Question 1

If the demand curve for a commodity faced by sellers is highly elastic, buyers have greater ability to substitute away from it.

Accepted Answer

When the demand curve for a commodity faced by sellers is highly elastic, it means that small changes in price lead to relatively larger changes in quantity demanded by buyers. This suggests that buyers have greater ability to substitute away from the commodity as they are more likely to switch to alternatives if the price of the commodity increases. Thus, option A is correct.

Question 2

Investment in a new facility is likely to increase the annual profit of a fertilizer producer by $85.The producer will purchase the facility only if it requires an annual investment of $90.

Accepted Answer

The annual investment required for the new facility is greater than the expected increase in annual profit, so it would result in a net decrease in profit. Therefore, the producer would not purchase the facility.

Question 3

A person with no competitive ideas can earn above market average returns at low risk by investing in a diversified portfolio of stocks.

Accepted Answer

Diversification can reduce risk, but it does not guarantee above-market average returns, especially without competitive ideas or strategies.

Question 4

Food retailers usually do not compete on which of the following factors?
A)Price
B)Variety
C)Location
D)Packaging

Accepted Answer

Food retailers typically do not compete on packaging, as customers are usually more concerned with the quality and price of the food itself. Price, variety, and location are all common competitive factors in the food retail industry.

Question 5

Assume that the adoption of a new technology costing $8 per year lowers the marginal cost of producing Good X from $7 to $3.The firm will adopt the new technology if it expects annual profit to increase from $14 to $18.

Accepted Answer

The answer of Assume that the adoption of a new...

Question 6

Innovative ideas often exist in an environment of uncertainty, and their probabilities of success usually cannot be determined in an objective way.

Accepted Answer

Innovative ideas are by definition new and untested, which means there is often a significant level of uncertainty surrounding their success. While some market research or feedback from potential users may give an indication of potential success, there is no guarantee that these ideas will be successful. Therefore, probabilities of success cannot be objectively determined.

Question 7

Temporary discounts offered to customers by competitive retailers usually reflect:
A)output rationing.
B)a rise in market demand.
C)price discrimination.
D)a fall in input prices.

Accepted Answer

Temporary discounts offered by competitive retailers usually reflect price discrimination, which means offering different prices to different customers based on their willingness to pay. It is a strategy to increase sales by attracting customers who may not have been willing to pay the regular price. This does not necessarily involve output rationing, a rise in market demand or a fall in input prices.

Question 8

If an economic change lowers the production cost of a commodity but does not reduce its market price, economic value will be created.

Accepted Answer

When the production cost of a commodity is lowered, the profit margin of the seller increases, which creates economic value. If the market price remains the same, the seller can either increase their profit or pass some of the cost savings onto the consumer, which also increases economic value.

Question 9

If the seller of a good gets less than his/her opportunity cost and the buyer pays more than his/her valuation of the good, economic value is created.

Accepted Answer

Economic value is created when the seller receives more than his/her opportunity cost and the buyer pays less than his/her valuation of the good, leading to mutual benefit and an increase in overall welfare.

Question 10

If Electro is a retailer of ductile iron pipes manufactured by Steelfact Corporation, an agreement between these two companies will be called a horizontal agreement.

Accepted Answer

A horizontal agreement is between companies at the same level of the supply chain, such as two manufacturers. Electro, being a retailer, and Steelfact Corporation, being a manufacturer, are at different levels of the supply chain, making their agreement a vertical agreement.

Question 11

When an innovation spreads among producers, the earlier adopters enjoy longer-lived streams of profit before the market reaches its new long-run equilibrium.

Accepted Answer

This statement is true. Early adopters of an innovation have an advantage because they can establish their brand, acquire customers, and benefit from a market edge before competitors catch up. This allows them to generate profits and build a stronger foundation before the market reaches its new equilibrium.

Question 12

Ezybuy is a newly opened chain of departmental stores that offers its customers free home delivery for purchases above $100.If this promotional policy increases the cost borne by the seller by $10 for every transaction, while each customer values this service at $3, it can be said to generate economic value.

Accepted Answer

The cost of the promotional policy ($10 per transaction) exceeds the value that each customer places on the service ($3). Therefore, it does not generate economic value.

Question 13

A seller with market power has greater command over product price compared to a perfect competitor and is thus less enthusiastic in devising new ways to create economic value.

Accepted Answer

A seller with market power has the ability to set prices higher than their marginal cost, leading to higher profits. However, they may still have incentives to create economic value by investing in research and development, improving product quality, and expanding their product line to maintain their market position and fend off potential competition. Therefore, the statement in the question is false.

Question 14

Suppose Melita is willing to pay a maximum of $30 for a pair of normal sunglasses and $36 for the same pair with a double UV-protection filter.If the unit cost of upgrading a product is $6, the seller will upgrade the product if Melita pays at least $35 for it.

Accepted Answer

The seller will upgrade the product if Melita pays at least $36 for it, as this is the maximum she is willing to pay for the upgraded version, covering the $6 upgrade cost.

Question 15

One possible reason for Wal-Mart's success is that centralized-decision making provides economies of scale that allow it to aggressively bargain down wholesale prices of standard consumer goods.

Accepted Answer

Wal-Mart's centralized decision-making and large purchasing power allow them to negotiate lower prices from suppliers, leading to cost savings that can be passed on to customers and ultimately resulting in their success.

Question 16

Which of the following facts about competitive ideas is true?
A)A successful competitive idea should be big in terms of investment.
B)A competitive idea is usually built on a foundation of other ideas.
C)A competitive idea should necessarily be scientific.
D)A successful competitive idea must be original.

Accepted Answer

Competitive ideas often build upon existing ideas, combining, refining, or expanding them to create something that can stand out in the market. This process of iteration and improvement is a common path to competitive success.

Question 17

Assume that a product upgrade strategy adopted by a microwave oven manufacturer increases his marginal cost by $1.50.If the strategy also increases the demand for the product by $3.50 per unit, total economic value will increase.

Accepted Answer

Increasing demand by a greater amount than the increase in marginal cost will result in an increase in total economic value. Therefore, the statement is true.

Question 18

Wal-Mart's store managers have the authority to stock items and price them to satisfy localized demand.Which of the following properties of this retail store is illustrated here?
A)Relationship with employees
B)Regional relationships
C)Centralized decision making
D)Decentralized decision making

Accepted Answer

This scenario exemplifies decentralized decision making, as the store managers have the authority to make decisions based on localized demand instead of relying on centralized decisions made at the corporate level.

Question 19

Which of the following is a reason behind Wal-Mart's success?
A)Absence of unionization and encouragement of merit-based promotions.
B)Complete control over the market price.
C)Presence of regional managers in the field rather than at headquarters.
D)Centralized control and inspection over the functioning of store managers.

Accepted Answer

Wal-Mart has been successful in managing costs and keeping prices low, in part through its avoidance of unionization, which reduces labor costs and allows for merit-based promotions. This has allowed the company to maintain high levels of efficiency and flexibility in its operations.

Question 20

Large firms that invest in specific assets which cannot easily be redeployed to other uses or locations, may be able to protect their profits for longer than if they do not make such investments.

Accepted Answer

By investing in specific assets that cannot easily be redeployed, the large firms can have a competitive advantage and protect their profits for a longer period. For example, if a firm invests in research and development to create a unique product, it can earn a higher profit margin as competitors cannot replicate that product easily. Similarly, if a company invests in building a large manufacturing plant, it can benefit from economies of scale, reduce production costs, and have a better market position.

Quiz 8: Competition and Strategy