Question 1

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?

Accepted Answer

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 2

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 3

A network linking six users is typically:

Accepted Answer

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 4

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?

Accepted Answer

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

Question 5

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?

Accepted Answer

A)  i  1.33

Question 6

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:

Accepted Answer

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 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

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 10

Refer to the following payoff matrix:  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 11

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

Accepted Answer

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 12

A network linking eight users is typically:

Accepted Answer

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 13

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

Accepted Answer

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

Question 14

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:

Accepted Answer

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 15

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.

Accepted Answer

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

Question 16

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:

Accepted Answer

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

Question 17

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. If the monopolist can earn $45 million indefinitely by limit pricing, should it do so?

Accepted Answer

A)  Yes, it will earn $225 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 $225 million in present value if it does this. 
D)  No, it will earn $270 million in present value if it does this.

Question 18

Refer to the following payoff matrix: 
 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 19

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 20

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.

Exam 13: Advanced Topics in Business Strategy

Limit pricing is:

A network linking six users is typically:

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?

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:

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

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

Penetration pricing is a way to:

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

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

A network linking eight users is typically:

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

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:

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

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