Business strategy, Managerial economics

1. Predatory pricing is a strategy
A) where a firm enjoys lower costs due to knowledge gained from its past production decisions.
B) used by a vertically integrated firm to squeeze margins of its competitors.
C) where a firm temporarily prices below its marginal cost to drive competitors out of the market.
D) where an incumbent maintains a price below the monopoly level to prevent entry by potential competitors.
E) of Darwinian natural selection.
2. A price-cost squeeze is tactic used
A) by a vertically integrated firm to charge downstream rivals a prohibitive price for an essential input; forcing rivals to use more costly substitutes or exit the industry.
B) to gain a critical mass of consumers by charging an initial low price.
C) by a vertically integrated firm to squeeze the margins of its competitors.
D) to prevent potential competitors from entering a market.
E) to create bottlenecks in order to benefit from negative externality of congestion beyond the infrastructure capacity.
3. Penetration pricing is a way to
A) raise a rival’s marginal cost.
B) increase profits in perfectly competitive environment.
C) lower a rival’s input costs.
D) increase a rival’s fixed costs.
E) gain a critical mass of customers.
4. An example of vertical foreclosure is when a firm
A) temporarily prices below its marginal cost to close competitors out of the market.
B) 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 refuses to sell to other downstream firms that need the input.
D) merges with a rival firm with the intention of eliminating the rival firm’s product from the market and that controls an essential upstream input refuses to sell to other downstream firms that need the input.
E) is when a vertically integrated firm becomes victim of subprime mortgage crisis.
5. Which of the following is the best example of a one-way network?
A) Network using optical fibers carrying signals to and from a subscriber’s premise.
B) The electricity that flows into residential areas.
C) The network of towers that connect cellular telephone users.
D) The network connect instant message users.
E) Facebook.com.
6. 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 network substitutability.
B) Cournot competition.
C) penetration pricing.
D) an indirect network externality and network complementarity.
E) complementary network price discrimination.
7. A two-way network linking 9 users creates how many potential network connections?
A) 72.
B) 56.
C) 90.
D) 18.
E) 81.
8. 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 1 will increase its output.
C) Firm 2 will enjoy lower profits.
D) Firm 1’s reaction function will shift down.
E) Firm 1 will gain market share.
9. Under limit pricing, the incumbent will produce
A) less than the monopoly output and charge a price that is less than the monopoly price.
B) more than the monopoly output and charge a price that is less than the monopoly price.
C) less than the monopoly output and charge a price that is greater than the monopoly price.
D) more than the monopoly output and charge a price that is greater than the monopoly price.
E) output limited to competitive level and charge prices limited by competitors’ prices.
10. A firm that engages in predatory pricing benefits from
A) having its prey stockpile its product.
B) price-cost squeeze, a tactic used by a vertically integrated firm to raise rival’s costs of inputs, while maintaining final product prices.
C) the second mover advantage and nework externalities.
D) the fact that predatory pricing is easy to prove in the court of law.
E) having deeper pockets than its prey and building a reputation for taking tough actions to drive a competitor out of the market.
11. 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) will benefit from learning by doing if he enters the market.
E) should play limit pricing games in order to gain a market share.
12. 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 – Q
B) P = 75 – 0.5Q
C) P = 150 – 4Q
D) P = 140 – 2Q
E) P = 130 – 2Q
13. 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 device 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.

Compute the present value of Smyth Industries’ profits, if it could have remained a monopoly, and the present value of Smyth Industries’ profits if it remains a duopolist in this market, given the interest rate is 5 percent.

A) $250 million; $110 million.
B) $210 million; $100 million.
C) $210 million; $200 million.
D) $1.5 billion; $420 million.
E) $1.05 billion; $210 million.
14. In the problem above, Smyth Industries is deciding whether it should engage in predatory pricing by slashing its price 50 percent below marginal cost, or remain as a duopolist. What do you suggest? hint: the present value of current and future profits from predatory pricing and duopoly.
A) Engage in predatory pricing since $210 million is greater than $200 million.
B) Engage in predatory pricing since $1.05 billion is greater than $1 billion.
C) Remain as a duopolist since $210 million is greater than $0.
D) Remain as a duopolist since $210 million is greater than $100 million.
E) The two options lead to the same profits.
15. 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) 0.75 < i < 1.0.
B) 1.0 < i < 1.33.
C) i > 1.33.
D) i < 0.75.
E) 5 < i < 10.
16. 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 out where it is earning $850,000 annually for the indefinite future. If the interested rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?
A) Yes, since $2 million > $150,000.
B) Yes, since $250,000 < $5 million.
C) No, since $2 million > $250,000.
D) Yes, since $850 million > $750,000.
E) The firm is indifferent, because $2 million = $2 million.
17. Consider an incumbent successfully links the preentry price and postentry profit to prevent entry. The incumbent’s monopoly profit is $10 million. If a rival successfully enters the market, the incumbent’s profits will fall to $4 million. If the incumbent lowers output to 25,000 units, its rival will stay out of the market resulting in an infinite stream of profits of $8 million annually. Due to a recent loan default, the current interest rate is whopping 210 percent. Is limit pricing profitable for the incumbent?
A) Yes, since $19.05 million is greater than $2 million.
B) No since $4 million is less than $4.2 million.
C) No, since $1.91 million is less than $2 million.
D) Yes, since $8 million is greater than $4 million.
E) Linking the preentry price to the postentry profit is sufficient to guarantee the profitability of limit pricing.
18.
Player 2
Player 1 a b
A $50; $5 $15; $30
B $40; $2 $20; $1

In this game, what is the Nash equilibrium?

A) {(A,a) and (A,b)}.
B) {(A,a)}.
C) {B,b)}.
D) {A,b)}.
E) There is no pure strategy Nash equilibrium to the above game.
19. Suppose the simultaneous-move game from the previous problem could be turned into a sequential-move game with player 1 moving first. In this case, a _____________ advantage exists and the equilibrium payoffs will be _____________.
A) first-mover; ($40,$2)
B) second-mover; ($50,$5)
C) first-mover; ($15,$30)
D) second-mover; ($15,$30)
E) competitive; ($2,$5)
20. 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:

A) Player B has a first-mover advantage. The strategy leading to an advantage is {(low output), (if low output, high output), (if high output, high output).
B) Player B has a first-mover advantage. The strategy leading to an advantage is {(low output), (if low output, high output), (if high output, low output).
C) Player B has a first-mover advantage. The strategy leading to an advantage is {(high output), (if low output, high output), (if high output, low output).
D) Player A has a first-mover advantage. The strategy leading to an advantage is {(high output), (if low output, high output), (if high output, low output).
E) Player B does not have a first-mover advantage in the above game.