Question 1

Sanford Inc.currently competes in a duopoly.The market price is $10 and Sanford's annual profit is $10 million.If Sanford were the only firm in the market, it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time.By charging $5 per unit for one year, Sanford could drive its rival out of the market and maintain a monopoly position indefinitely.However, this strategy will result in a $20 million loss since its marginal cost is $8 per unit.
a.What pricing strategy is the manager considering?
b.Ignoring legal considerations, is this pricing strategy profitable? Assume the interest rate is 5 percent and, for simplicity, that any current period profits or losses occur immediately (at the beginning of the year).

Accepted Answer

The answer of Sanford Inc.currently competes in a duopoly.The market...

Question 2

As a newly hired stock analyst, your first job is determining the value of a company that sells a service that has extremely strong network effects.Essentially, this firm sells a two-way network that links users and currently comprises 50,000 nodes.Each connection service within the network has a value of $10.Estimate the total value of the firm.

Accepted Answer

The answer of As a newly hired stock analyst, your...

Question 3

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

Accepted Answer

A) Existing doctors in a particular medical field lobby to have new doctors to acquire new licenses. 
B) Yellow Cab Company lobbying NYC Government officials that would require all taxi cab drivers to pay for a medallion - right to drive a cab in NYC. 
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 NYC George Washington bridge.

Question 4

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

Accepted Answer

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 5

Penetration pricing is

Accepted Answer

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 6

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

Accepted Answer

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 7

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?

Accepted Answer

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

Question 8

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?

Accepted Answer

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

Question 9

A monopolist's demand curve is given by D^M and its average cost curve is AC in the accompanying figure.Suppose a potential entrant can produce at the same cost as the monopolist. a.What level of output does the monopolist have to produce in order for the entrant to face the residual demand curve, D^R? b.How much profit will the monopolist earn if it commits to the output that generates the residual demand curve, D^R? c.Is the level of output that generates the residual demand curve, D^R, enough for the monopolist to deter entry?

Accepted Answer

The answer of A monopolist's demand curve is given by...

Question 10

If Smyth Industries engages in predatory pricing by slashing its price 50 percent below marginal cost, the present value of current and future profits are

Accepted Answer

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

Question 11

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

Accepted Answer

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 associated with this question are correct.

Question 12

An example of vertical foreclosure is when a firm

Accepted Answer

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 13

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

Accepted Answer

A) the incumbent linking the pre-entry price to post-entry profits. 
B) the incumbent reducing price below the monopoly price to prevent entry. 
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 associated with this question are correct.

Question 14

Vertical foreclosure is an example of a firm

Accepted Answer

A) raising its rivals' costs. 
B) that 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 refusing to sell to other downstream firms that need the input. 
D) raising its rivals' costs and that controls an essential upstream input refusing to sell to other downstream firms that need the input.

Question 15

A network linking 8 users is typically

Accepted Answer

A) less likely to exhibit bottlenecks than a network linking 2 users. 
B) more than four times as valuable as a network linking 2 users. 
C) four times as valuable as a network linking 2 users. 
D) less than four times as valuable as a network linking 2 users.

Question 16

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?

Accepted Answer

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

Question 17

A bottleneck is a

Accepted Answer

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 18

Is it Smyth Industries to remain as a duopolist or engage in predatory price?

Accepted Answer

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 19

Consider a two-way network with 1,000 users.The number of potential connections is

Accepted Answer

A) 999. 
B) 1,000. 
C) 2,000. 
D) 999,000.

Question 20

Consider an incumbent successfully links the preentry price and postentry 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 annually.Due to a recent loan default, the current interest rate is whopping 210 percent.Is limit pricing profitable for the incumbent?

Accepted Answer

A) Yes, since $19.05 million is greater than $2 million. 
B) No, since $1.91 million is less than $2 million. 
C) No since $4 million is less than $4.2 million. 
D) Linking the preentry price to the postentry profit is sufficient to guarantee the profitability of limit pricing.

Exam 13: Advanced Topics in Business Strategy