Question 1

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?

Accepted Answer

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 2

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?

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 3

Penetration pricing is a way to:

Accepted Answer

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 4

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 5

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { a}  & \text { b}  \
\hline & & \
\text { A } Q & \$ 50, \$ 5 & \$ 15, \$ 30 \
\hline & & \
\text { B } Q & \$ 40, \$ 2 & \$ 2, \$ 1\
\hline
\end{array}
\end{array}$ The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix is:

Accepted Answer

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

Question 6

Limit pricing is:

Accepted Answer

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 7

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 first...

Question 8

SunCenter is the only firm in its industry.Currently,SunCenter charges $75 per unit,a price well in excess of its marginal cost of $5 per unit,and earns $70 million per year in profit.According to a trusted source,the manager of SunCenter learned that a new firm is contemplating entering the market.This would reduce its profit to $40 million per year.If SunCenter expanded its output and lowered its price to $50,the entrant would find it unprofitable to enter the market,and SunCenter would earn profits of $50 million per year for the indefinite future.
a.What pricing strategy is the manager of SunCenter considering?
b.If SunCenter was able to credibly commit to maintain a price of $50,would it be a profitable strategy?

Accepted Answer

The answer of SunCenter is the only firm in its...

Question 9

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { Low } Q & \text { High } Q \
\hline & & \
\text { Low } Q & \$ 50, \$ 5 & \$ 15, \$ 30 \
\hline & & \
\text { High } Q & \$ 40, \$ 2 & \$ 2, \$ 1\
\hline
\end{array}
\end{array}$ 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.

Accepted Answer

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 10

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

Accepted Answer

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 11

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

Accepted Answer

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

Question 12

A monopolist earns $80 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 $80 million the first period but fall to $35 million annually thereafter.The opportunity cost of funds is 20 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?

Accepted Answer

A)  $350 million 
B)  $255 million 
C)  $400 million 
D)  $280 million

Question 13

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

Accepted Answer

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.

Question 14

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?

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

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?

Accepted Answer

A)  πL > $200 
B)  πL > $500 
C)  πL > $900 
D)  πL > $1,000

Question 17

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?

Accepted Answer

A)  i  1.5

Question 18

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 19

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?

Accepted Answer

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 20

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?

Accepted Answer

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

Exam 13: Advanced Topics in Business Strategy