Question 1

A bottleneck is a:
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.

Accepted Answer

A bottleneck occurs when the capacity of a certain part of the infrastructure is reached and congestion occurs. This leads to negative externalities, such as delays and increased costs for users. The correct answer is therefore D, which describes a negative externality resulting from congestion beyond the infrastructure capacity.

Question 2

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's reaction function will shift up.
B) firm 2's reaction function will shift up.
C) firm 2's reaction function will shift down.
D) firm 1's reaction function will shift down.

Accepted Answer

If firm 2's strategy increases firm 1's marginal cost, it will cause firm 1's reaction function to shift downwards. This is because firm 1 will produce less output at any given price, as its cost of production has increased. The shift in firm 1's reaction function would result in a decrease in the equilibrium quantity and an increase in the equilibrium price. Therefore, the best choice is D.

Question 3

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

Accepted Answer

The answer of Refer to the following payoff matrix:
\(\begin{array}{r}
\text {...

Question 4

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:
A) −$100 million.
B) $0.
C) $100 million.
D) $200 million.

Accepted Answer

The answer of Smyth Industries operated as a monopolist for...

Question 5

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that,inadvertently,lowers firm 1's marginal cost:
A) firm 1's reaction function will shift up.
B) firm 2's reaction function will shift up.
C) firm 2's reaction function will shift down.
D) firm 1's reaction function will shift down.

Accepted Answer

If Firm 2's strategy inadvertently lowers the marginal cost for Firm 1, then Firm 1's profit-maximizing output level will increase. This will result in a shift up in Firm 1's reaction function, as it will produce more output for any given output level by its competitor. Therefore, the best choice is A.

Question 6

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { a}  & \text { b}  \
\hline & & \
\text { A } Q & \$ 50, \$ 5 & \$ 15, \$ 30 \
\hline & & \
\text { B } Q & \$ 40, \$ 2 & \$ 2, \$ 1\
\hline
\end{array}
\end{array}$ Suppose the simultaneous-move game depicted in the payoff matrix could be turned into a sequential-move game with player 1 moving first.In this case,the equilibrium payoffs will be:
A) ($20, $1)
B) ($50, $5)
C) ($40, $2)
D) ($15, $30)

Accepted Answer

In the sequential-move version of this game, if Player 1 chooses action A, Player 2 will respond with action a, since this yields Player 2 the highest payoff of \$50. If Player 1 chooses action B, Player 2 will respond with action b, as b yields Player 2 \$30, which is more than the \$5 they would get from choosing a. Therefore, the unique subgame perfect equilibrium of this game is for Player 1 to choose action B, and for Player 2 to choose action b, resulting in payoffs of ($40, $2).

Question 7

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

Accepted Answer

When a new user joins a two-way network, they can potentially connect with all other 1,000 users, adding 1,000 potential connections to the network. Additionally, existing users can potentially connect with the new user, adding another 1,000 potential connections. Therefore, adding one additional user adds 1,000 + 1,000 = 2,000 potential connections, which is closest to option B.

Question 8

Suppose the inverse market demand is given by P = 150 − 2Q.If the incumbent continues to produce 10 units of output,which of the following equations best summarizes the potential entrant's residual demand curve?
A) P = 130 − 2Q
B) P = 150 − 4Q
C) P = 75 − 0.5Q
D) P = 130 − Q

Accepted Answer

The incumbent produces 10 units, so Q_incumbent = 10. The inverse market demand is P = 150 - 2Q. To find the residual demand for the potential entrant, we substitute Q_incumbent into the market demand, getting P = 150 - 2*(10 + Q_entrant) = 150 - 20 - 2Q_entrant = 130 - 2Q_entrant. Thus, the correct equation is P = 130 - 2Q, which matches option A.

Question 9

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { Low } Q & \text { High } Q \
\hline & & \
\text { Low } Q & \$ 50, \$ 5 & \$ 15, \$ 30 \
\hline & & \
\text { High } Q & \$ 40, \$ 2 & \$ 2, \$ 1\
\hline
\end{array}
\end{array}$ If the payoff matrix is a simultaneous-move production game,the Nash equilibrium is for:
A) both players to produce low output.
B) both players to produce high output.
C) player 1 to produce low output and player 2 to produce high output.
D) player 1 to produce high output and player 2 to produce low output.

Accepted Answer

In a simultaneous-move production game, the players choose their output levels simultaneously without knowing the other player's choice. To find the Nash equilibrium, we look for a situation where neither player has an incentive to change their choice given the other player's choice. In this game, if player 2 chooses to produce low output, then player 1's best response is also to produce low output (since it leads to a higher payoff for player 1 compared to producing high output). Similarly, if player 2 chooses to produce high output, then player 1's best response is to produce low output (again, leading to a higher payoff for player 1). Therefore, the only Nash equilibrium is for player 1 to produce low output and player 2 to produce high output.

Question 10

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

Accepted Answer

To find the residual demand curve faced by the potential entrant, we need to subtract the quantity produced by the incumbent from the total market demand and then solve for P in terms of Q. 
Total market demand: P = 75 - 0.5Q 
Quantity produced by the incumbent: Q1 = 20 
Residual demand curve: P = 75 - 0.5Q1 - 0.5Q2, where Q2 is the output of the potential entrant. 
Substituting Q1 = 20 and rearranging, we get: 
P = 75 - 0.5Q2 - 10 
P = 65 - 0.5Q2 
So the correct answer is D.

Question 11

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 2.
A) Player 2 moves first and plays Low Q. Observing player 2's move, player 1's best response is to play Low Q.
B) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play Low Q.
C) Player 1 moves first and plays Low Q. Observing player 1's move, player 2's best response is to play High Q.
D) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play High Q.

Accepted Answer

In a sequential-move game, the first mover can influence the subsequent moves of the other player. If Player 2 moves first and chooses High Q, Player 1's best response, to maximize their payoff, is to choose Low Q, which gives Player 1 a payoff of $15 and Player 2 a payoff of $30. This strategy gives Player 2 a first-mover advantage by allowing them to secure a higher payoff than in any other scenario.

Question 12

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?
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.

Accepted Answer

Remaining as a duopolist is more financially viable for Smyth Industries. If they continue earning $10 million annually without engaging in predatory pricing, they avoid the $1 billion loss. Over 20 years, they would earn $200 million ($10 million x 20 years), which is significantly better than incurring a $1 billion loss from predatory pricing, even if it potentially regains monopoly profits afterward.

Question 13

Which of the following is NOT an example of raising rivals' fixed costs?
A) Existing doctors in a particular medical field lobby to require new doctors to acquire new licenses.
B) Yellow Cab Company lobbying New York City government officials for an ordinance that would require all taxi cab drivers to pay for a medallion, giving them the right to drive a cab in New York City.
C) Federal Express lobbying the U.S. Department of Transportation to increase annual terminal fees.
D) The New York Port Authority lobbying to increase the tolls on New York City's George Washington Bridge.

Accepted Answer

Raising rivals' fixed costs involves actions that increase the fixed costs of competitors. Options A, B, and C are examples of this because they involve lobbying to impose new costs on entrants or competitors. Option D, increasing tolls on a bridge, does not specifically target competitors' fixed costs in a business sense but rather affects all users of the bridge equally, making it not an example of raising rivals' fixed costs.

Question 14

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

Accepted Answer

If Smyth Industries decides to price its product 50% below marginal cost for one year, it will incur a loss of $1 billion. However, this strategy can potentially drive Jones Incorporated out of the market, allowing Smyth to regain its monopoly position and earn profits of $50 million annually.

To calculate the present value of Smyth's profits as a duopolist, we can use the formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years. In this case, n is assumed to be perpetual, since there is no specified end date.

Using this formula, we can calculate the present value of Smyth's profits as follows:

PV = $50 million / (1 + 0.05)^0 + $10 million / (1 + 0.05)^1 + $10 million / (1 + 0.05)^2 + $10 million / (1 + 0.05)^3 + ...

PV = $50 million + $9.52 million + $9.07 million + $8.63 million + ...

PV = $210 million (rounded to the nearest million)

Therefore, the present value of Smyth Industries' profits as a duopolist is $210 million, which is greater than the potential loss of $1 billion from the aggressive pricing strategy. Therefore, the best choice is C) $210 million.

Question 15

Suppose that a one-way network leads to the development of a number of new complementary products and services.This phenomenon is known as:
A) a direct network externality.
B) an indirect network externality.
C) a reputation effect.
D) lock-in.

Accepted Answer

An indirect network externality occurs when the adoption and use of a product or service creates opportunities for complementary goods or services to be developed. In this case, the one-way network is leading to the development of new complementary products and services, indicating an indirect network externality. Direct network externalities occur when the value of a product or service increases as more people use it, while lock-in refers to a situation where customers become dependent on a product or service and cannot easily switch to alternatives. Reputation effect describes a phenomenon where a product or service gains value based on its perceived quality or the opinions of others.

Question 16

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.
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.

Accepted Answer

If Player 1 moves first and chooses High Q, Player 2's best response is to choose Low Q, as it gives Player 2 a higher payoff ($5 vs. $2) compared to choosing High Q. This strategy maximizes Player 1's payoff ($40) when moving first.

Question 17

Suppose that Microsoft and Google compete in the market for PC Internet browsers.Initially these firms compete as Cournot duopolies with symmetric reaction functions.If Microsoft enters into exclusive contracts with PC suppliers that preclude suppliers from loading Google's Internet browser on PCs loaded with the Windows operating system,then Google's marginal cost of distributing its browser will increase to $5 per unit. The new equilibrium would entail Microsoft supplying __________ browsers and Google supplying ____________ browsers to the market.The end result is ________ profits for Google.
A) more; fewer; lower
B) fewer; more; higher
C) more; more; lower
D) fewer; fewer; higher

Accepted Answer

By entering into exclusive contracts with PC suppliers, Microsoft increases the marginal cost for Google to distribute its browser, making it less competitive. As a result, Microsoft would supply more browsers due to reduced competition, while Google would supply fewer browsers because of the increased costs and reduced access to the market. Consequently, Google's profits would be lower due to decreased market share and increased costs.

Question 18

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

Accepted Answer

The electricity that flows into residential areas is a one-way network, as it only flows from the electricity provider to the consumers' homes and does not flow back in the opposite direction.

Question 19

Consider a two-way network with 1,000 users.The number of potential connections is:
A) 999.
B) 1,000.
C) 2,000.
D) 999,000.

Accepted Answer

In a two-way network with 1,000 users, each user can connect with 999 other users, leading to 1,000 * 999 connections. However, since each connection involves two users, we've double-counted. The correct formula for calculating the number of unique connections is n(n-1)/2, where n is the number of users. Substituting 1,000 for n gives us 1,000(999)/2 = 499,500. However, the correct interpretation of the potential connections in a network without considering the division by 2 (as might be implied by the question's phrasing) leads to the initial calculation of 1,000 * 999 = 999,000 potential connections, assuming each connection is counted separately for each user. This discrepancy arises from interpreting the question's intent and the definition of "potential connections" used.

Question 20

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:
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.

Accepted Answer

A direct network externality is a situation where the value of a product or service increases as more people use it. In this case, a two-way network linking users creates a direct network externality because the more people that use the network, the more valuable the service becomes. As such, the correct answer is C, a positive externality known as a direct network externality.

Quiz 13: Advanced Topics in Business Strategy

A bottleneck is a:

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

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

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

Suppose the inverse market demand is given by P = 150 − 2Q.If the incumbent continues to produce 10 units of output,which of the following equations best summarizes the potential entrant's residual demand curve?

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?

Which of the following is NOT an example of raising rivals' fixed costs?

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

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

Consider a two-way network with 1,000 users.The number of potential connections is:

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: