even.

Question 32

The figure given below represents a firm in a market characterized by many buyers and one seller.MC represents the marginal cost, MR the marginal revenue, and D the demand curve of a firm.The firm is initially in equilibrium producing 6 units of output at a price of $10 per unit.
Figure 8-2

Refer to Figure 8-2.Suppose the adoption of a new cost saving technology lowers marginal cost by $2 although the buyer's valuation remains unchanged.This allows the firm to produce 8 units of output at a price of $8 per unit.The profit earned by the firm will:

A)increase by $10.
B)decrease by $5.
C)remain unchanged.
D)increase by $5.

Question 33

In the figure given below, Panel A represents preexisting firms which are in long run equilibrium at price P₀ and output q₀.MC and AC represents the marginal cost and the average cost of the preexisting firms.Panel B represents a market where every seller has the smallest ability to affect prices.The market is in equilibrium at price P₀ and output Q shown by the intersection of the long-run supply curve (LRS) and market demand (D).
Figure 8-4

Refer to Figure 8-4.Which of the following can be concluded about the innovative firm which reduces its marginal and average cost by using the new technology?

A)The equilibrium output produced by this firm will increase.
B)The equilibrium output produced by this firm will decrease.
C)This firm will offer its produce at a price below P0.
D)This firm will offer its produce at a price above P0.

Question 34

Suppose the cost of producing cellular phones declines from $25 to $20.If buyers' valuations remain fixed at $30, the transaction would create _____ more economic value.

A)$10
B)$5
C)$2
D)$15

Question 35

The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.
Figure 8-3

Refer to Figure 8-3.Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.How will the profit earned by the seller change?

A)The firm's profit will increase by $0.62.
B)The firm's profit will increase by $2.6.
C)The firm's profit will remain unchanged.
D)The firm's profit will decrease by $6.2.

Question 36

The figure given below represents a firm in a market characterized by many buyers and one seller.MC represents the initial marginal cost, MR the initial marginal revenue, and D the initial demand curve of the firm in equilibrium.Further, MC', D', and MR' represents the revised marginal cost, demand, and marginal revenue respectively after the firm adopts the strategy discussed below.
Figure 8-1

Refer to Figure 8-1.Will the firm invest in the purchase of new machinery which improves the quality of its product?

A)It will not as the demand for the firm's output declines after using the new machine.
B)It will not as the firm's profit margin reduces after using the new machine.
C)It will if the annual cost for this machinery is more than $5.
D)It will if the annual cost for this machinery is less than $7.5.

Question 37

In a market characterized by a single seller and many buyers, a seller's investment to reduce transaction costs can lead to which of the following situations?

A)It can reduce producer surplus in the long run.
B)It can raise the price paid by customers and still make them better off.
C)It can decrease the brand value of the product.
D)It can lower the quality of the product in the long run.

Question 38

The figure given below represents a firm in a market characterized by many buyers and one seller.MC is the initial marginal cost of the seller.MC' denotes the marginal cost inclusive of the $1 transaction cost.On the other hand, buyers incur a transaction cost worth $2 represented by the vertical distance between D and D'.MR and MR' represent the marginal revenue curve corresponding to the demand curves D and D' respectively.
Figure 8-3

Refer to Figure 8-3.Suppose the seller incurs an additional cost of $1 per unit of output to reduce the transaction costs of the buyers to zero.Determine the profit maximizing price and output when the buyers incur zero transaction cost.

A)Output = 2.5 units and price = $8.25
B)Output = 2.5 units and price = $6.5
C)Output = 3 units and price = $9
D)Output = 3 units and price = $6.5

Question 39

In a market characterized by many sellers, assume that transaction costs for both buyers and sellers are both costlessly cut to zero.What will happen to total economic value?

A)Economic value will remain unchanged because the decrease in consumer surplus will offset the increase in producer surplus.
B)Economic value will remain unchanged because the decrease in producer surplus will offset the increase in consumer surplus.
C)Economic value will certainly increase but its magnitude will depend on the initial transaction costs of the market participants.
D)Economic value will certainly decrease but its magnitude will depend on the initial transaction costs of the market participants.

Question 40

In a market characterized by many sellers, if an outsider devises a way to reduce transaction costs it will:

A)benefit both buyers and sellers.
B)cause both buyers and sellers to lose.
C)benefit the buyers but cause the sellers to lose.
D)benefit the sellers but cause the buyers to lose.

Question 41

Why does the structure of a corporate business complicate the analysis of a strategy?

Question 42

Which of the following contracts contain vertical restrictions that limit the transacting parties' choices but create economic value?

A)An agreement between firms to jointly invest in research and development.
B)A franchise contract specifying exclusive territory of operation.
C)A contract amongst competitive firms on an uniform pricing strategy.
D)A collusion between two oligopoly firms specifying individual production.

Question 43

Which of the following exemplifies an intangible durable strategy used by firms to prevent competition?

A)Merging with its competitors
B)Using brand name or trademark as a reflection of product quality
C)Advertising
D)Investing in specific assets

Question 44

Which of the following is an example of a durable strategy undertaken by firms to prevent competition?

A)Purchasing the latest technology available in the market
B)A firm spending huge sums on advertisements.
C)Selecting a unique location for carrying out operation
D)Identifying a competent sales force

Question 45

A firm's resource at a given point in time can be defined as:

A)those investments made by it in profitable organizations.
B)those tangible and intangible assets attached to it semipermanently.
C)its ability to control the market price.
D)its lobbying ability built over years of experience.

Question 46

Why is reliable data on the formation and survival of startups difficult to obtain?

Question 47

Which of the following is considered per se illegal under the U.S.antitrust law?

A)An agreement to fix prices of commodities.
B)An agreement to maintain certain technical standards.
C)An agreement to operate only in specific regions.
D)An agreement to follow identical production technique.

Question 48

Which of the following industries can create barriers to the entry of new firms due to size and specificity?

A)A hydroelectric power plant
B)A garment manufacturer exporting apparels
C)An owner of a retail chain
D)An automobile manufacturing company

Question 49

How is economic value created during transactions between buyers and sellers?

Question 50

The figure given below represents a monopoly firm producing perfume with downward sloping demand and marginal revenue (MR) curves.The products of this firm are sold in the competitive market by a retailer.Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.
Figure 8-6

Refer to Figure 8-6.Determine the profit earned by the perfume monopolist if it chooses to hire a retailer for selling its product.

A)$2.7
B)$6.5
C)$5.5
D)$2.4

Question 51

The figure given below represents a monopoly firm producing perfume with downward sloping demand and marginal revenue (MR) curves.The products of this firm are sold in the competitive market by a retailer.Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.
Figure 8-6

Refer to Figure 8-6.Determine the profit earned by the perfume monopolist if it chooses to retail its products?

A)$3.2
B)$1.5
C)$3.5
D)$2.2

Question 52

In order to be successful as an innovator, a firm may require:

A)constant investment in mergers and acquisitions.
B)frequent expansion of its scale of operation.
C)to invest the majority of its annual profit in market research.
D)research facilities and a culture that respects scientists and engineers.

Question 53

The figure given below represents a monopoly firm producing perfume with downward sloping demand and marginal revenue (MR) curves.The products of this firm are sold in the competitive market by a retailer.Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.
Figure 8-6

Refer to Figure 8-6.What will be the profit-maximizing output and wholesale price of the perfume monopolist if it produces the output and allows an individual retailer to market the product?

A)Output = 1.7 units and price = $5.4
B)Output = 2.3 units and price = $3.4
C)Output = 2.3 units and price = $5.4
D)Output = 1.7 units and price = $5

Question 54

The figure given below represents a monopoly firm producing perfume with downward sloping demand and marginal revenue (MR) curves.The products of this firm are sold in the competitive market by a retailer.Among the horizontal lines in the figure:
A - represents the marginal cost of per unit perfume production
B - represents the marginal cost of an independent perfume retailer
C - represents the sum of A and B
D - represents the marginal cost of the perfume monopolist for retailing its own output
E - represents the sum of A and D.
Figure 8-6

Refer to Figure 8-6.What will be the profit maximizing output and price for the perfume monopolist if it is producing and retailing its output?

A)Output = 1.7 units and price = $6.3
B)Output = 2.3 units and price = $6.3
C)Output = 2.3 units and price = $5.4
D)Output = 1.7 units and price = $5

Question 55

Which of the following factors affect vertical integration of firms?

A)The demand for the final product in the market.
B)The market power of each firm in an industry.
C)The number of firms in an industry.
D)The transaction cost at each stage of production.

Question 56

The figure given below represents a perfectly competitive market in long-run equilibrium.LRS represents the long-run supply curve of this market with demand (D) and price $50.When two large firms merge, output declines to 400 units and per unit production cost drops to $30.
Figure 8-5

Refer to Figure 8-5.Which of the following regions in the figure represents the deadweight loss resulting from the merger?

A)Area of triangle APR
B)Area of the square BCPQ
C)Area of the triangle BQR
D)Area of triangle ACB

Question 57

Which of the following activities undertaken by a competitive firm can improve its public relations?

A)Investing in assets that cannot easily be redeployed to other uses or locations.
B)Donating a portion of its annual profit to hurricane affected families
C)Providing good quality products at a high price.
D)Investing in in-house research

Question 58

The figure given below represents a perfectly competitive market in long-run equilibrium.LRS represents the long-run supply curve of this market with demand (D) and price $50.When two large firms merge, output declines to 400 units and per unit production cost drops to $30.
Figure 8-5

Refer to Figure 8-5.Calculate the value of the deadweight loss resulting from the horizontal merger?

A)$800
B)$600
C)$400
D)$300

Question 59

Which of the following is true about vertical mergers?

A)It improves coordination among the individual firms in an industry.
B)It is an agreement among firms to follow a common pricing policy.
C)It increases the competitiveness of the merged firms.
D)It increases the market power of the merged firms.

Question 60

The figure given below represents a perfectly competitive market in long-run equilibrium.LRS represents the long-run supply curve of this market with demand (D) and price $50.When two large firms merge, output declines to 400 units and per unit production cost drops to $30.
Figure 8-5

Refer to Figure 8-5.What is the net benefit of the merger?

A)$8,000
B)$2,400
C)$7,400
D)$600

Question 61

Name some of the barriers to entry that can be created by a competitive firm to protect profits?

Question 62

How do firms benefit by maintaining public relations and influencing the government? Explain with examples.

Question 63

Explain the functioning and significance of vertical agreements.Use specific examples from the apparel and textile markets.

Question 64

In a market characterized by a single seller and many buyers, will a seller's initiative to improve the quality of its product at a higher cost of production be profitable?

Question 65

In a market characterized by a single seller and many buyers, when is it profitable to increase the value of a product by incurring fixed costs?

Question 66

What are the benefits of a franchise contract?

Question 67

Explain the difference between the per se and "rule of reason" standards of the antitrust laws

Question 68

When can a seller's investment in reducing transaction cost increase the price of the product to customers but still leave them better off?

Question 69

In a market characterized by many sellers, explain graphically the impact of an economic change which reduces transaction costs to zero for both the buyers as well as the sellers.

Question 70

On which two factors do the consequences of a merger depend?