Deck 13: Advanced Topics in Business Strategy

Question 1

In general, adding one more user to a two-way network tends to:

A) benefit the new user more than the existing users.
B) benefit existing users more than the new user.
C) provide equal benefits to existing users and the new user.
D) not provide any benefit to either new or existing users.

Answer 1

B

Question 2

When the average cost curve lies above the entrant's residual demand curve, an entrant:

A) can profitably enter the market.
B) cannot profitably enter the market.
C) is indifferent between entering and not entering the market.
D) lowers the incumbent's average cost curve.

Answer 2

B

Question 3

Which of the following is an example of a network?

A) Wireless telephone service
B) Railroads
C) Internet
D) All of the examples associated with this question are networks.

Answer 3

D

Question 4

Which of the following is FALSE?

A) It is always more profitable to engage in limit pricing than to permit entry.
B) Being the first mover is always best.
C) Engaging in predatory pricing is always more profitable than permitting existing firms to remain in the market.
D) All of the statements associated with this question are false.

Question 5

Firms that can effectively price discriminate can increase profitability when they engage in:

A) predatory pricing.
B) limit pricing.
C) strategies that raises rivals' costs.
D) Any of the statements associated with this question are correct.

Question 6

Selling a product below cost to gain a foothold in the market in order to eliminate the inefficiencies introduced by lock-in is known as:

A) predatory pricing.
B) limit pricing.
C) penetration pricing.
D) the price-cost squeeze.

Question 7

Nodes are:

A) examples of positive network externalities.
B) examples of negative network externalities.
C) different points in geographic or economic space linked by a network.
D) None of the statements are correct.

Question 8

A firm that engages in predatory pricing benefits from:

A) building a reputation of accommodating future entrants.
B) building a reputation for taking tough actions to drive a competitor out of the market.
C) having its prey stockpile its product.
D) full protection from the courts.

Question 9

A potential entrant knows that it faces a (inverse) residual demand curve given by P = 50 - 4Q. While the entrant does not know the inverse market demand, it does know that the incumbent committed to producing 150 units. Using this information, which of the following equations best summarizes the inverse market demand curve?

A) P = 200 - 4Q
B) P = 200 - Q
C) P = 150 - 4Q
D) None of the statements are correct.

Question 10

Firms 1 and 2 compete in a Cournot duopoly. If firm 2 adopts a strategy that raises firm 1's marginal cost:

A) firm 1 will reduce its output.
B) firm 2 will gain market share.
C) firm 2 will enjoy higher profits.
D) All of the statements associated with this question are correct.

Question 11

Vertical foreclosure is an example of a firm:

A) engaging in a price-cost squeeze.
B) that merges with a rival firm with the intention of eliminating the rival firm's product from the market.
C) engaging in penetration pricing.
D) that controls an essential upstream input and raises rivals' costs by refusing to sell to other downstream firms that need the input.

Question 12

A two-way network linking five users creates how many potential network connections?

A) 5
B) 10
C) 20
D) 30

Question 13

Which of the following makes it more difficult for an incumbent to successfully engage in limit pricing?

A) Complete information
B) Commitment mechanisms
C) Learning curve effects
D) A firm's past reputation for being tough on entrants

Question 14

Limit pricing will effectively deter entry when:

A) the incumbent links the pre-entry price to post-entry profits.
B) the incumbent has incomplete information.
C) the entrant must commit to enter the market.
D) All of the statements associated with this question are correct.

Question 15

Bottlenecks:

A) occur only in one-way networks.
B) occur only in two-way networks.
C) occur in both one-way and two-way networks.
D) are a positive externality associated with networks.

Question 16

A network linking six users is typically:

A) less likely to exhibit bottlenecks than a network linking two users.
B) three times as valuable as a network linking two users.
C) more than three times as valuable as a network linking two users.
D) less than three times as valuable as a network linking two users.

Question 17

Which of the following is incorrect?

A) Predatory pricing is easy to prove in court.
B) Learning curve effects may enable an incumbent to produce at a lower cost than a potential entrant.
C) A firm can benefit from strategies that raise the marginal costs of its rivals.
D) A firm can benefit from strategies that raise the fixed costs of all the firms in the industry.

Question 18

A single firm that charges the monopoly price in the market earns $500. If another firm successfully enters the market, the incumbent's profits fall to $325 and the entrant earns $250. If the incumbent engages in limit pricing, its profits are $400. For what interest rate, i, is limit pricing a profitable strategy for the incumbent?

A) i < 0.75
B) 0.75 < i < 1.0
C) 1.0 < i < 1.33
D) i > 1.33

Question 19

Network externalities:

A) may be positive.
B) may be direct.
C) may be indirect.
D) All of the statements associated with this question are correct.

Question 20

Penetration pricing is:

A) a way to raise a rival's marginal cost.
B) a way to raise a rival's fixed cost.
C) a way to overcome an incumbent's first-mover advantage.
D) ineffective in markets with strong networks.

Question 21

A single firm that charges the monopoly price in the market earns $600. If another firm successfully enters the market, the incumbent's profits fall to $350 and the entrant earns $275. If the incumbent engages in limit pricing, its profits are $400. For what interest rate, i, is limit pricing a profitable strategy for the incumbent?

A) i > 4
B) i < 0.25
C) 0.75 < i < 4
D) 0.25 < i < 0.75

Question 22

Consider a monopolist attempting to engage in limit pricing with total costs C(Q) = 100 + 2Q. The market (inverse) demand for its product is P = 100 - 2Q. Currently, the monopolist produces 30 units of output. Assuming the potential entrant has the same cost structure as the incumbent monopolist, is it profitable for the entrant to produce 10 units of output?

A) Yes, since the market price of $20 is greater than the average total cost of producing 10 units.
B) No, since the market price of $20 is less than the average total cost of producing 10 units.
C) Yes, since the market price of $50 is greater than the average total cost of producing 10 units.
D) No, since the market price of $50 is less than the average total cost of producing 10 units.

Question 23

The price-cost squeeze is:

A) a tactic used by a vertically integrated firm to raise rivals' costs of inputs, while maintaining final product prices.
B) a strategy whereby a firm temporarily prices below its marginal costs to drive competitors out of the market.
C) a strategy whereby an incumbent maintains a price below the monopoly price in order to prevent entry.
D) the act of charging a low price initially upon entering a market to gain market share.

Question 24

Effective limit pricing between one incumbent firm and one potential entrant involves:

A) the incumbent linking the pre-entry price to post-entry profits only.
B) the incumbent reducing price below the monopoly price to prevent entry only.
C) the incumbent linking the pre-entry price to post-entry profits and the incumbent reducing price below the monopoly price to prevent entry.
D) None of the statements are correct.

Question 25

A two-way network linking nine users creates how many potential network connections?

A) 72
B) 56
C) 90
D) 18

Question 26

Consider an incumbent that is a monopoly currently earning $1 million annually. Given the declining costs of raw materials, the incumbent believes a new firm may enter the market. If successful, a new entrant would reduce the incumbent's profits to $750,000 annually. To keep potential entrants out of the market, the incumbent lowers its price to the point where it is earning $850,000 annually for the indefinite future. If the interest rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?

A) No, since $2 million > $250,000.
B) Yes, since $2 million > $250,000.
C) No, since $5 million > $100,000.
D) Yes, since $250,000 > $5 million.

Question 27

Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, compute the present value of Smyth Industries' profits, if it could have remained a monopoly when the interest rate was 5 percent.

A) $100 million
B) $200 million
C) $210 million
D) $1.05 billion

Question 28

Under limit pricing, the incumbent will produce:

A) more than the monopoly output and charge a price that is greater than the monopoly price.
B) less than the monopoly output and charge a price that is greater than the monopoly price.
C) more than the monopoly output and charge a price that is less than the monopoly price.
D) less than the monopoly output and charge a price that is less than the monopoly price.

Question 29

Which of the following is a correct statement?

A) Predatory pricing is easy to prove in a court of law.
B) An incumbent firm may experience a learning curve that allows it to produce at a lower cost than a potential entrant.
C) A firm receives no individual benefit from strategies that raise the marginal costs of its rivals.
D) No individual firm can benefit from strategies that raise the fixed costs of all the firms in the industry.

Question 30

Consider an incumbent that successfully links the pre-entry price and post-entry profit to prevent entry. The incumbent's monopoly profit is $10 million. If a rival successfully enters the market, the incumbent's profits will fall to $4 million. If the incumbent lowers output to 25,000 units, its rival will stay out of the market, resulting in an infinite stream of profits of $8 million annually. Due to a recent loan default, the current interest rate is whopping 210 percent. Is limit pricing profitable for the incumbent?

A) Yes, since $19.05 million is greater than $2 million.
B) No, since $1.905 million is less than $2 million.
C) No since $4 million is less than $4.2 million.
D) Linking the pre-entry price to the post-entry profit is sufficient to guarantee the profitability of limit pricing.

Question 31

An example of vertical foreclosure is when a firm:

A) temporarily prices below its marginal cost to close competitors out of the market.
B) merges with a rival firm with the intention of eliminating the rival firm's product from the market.
C) that controls an essential upstream input refuses to sell to other downstream firms that need the input.
D) merges with a rival firm with the intention of eliminating the rival firm's product from the market and that controls an essential upstream input refuses to sell to other downstream firms that need the input.

Question 32

Penetration pricing is a way to:

A) raise a rival's marginal cost.
B) lower a rival's input costs.
C) increase a rival's fixed costs.
D) gain a critical mass of customers.

Question 33

Which of the following is NOT an example of a network?

A) Airlines
B) Trucking
C) Telecommunications
D) None of the statements are correct.

Question 34

Firms 1 and 2 compete in a Cournot duopoly. If firm 1 adopts a strategy that raises firm 2's marginal cost:

A) firm 2 will increase its output.
B) firm 1 will lose market share.
C) firm 1 will enjoy higher profits.
D) All of the statements associated with this question are correct.

Question 35

Firms that can effectively price discriminate can increase profitability when they engage in:

A) limit pricing.
B) vertical foreclosure.
C) a price-cost squeeze.
D) Any of the statements associated with this question are correct.

Question 36

A network linking eight users is typically:

A) less likely to exhibit bottlenecks than a network linking two users.
B) more than four times as valuable as a network linking two users.
C) four times as valuable as a network linking two users.
D) less than four times as valuable as a network linking two users.

Question 37

If one more user is added to a two-way network, it will generally:

A) benefit the new user more than the existing users.
B) benefit existing users more than the new user.
C) provide equal benefits to existing users and the new user.
D) unable to tell, because this analysis depends on the type of industry.

Question 38

Which of the following is an INCORRECT statement about predatory pricing?

A) It benefits the firm engaging in predatory pricing to have deeper pockets than its prey.
B) Reputation for taking tough actions to drive a competitor out of the market can enhance the benefits received from the firm engaging in the predatory pricing.
C) Having its prey stockpile its product produces more benefits to the firm engaging in the predatory pricing.
D) None of the statements are correct.

Question 39

Suppose the inverse market demand is given by P = 20 - Q. If the incumbent continues to produce eight units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A) P = 12 - Q
B) P = 8 - Q
C) P = 20 - 12Q
D) P = 12 - 8Q

Question 40

Limit pricing is:

A) a strategy whereby a firm temporarily prices below its marginal costs to drive competitors out of the market.
B) a strategy used by a vertically integrated firm to raise rivals' costs of inputs, while holding constant final product prices.
C) a strategy whereby an incumbent maintains a price below the monopoly price in order to prevent entry.
D) the act of charging a low price initially upon entering a market to gain market share.

Question 41

Consider a two-way network with 1,000 users. Adding one additional user to such a network benefits all users by adding:

A) 999 potential connections to the network.
B) 1,000 potential connections to the network.
C) 2,000 potential connections to the network.
D) 999,000 potential connections to the network.

Question 42

Using the following sequential-move production game, determine whether player B has a first-mover advantage and identify the strategy that leads to that advantage:

A) Player B has a first-mover advantage. The equilibrium strategies leading to an advantage are {(low output); (if low output, high output), (if high output, high output)}.
B) Player B has a first-mover advantage. The equilibrium strategies leading to an advantage are {(low output); (if low output, high output), (if high output, low output)}.
C) Player B has a first-mover advantage. The equilibrium strategies leading to an advantage are {(high output); (if low output, high output), (if high output, low output)}.
D) Player B does not have a first-mover advantage in the game.

Question 43

Suppose the inverse market demand is given by P = 75 - 0.5Q. If the incumbent continues to produce 20 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A) P = 65 - 2Q
B) P = 20 - 0.5Q
C) P = 150 - 2Q
D) P = 65 - 0.5Q

Question 44

Suppose the inverse market demand is given by P = 150 - 2Q. If the incumbent continues to produce 10 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A) P = 130 - 2Q
B) P = 150 - 4Q
C) P = 75 - 0.5Q
D) P = 130 - Q

Question 45

Suppose that Microsoft and Google compete in the market for PC Internet browsers. Initially these firms compete as Cournot duopolies with symmetric reaction functions. If Microsoft enters into exclusive contracts with PC suppliers that preclude suppliers from loading Google's Internet browser on PCs loaded with the Windows operating system, then Google's marginal cost of distributing its browser will increase to $5 per unit.
The new equilibrium would entail Microsoft supplying __________ browsers and Google supplying ____________ browsers to the market. The end result is ________ profits for Google.

A) more; fewer; lower
B) fewer; more; higher
C) more; more; lower
D) fewer; fewer; higher

Question 46

Refer to the following payoff matrix: Suppose the simultaneous-move game depicted in the payoff matrix could be turned into a sequential-move game with player 1 moving first. In this case, the equilibrium payoffs will be:

A) ($20, $1).
B) ($50, $5).
C) ($40, $2).
D) ($15, $30).

Question 47

A bottleneck is a:

A) positive externality resulting from network complementarities.
B) negative externality resulting from indirect network externalities.
C) positive externality resulting from congestion beyond the infrastructure capacity.
D) negative externality resulting from congestion beyond the infrastructure capacity.

Question 48

Which of the following is the best example of a one-way network?

A) The electricity that flows into residential areas
B) The network of towers that connect cellular telephone users
C) The network that connects instant message users
D) Network using optical fibers carrying signals to and from a subscriber's location

Question 49

Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, compute the present value of Smyth Industries' profits if it remains a duopolist in this market when the interest rate is 5 percent.

A) $100 million
B) $200 million
C) $210 million
D) $1.05 billion

Question 50

Refer to the following payoff matrix: If the payoff matrix is a simultaneous-move production game, the Nash equilibrium is for:

A) both players to produce low output.
B) both players to produce high output.
C) player 1 to produce low output and player 2 to produce high output.
D) player 1 to produce high output and player 2 to produce low output.

Question 51

Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, is it in Smyth Industries' interest to remain as a duopolist or engage in predatory pricing?

A) Engage in predatory pricing since $210 million is greater than $200 million.
B) Remain as a duopolist since $210 million is greater than $0.
C) Engage in predatory pricing since $1.05 billion is greater than $1 billion.
D) Remain as a duopolist since $210 million is greater than $100 million.

Question 52

Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, answer the following question: If Smyth Industries engages in predatory pricing by slashing its price 50 percent below marginal cost, the present value of current and future profits is:

A) -$100 million.
B) $0.
C) $100 million.
D) $200 million.

Question 53

Refer to the following payoff matrix: Suppose the production game depicted in the payoff matrix is a sequential-move game. Identify the strategy leading to a first-mover advantage for player 2.

A) Player 2 moves first and plays Low Q. Observing player 2's move, player 1's best response is to play Low Q.
B) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play Low Q.
C) Player 1 moves first and plays Low Q. Observing player 1's move, player 2's best response is to play High Q.
D) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play High Q.

Question 54

Refer to the following payoff matrix: Suppose the production game depicted in the payoff matrix is a sequential-move game. Identify the strategy leading to a first-mover advantage for player 1.

A) Player 1 moves first and plays High Q. Observing player 1's move, player 2's best response is to play Low Q.
B) Player 1 moves first and plays Low Q. Observing player 1's move, player 2's best response is to play Low Q.
C) Player 1 moves first and plays High Q. Observing player 1's move, player 2's best response is to play High Q.
D) Player 1 moves first and plays Low Q. Observing player 1's move, player 2's best response is to play High Q.

Question 55

Refer to the following payoff matrix: The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix is:

A) {(A,a) and (A,b)}.
B) {(A,a)}.
C) {B,b)}.
D) There is no pure strategy Nash equilibrium to this game.

Question 56

A two-way network that links users and in which the per-unit value of the service increases as the size of the network increases is a:

A) positive externality known as an indirect network externality.
B) negative externality known as an indirect network externality.
C) positive externality known as a direct network externality.
D) negative externality known as a direct network externality.

Question 57

Firms 1 and 2 compete in a Cournot duopoly. If firm 2 adopts a strategy that raises firm 1's marginal cost:

A) firm 1's reaction function will shift up.
B) firm 2's reaction function will shift up.
C) firm 2's reaction function will shift down.
D) firm 1's reaction function will shift down.

Question 58

Suppose that a one-way network leads to the development of a number of new complementary products and services. This phenomenon is known as:

A) a direct network externality.
B) an indirect network externality.
C) a reputation effect.
D) lock-in.

Question 59

Firms 1 and 2 compete in a Cournot duopoly. If firm 2 adopts a strategy that, inadvertently, lowers firm 1's marginal cost:

A) firm 1's reaction function will shift up.
B) firm 2's reaction function will shift up.
C) firm 2's reaction function will shift down.
D) firm 1's reaction function will shift down.

Question 60

Which of the following is NOT an example of raising rivals' fixed costs?

A) Existing doctors in a particular medical field lobby to require new doctors to acquire new licenses.
B) Yellow Cab Company lobbying New York City government officials for an ordinance that would require all taxi cab drivers to pay for a medallion, giving them the right to drive a cab in New York City.
C) Federal Express lobbying the U.S. Department of Transportation to increase annual terminal fees.
D) The New York Port Authority lobbying to increase the tolls on New York City's George Washington Bridge.

Question 61

Predatory pricing is a strategy:

A) whereby an incumbent maintains a price below the monopoly level to prevent entry by potential competitors.
B) whereby a firm enjoys lower costs due to knowledge gained from its past production decisions.
C) whereby a firm temporarily prices below its marginal cost to drive competitors out of the market.
D) used by a vertically integrated firm to squeeze the margins of its competitors.

Question 62

Consider an incumbent that is a monopoly currently earning $2 million annually. Given the declining costs of raw materials, the incumbent believes a new firm may enter the market. If successful, a new entrant would reduce the incumbent's profits to $1.2 million annually. To keep potential entrants out of the market, the incumbent lowers its price to the point where it is earning $1.6 million annually for the indefinite future. If the interest rate is 10 percent, does it make sense for the incumbent to limit price to prevent entry?

A) No, since $4 million > $400,000.
B) Yes, since $4 million > $400,000.
C) No, since $2 million > $200,000.
D) Yes, since $2 million > $200,000.

Question 63

A single firm that charges the monopoly price in the market earns $1,300. If another firm successfully enters the market, the incumbent's profits fall to $700 and the entrant earns $575. If the interest rate is 0.5, how high must the firm's profits from limit pricing be for limit pricing to be a profitable strategy for the incumbent?

A) π^L > $200
B) π^L > $500
C) π^L > $900
D) π^L > $1,000

Question 64

Which of the following is a strategy that can be used only by vertically integrated firms?

A) Vertical foreclosure
B) Predatory pricing
C) Limit pricing
D) Penetration pricing

Question 65

Refer to the following payoff matrix: The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix is:

A) {(A,a) and (A,b)}.
B) {(A,a)}.
C) {B,b)}.
D) There is no pure strategy Nash equilibrium to this game.

Question 66

A two-way network linking 15 users creates how many potential network connections?

A) 225
B) 100
C) 210
D) 300

Question 67

Refer to the following payoff matrix: Suppose the production game depicted in the payoff matrix is a sequential-move game. Identify the strategy leading to a first-mover advantage for player 2.

A) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play Low Q.
B) Player 2 moves first and plays Low Q. Observing player 2's move, player 1's best response is to play Low Q.
C) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play High Q.
D) Player 2 moves first and plays Low Q. Observing player 2's move, player 1's best response is to play High Q.

Question 68

A monopolist earns $50 million annually and will maintain that level of profit indefinitely, provided no other firm enters the market. If another firm successfully enters the market, the incumbent's profits remain at $50 million the first period, but fall to $25 million annually thereafter. The opportunity cost of funds is 10 percent, and profits in each period are realized at the beginning of each period. What is the present value of the firm's current and future earnings if entry occurs?

A) $300 million
B) $250 million
C) $400 million
D) $500 million

Question 69

A potential entrant knows that it faces a (inverse) residual demand curve given by P = 90 - 3Q. While the entrant does not know the inverse market demand, it does know that the incumbent committed to producing 10 units. Using this information, which of the following equations best summarizes the inverse market demand curve?

A) P = 60 - 3Q
B) P = 80 - 3Q
C) P = 50 - 3Q
D) None of the statements is correct.

Question 70

Refer to the following payoff matrix: If the payoff matrix is a simultaneous-move production game, the Nash equilibrium is for:

A) both players to produce low output.
B) both players to produce high output.
C) player 1 to produce low output and player 2 to produce high output.
D) player 1 to produce high output and player 2 to produce low output.

Question 71

A monopolist earns $50 million annually and will maintain that level of profit indefinitely, provided no other firm enters the market. If another firm successfully enters the market, the incumbent's profits remain at $50 million the first period, but fall to $25 million annually thereafter. The opportunity cost of funds is 10 percent, and profits in each period are realized at the beginning of each period. If the monopolist can earn $27 million indefinitely by limit pricing, should it do so?

A) Yes, it will earn $297 million in present value if it does this.
B) Yes, it will earn $270 million in present value if it does this.
C) No, it will earn $297 million in present value if it does this.
D) No, it will earn $270 million in present value if it does this.

Question 72

Suppose the inverse market demand is given by P = 105 - Q. If the incumbent continues to produce 40 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A) P = 65 - 2Q
B) P = 20 - 0.5Q
C) P = 150 - Q
D) P = 65 - Q

Question 73

Firms 1 and 2 compete in a Cournot duopoly. If firm 1 adopts a strategy that raises firm 2's marginal cost:

A) firm 2 will increase its output.
B) firm 1 will increase market share.
C) firm 1 will suffer lower profits.
D) All of the statements associated with this question are correct.

Question 74

Consider a monopolist attempting to engage in limit pricing with total costs C(Q) = 200 + 10Q. The market (inverse) demand for its product is P = 150 - 2Q. Currently, the monopolist produces 40 units of output. Assuming the potential entrant has the same cost structure as the incumbent monopolist, is it profitable for the entrant to produce 20 units of output?

A) Yes, since the market price of $30 is greater than the average total cost of producing 20 units.
B) No, since the market price of $30 is less than the average total cost of producing 20 units.
C) Yes, since the market price of $70 is greater than the average total cost of producing 20 units.
D) No, since the market price of $70 is less than the average total cost of producing 20 units.

Question 75

Refer to the following payoff matrix: Suppose the simultaneous-move game depicted in this payoff matrix could be turned into a sequential-move game with player 1 moving first. In this case, the equilibrium payoffs will be:

A) ($20, $1).
B) ($50, $5).
C) ($40, $2).
D) ($25, $30).

Question 76

A price-cost squeeze is a tactic used:

A) to prevent potential competitors from entering a market.
B) by a vertically integrated firm to squeeze the margins of its competitors.
C) by a vertically integrated firm to charge downstream rivals a prohibitive price for an essential input, forcing rivals to use more costly substitutes or exit the industry.
D) to gain a critical mass of consumers by charging an initial low price.

Question 77

Firms 1 and 2 compete in a Cournot duopoly. If firm 2 adopts a strategy that raises firm 1's marginal cost:

A) firm 1 will increase its output.
B) firm 2 will gain market share.
C) firm 2 will enjoy lower profits.
D) All of the statements associated with this question are correct.

Question 78

Firms 1 and 2 compete in a Cournot duopoly. If firm 2 adopts a strategy that raises firm 1's marginal cost:

A) firm 1 will increase its output.
B) firm 2 will lose market share.
C) firm 1 will enjoy higher profits.
D) None of the statements is correct.

Question 79

Firms 1 and 2 compete in a Cournot duopoly. If firm 2 adopts a strategy that raises firm 1's marginal cost:

A) firm 1 will reduce its output.
B) firm 2 will lose market share.
C) firm 2 will enjoy lower profits.
D) None of the statements is correct.

Question 80

A single firm that charges the monopoly price in the market earns $800. If another firm successfully enters the market, the incumbent's profits fall to $500 and the entrant earns $450. If the incumbent engages in limit pricing, its profits are $600. For what interest rate, i, is limit pricing a profitable strategy for the incumbent?

A) i < 0.5
B) 0.5 < i < 1.0
C) 1.0 < i < 1.5
D) i > 1.5