Question 1

Vertical foreclosure is an example of a firm
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.

Accepted Answer

D

Question 2

Penetration pricing is
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.

Accepted Answer

Penetration pricing is a strategy used by new entrants in the market to overcome an incumbent's first-mover advantage by offering a lower price initially to gain market share. This helps the new entrant to establish their brand in the market, gain customer loyalty and more long-term customers.

Question 3

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

Accepted Answer

D

Question 4

A network linking 6 users is typically
A)less likely to exhibit bottlenecks than a network linking 2 users.
B)three times as valuable as a network linking 2 users.
C)more than three times as valuable as a network linking 2 users.
D)less than three times as valuable as a network linking 2 users.

Accepted Answer

A network linking 6 users is more valuable than a network linking 2 users because it allows for more connections, collaborations, and sharing of resources. Additionally, with more users, the network is less likely to exhibit bottlenecks due to the distribution of traffic and resources among multiple users. Therefore, a network linking 6 users is more than three times as valuable as a network linking 2 users.

Question 5

In general, adding one more user to a two-way network tends to
A)benefit the new user more than the existing users.
B)benefit existing users more than the new user.
C)provide equal benefits to existing users and the new user.
D)does not provide any benefit to either new or existing users.

Accepted Answer

When a new user is added to a two-way network, the existing users benefit more than the new user since there are now more connections and potentially more resources available. The new user still has limited connections and resources until they establish further connections within the network. Therefore, existing users tend to benefit more from the addition of a new user.

Question 6

Nodes are
A)examples of positive network externalities.
B)examples of negative network externalities.
C)different points in geographic or economic space linked by a network.
D)none of the statements associated with this question are correct.

Accepted Answer

Nodes refer to different points in a network, whether it's a geographic or economic network. For example, in a transportation network, nodes could be different cities, while in a social network, nodes could be different individuals. Therefore, option C is the correct choice. A and B are incorrect as they refer to network externalities, which is not what the term "nodes" means. D is incorrect because at least one of the statements is correct (C).

Question 7

A two-way network linking 5 users creates how many potential network connections?
A)5.
B)10.
C)20.
D)30.

Accepted Answer

Each user can connect with 4 other users in the network. Therefore, the total number of potential network connections can be calculated using the combination formula:
nCr = n! / r! (n-r)!

In this case, the number of users (n) is 5, and the number of connections to be made (r) is 2.

So, 5C2 = 5! / (2! × (5-2)!) = 10.

However, we must also consider that each connection can be made in two directions (user A can connect with user B, and user B can connect with user A). Therefore, the total number of potential network connections is 10 × 2 = 20.

Hence, the correct answer is C) 20.

Question 8

Bottlenecks
A)occur only in one-way networks.
B)occur only in two-way networks.
C)occur in both one-way and two-way networks.
D)are a positive externality associated with networks.

Accepted Answer

Bottlenecks can occur in both one-way and two-way networks. They refer to a part of the network where the flow of information or goods is obstructed or reduced, causing delays or inefficiencies. Therefore, this problem is not limited to any specific type of network.

Question 9

Which of the following is false?
A)It is always more profitable to engage in limit pricing than to permit entry.
B)Being the first-mover is always best.
C)Engaging in predatory pricing is always more profitable than permitting existing firms to remain in the market.
D)All of the statements associated with this question are false.

Accepted Answer

All of the statements associated with this question are false.

Question 10

Which of the following is an example of a network?
A)Wireless telephone service.
B)Railroads.
C)Internet.
D)All of the examples associated with this question are networks.

Accepted Answer

All of the examples listed in the question are examples of networks. Wireless telephone service and the Internet are both types of communication networks, while railroads are a transportation network.

Question 11

Selling a product below cost to gain a foothold in the market in order to eliminate the inefficiencies introduced by lock-in is known as
A)predatory pricing.
B)limit pricing.
C)penetration pricing.
D)the price-cost squeeze.

Accepted Answer

Penetration pricing involves selling a product below cost to gain a foothold in the market. This is often done in order to eliminate the inefficiencies introduced by lock-in, which can make it difficult for new competitors to enter the market. Predatory pricing, on the other hand, involves selling a product below cost with the intention of driving competitors out of the market. Limit pricing involves setting a price low enough to deter new entrants from entering the market. The price-cost squeeze refers to a situation in which a company's costs increase faster than the price it charges, leading to a decrease in profitability.

Question 12

Which of the following is incorrect?
A)Predatory pricing is easy to prove in court.
B)Learning curve effects may enable an incumbent to produce at a lower cost than a potential entrant.
C)A firm can benefit from strategies that raise the marginal costs its rivals.
D)A firm can benefit from strategies that raise the fixed costs of all the firms in the industry.

Accepted Answer

Predatory pricing is often difficult to prove in court as it requires establishing the intent of the firm to drive out competitors rather than just pursuing aggressive pricing strategies.

Question 13

Which of the following makes it more difficult for an incumbent to successfully engage in limit pricing?
A)Complete information.
B)Commitment mechanisms.
C)Learning curve effects.
D)A firm's past reputation for being tough on entrants.

Accepted Answer

The answer of Which of the following makes it more...

Question 14

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

Accepted Answer

If firm 2 raises firm 1's marginal cost, firm 1 will reduce its output, allowing firm 2 to gain market share and potentially enjoy higher profits.

Question 15

Limit pricing will effectively deter entry when
A)the incumbent links the pre-entry price to post-entry profits.
B)the incumbent has incomplete information.
C)the entrant must commit to enter the market.
D)all of the statements associated with this question are correct.

Accepted Answer

Limit pricing deters entry when the incumbent sets a low price to signal to potential entrants that entering the market would not be profitable, linking pre-entry price to post-entry profits.

Question 16

Firms that can effectively price discriminate will increase profitability when they engage in
A)predatory pricing.
B)limit pricing.
C)strategies that raises rivals' costs.
D)any of the statements associated with this question are correct.

Accepted Answer

All of the statements associated with this question are correct. Effective price discrimination allows firms to charge different prices to different groups of customers based on their willingness to pay, thus maximizing profits. Predatory pricing involves setting low prices to drive competitors out of the market, limiting pricing involves setting prices low enough to discourage new competitors from entering the market, and raising rivals' costs involves using strategies such as exclusive contracts or patent litigation to increase the costs of competitors. All of these strategies can be used in conjunction with price discrimination to increase profitability.

Question 17

Network externalities
A)may be positive.
B)may be direct.
C)may be indirect.
D)all of the of the statements associated with this question are correct.

Accepted Answer

Network externalities can be positive, direct, or indirect. Positive network externalities occur when the value of a product or service increases as more people use it. Direct network externalities occur when the value of a product or service increases as more people use the same product or service. Indirect network externalities occur when the value of a product or service increases as more people use complementary products or services. Therefore, all of the statements associated with this question are correct.

Question 18

A firm that engages in predatory pricing benefits from
A)having deeper pockets than its prey.
B)building a reputation for taking tough actions to drive a competitor out of the market.
C)having its prey stockpile its product.
D)having deeper pockets than its prey and building a reputation for taking tough actions to drive a competitor out of the market.

Accepted Answer

Predatory pricing involves setting prices lower than the competition to drive them out of business. The firm engaging in predatory pricing benefits from having deeper pockets than its prey, as they can sustain losses for a longer period of time. They also benefit from building a reputation for taking tough actions to drive a competitor out of the market, which can deter new competitors from entering the market in the future. Additionally, if the prey stockpiles its product, it can lead to higher costs and inefficiencies for the prey, making it more difficult for them to compete.

Question 19

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?
A)i < 0.75.
B)0.75 < i < 1.0.
C)1.0 < i < 1.33.
D)i > 1.33.

Accepted Answer

The answer of A single firm that charges the monopoly...

Question 20

When the average cost curve lies above the entrant's residual demand curve, an entrant
A)can profitably enter the market.
B)cannot profitably enter the market.
C)is indifferent between entering and not entering the market.
D)lower the incumbent's average cost curve.

Accepted Answer

If the average cost curve of the incumbent firm lies above the entrant's residual demand curve, it means that the incumbent is already producing at a higher average cost than what the entrant can produce at. Thus, the entrant cannot profitably enter the market since they will not be able to compete with the incumbent's prices while maintaining a profitable level of production.

Quiz 13: Advanced Topics in Business Strategy

Vertical foreclosure is an example of a firm

Penetration pricing is

A network linking 6 users is typically

In general, adding one more user to a two-way network tends to

Nodes are

A two-way network linking 5 users creates how many potential network connections?

Bottlenecks

Which of the following is false?

Which of the following is an example of a network?

Selling a product below cost to gain a foothold in the market in order to eliminate the inefficiencies introduced by lock-in is known as

Which of the following is incorrect?

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

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

Limit pricing will effectively deter entry when

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

Network externalities

A firm that engages in predatory pricing benefits from

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