Deck 21: Strategy Myths

Question 1

Diversification

A)maximizes risk.
B)maximizes profit.
C)minimizes risk.
D)minimizes costs.

Answer 1

minimizes risk.

Question 2

The tournament effect

A)may help explain why CEO are highly paid.
B)why most golfers are below average.
C)explains why the behavior of total revenue often patterns lottery sales.
D)may help explain why CEOs are generally viewed as dishonest by the public.

Answer 2

may help explain why CEO are highly paid.

Question 3

To protect economic profits

A)a firm should try to acquire a barrier to entry.
B)a firm should limit substitutes.
C)a firm should have a patent if possible.
D)all of these choices.

Answer 3

all of these choices.

Question 4

Economic profits are earned when

A)price equals marginal cost.
B)price equals average variable costs.
C)price equals average total costs.
D)price is greater than average total costs.

Question 5

When a firm acquires another,

A)the acquired firm suffers a winner's curse.
B)the acquiring firm may suffer a winner's curse.
C)neither firm suffers from a winner's curse.
D)a winner's curse only applies if a patent is lost.

Question 6

To maximize total revenue

A)should produce where MR=MC.
B)should produce where MR=P.
C)a firm should produce where MR=0.
D)should produce where P=ATC.

Question 7

To gain market share

A)a firm needs to be in a competitive market.
B)a firm needs to limit substitutes.
C)a firm needs to produce a commodity.
D)a firm needs to be a substitute for other products

Question 8

When a firm acquires another,

A)the one acquired gains the most.
B)the acquiring firm gains the most.
C)both are better off together compared to being separate.
D)none of these choices.

Question 9

Stock options were developed as a form of executive compensation

A)in order to enhance accounting profits.
B)in order to align CEO performance with shareholder interests.
C)in order to align the performance with the performance of the CEO.
D)in order to make CEOs more socially aware.

Question 10

To gain market share a firm should

A)maximize marginal revenue.
B)maximize profit.
C)maximize revenue.
D)minimize marginal cost.

Question 11

In a cash acquisition

A)cash is transferred from one firm to another.
B)the acquired firm must issue new stock.
C)the acquiring firm buys stock.
D)the acquiring firm buys the acquired firm's bonds.

Question 12

Market share

A)does not guarantee profitability.
B)guarantees profitability.
C)is why Pets.com is so dominant today.
D)none of these choices.

Question 13

Studies show that

A)mergers create considerable shareholder value.
B)mergers lead to economic profit.
C)mergers generally do not create shareholder value.
D)'dogs' and 'cash cow' do not need to be merged.

Question 14

The performance of diversified companies

A)is always greater than the performance of more narrowly focused firms.
B)can be seen in greater economic profits.
C)usually is greater than the overall economy.
D)often simply mirrors the general economy.

Question 15

Business executives are more honest that other groups because

A)they serve customers.
B)they serve the market.
C)they are regulated.
D)because they want to earn accounting profits.

Question 16

The market for corporate takeovers

A)helps disciplines the behavior of CEOs.
B)forces CEOs to focus on market share.
C)had nothing to do with the monitoring of CEO behavior.
D)is not efficient.

Question 17

The superstar effect is that

A)the supply of superstars is more elastic than that for average players.
B)the labor market cannot create equilibrium wages for the best players.
C)the demand for a few players is relatively greater than the demand for most other players.
D)none of these choices.

Question 18

Market power and market concentration

A)are directly related.
B)are indirectly related.
C)are inversely related.
D)are not related.

Question 19

Diversification makes sense as a business strategy if it

A)creates job security for workers.
B)creates value for stockholders.
C)creates accounting profits.
D)creates greater market share.

Question 20

Growth should

A)be the only strategy.
B)be a possible strategy.
C)never be a strategy.
D)be a strategy only if it minimizes ATC.

Question 21

Stock options have been shown to not align the work of the CEO with the interests of shareholders.

Question 22

Suppressed technologies

A)is what lead to the development of internet search engines.
B)means that price controls are needed for corporate control.
C)means that new inventions always are introduced by entrepreneurs.
D)means that firms often hide threatening new inventions.

Question 23

To maximize market share managers need to maximize profits.

Question 24

Studies show that business executives are generally more dishonest than the average professional.

Question 25

If marginal revenue is zero then total revenue is maximized.

Question 26

Globalization raises the standard of living of all countries.

Question 27

The winner's curse is not useful in understanding the performance of companies after a merger.

Question 28

A firm must stress market share to be successful.

Question 29

Diversified companies show above average performance because risk is better managed.

Question 30

Mergers often do not lead to value creation.

Question 31

CEOs must create value for shareholders to be successful.