Question 1

The more similar are the firms in an industry in terms of costs, strategies, and locations, the more intensely will they compete.

Accepted Answer

False

Question 2

Concentration in an industry is measured by its concentration ratio-a common measure of which is the combined market share of the leading firms.

Accepted Answer

Concentration in an industry is indeed measured by its concentration ratio, which is commonly calculated as the combined market share of the leading firms.

Question 3

A product that has close substitutes will tend to have inelastic demand.

Accepted Answer

If a product has close substitutes, it means that there are many alternatives available to consumers, which makes it easier for them to switch to another product if the price of the original product increases. This makes the demand for the product more elastic, as consumers have many options to choose from. In contrast, products with few or no substitutes tend to have more inelastic demand, as consumers have fewer options and are willing to pay a higher price for the product.

Question 4

Entry barriers that are effective against small, start-up companies tend to be equally effective against established firms diversifying from other industries.

Accepted Answer

Entry barriers such as economies of scale, access to distribution channels, and regulatory policies might be more challenging for small, start-up companies to overcome compared to established firms. Established firms often have more resources, brand recognition, and experience in navigating market entry challenges, making it easier for them to diversify into new industries compared to startups facing these barriers for the first time.

Question 5

According to Warren Buffett brilliant managers can succeed, even in businesses with poor
fundamental economics.

Accepted Answer

The answer of According to Warren Buffett brilliant managers can...

Question 6

Michael Porter's five forces of competition framework links the structure of an industry to its overall level of profitability.

Accepted Answer

Michael Porter's five forces framework is used to analyze the competitive environment of an industry and its impact on overall profitability. The framework includes factors such as the bargaining power of suppliers and buyers, the threat of new entrants and substitute products, and the intensity of rivalry among competitors. By understanding and analyzing these forces, companies can make strategic decisions to improve their competitive position and profitability within the industry.

Question 7

"Producer surplus" is not a form of "economic rent."

Accepted Answer

Producer surplus can be considered a form of economic rent, as it represents the difference between what producers are willing to accept for a good or service versus what they actually receive, often due to market conditions, which is a concept closely related to economic rent.

Question 8

The greater the value of a product to its customers, the more profitable will it be to supply that product.

Accepted Answer

The profitability of supplying a product is influenced by many factors beyond its value to customers, including production costs, competition, market demand, and pricing strategies. A product highly valued by customers can still be unprofitable if the costs to produce and supply it exceed the revenue generated from sales.

Question 9

The bargaining power of a buyer when negotiating with a supplier is all about relationship management; it does not depend upon the threat of walking away from the deal.

Accepted Answer

The bargaining power of a buyer when negotiating with a supplier can depend on various factors, such as the availability of alternative suppliers, the importance of the buyer to the supplier’s business, and the strength of the buyer’s negotiating position. Threat of walking away from the deal can be a significant tool in negotiation and can increase the buyer's bargaining power. However, relationship management is also an important factor and can lead to better communication, trust, and long-term benefits.

Question 10

If a firm is to create profit, the first condition is that it must supply a product for which the price the customer is willing to pay exceeds the cost incurred in supplying that product.

Accepted Answer

This statement is true. In order to make a profit, the revenue generated from selling a product must be greater than the costs incurred in producing and selling that product.

Question 11

Lower levels of capacity utilization impose higher costs on firms (as fixed costs are spread over a smaller volume of business).This encourages firms to raise prices.

Accepted Answer

The answer of Lower levels of capacity utilization impose higher...

Question 12

Suppliers of technically-sophisticated components are more likely to be able to exercise supplier power than the suppliers of raw materials.

Accepted Answer

Suppliers of technically-sophisticated components often have unique expertise or patents that make it difficult for buyers to find alternatives, therefore giving them more power in the supplier-buyer relationship. On the other hand, suppliers of raw materials often have many competitors and may not have as much negotiating power.

Question 13

Formal, broad-based scanning of the external environment is an essential activity for all business enterprises.

Accepted Answer

The answer of Formal, broad-based scanning of the external environment...

Question 14

Threats of retaliation by incumbents against a new entrant (e.g.threatening to make aggressive price-cuts), cannot be regarded as a source of entry barriers.

Accepted Answer

Threats of retaliation by incumbents, such as aggressive price cuts, can deter new entrants by increasing the perceived risk and cost of entering the market, thus acting as a source of entry barriers.

Question 15

The main reason that niche markets are often highly profitable for incumbents is because their customers tend to be insensitive to prices.

Accepted Answer

Niche markets are often highly profitable for incumbents not because their customers are insensitive to prices, but because these markets have less competition and the products or services can be tailored very specifically to the needs and preferences of a targeted customer group, allowing for potentially higher margins.

Question 16

According to Charlie Munger, the profitability in the reinsurance industry is depressed by the fact that many companies believe it to be an attractive business.

Accepted Answer

Charlie Munger has stated that the profitability in the reinsurance industry is reduced due to the fact that people think it's an attractive industry, resulting in increased competition and lower margins.

Question 17

In a "contestable market" it is actual entry rather than the threat of entry that keeps prices at their competitive level.

Accepted Answer

In a contestable market, it is the threat of potential entry by new competitors, not actual entry, that disciplines the market and keeps prices close to their competitive levels. This concept hinges on the ease with which new firms can enter and exit the market without significant barriers.

Question 18

Economies of scale, absolute cost advantages, high capital requirements, and limited access to channels of distribution give incumbent firms an advantage over new entrants to an industry.

Accepted Answer

Economies of scale allow incumbent firms to produce at a lower cost per unit, giving them a cost advantage over new entrants. Absolute cost advantages refer to having access to cheaper inputs or production methods, which again favors incumbent firms. High capital requirements can act as a barrier to entry for new firms, and limited access to channels of distribution can make it difficult for new firms to get their products to market. All of these factors combined give established firms an advantage over new entrants.

Question 19

The reason that the shares of steel, automobile and chemical companies are regarded as "cyclical" is that the high fixed costs of these industries make profits highly sensitive to changes in the level of demand.

Accepted Answer

The statement is true. The fixed costs of industries such as steel, automobile, and chemical are high, which means that changes in demand can have a significant impact on profitability.

Question 20

An exit barrier is anything that is an impediment to excess capacity leaving an industry.

Accepted Answer

An exit barrier can be anything that makes it difficult for a company to leave an industry, such as high fixed costs, specialized assets, or regulatory requirements.

Quiz 3: Industry Analysis: the Fundamentals