Question 1

Consider a monopolist attempting to engage in limit pricing with total costs C(Q)= 200 + 10Q.The market (inverse)demand for its product is P = 150 − 2Q.Currently,the monopolist produces 40 units of output.Assuming the potential entrant has the same cost structure as the incumbent monopolist,is it profitable for the entrant to produce 20 units of output?
A) Yes, since the market price of $30 is greater than the average total cost of producing 20 units.
B) No, since the market price of $30 is less than the average total cost of producing 20 units.
C) Yes, since the market price of $70 is greater than the average total cost of producing 20 units.
D) No, since the market price of $70 is less than the average total cost of producing 20 units.

Accepted Answer

The market price of $30 is greater than the average total cost of producing 20 units, which is $25.

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 will increase its output.
B) firm 2 will lose market share.
C) firm 1 will enjoy higher profits.
D) None of the preceding statements is correct.

Accepted Answer

In a Cournot duopoly, if firm 2 adopts a strategy that raises firm 1's marginal cost, firm 1 will likely reduce its output to equate marginal cost with marginal revenue, not increase it. This reduction in output could potentially allow firm 2 to gain, not lose, market share. Additionally, higher marginal costs for firm 1 would typically lead to lower, not higher, profits for firm 1. Therefore, none of the provided statements is correct.

Question 3

Predatory pricing is a strategy:
A) whereby an incumbent maintains a price below the monopoly level to prevent entry by potential competitors.
B) whereby a firm enjoys lower costs due to knowledge gained from its past production decisions.
C) whereby a firm temporarily prices below its marginal cost to drive competitors out of the market.
D) used by a vertically integrated firm to squeeze the margins of its competitors.

Accepted Answer

Predatory pricing is a strategy where a firm prices below its marginal cost in the short run to drive its competitors out of the market. The intent behind predatory pricing is to capture a larger market share by eliminating competition, making it difficult for new competitors to enter the market or survive.

Question 4

A price-cost squeeze is a tactic used:
A) to prevent potential competitors from entering a market.
B) by a vertically integrated firm to squeeze the margins of its competitors.
C) 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.
D) to gain a critical mass of consumers by charging an initial low price.

Accepted Answer

A price-cost squeeze is when a vertically integrated firm charges its rivals a high price for an essential input while keeping the prices low for end consumers. This strategy forces their rivals to either pay the high price or exit the market altogether, while maintaining the firm's monopoly power.

Question 5

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { Low } Q & \text { High } Q \
\hline & & \
\text { Low } Q & \$ 10, \$ 35 & \$ 25, \$ 30 \
\hline & & \
\text { High } Q & \$ 30, \$ 7 & \$ 20, \$ 6\
\hline
\end{array}
\end{array}$ 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 High Q. Observing player 2's move, player 1's best response is to play Low Q.
B) Player 2 moves first and plays Low Q. Observing player 2's move, player 1's best response is to play Low Q.
C) Player 2 moves first and plays High Q. Observing player 2's move, player 1's best response is to play High Q.
D) Player 2 moves first and plays Low Q. Observing player 2's move, player 1's best response is to play High Q.

Accepted Answer

If Player 2 moves first and plays High Q, then Player 1's best response is to play Low Q, resulting in a payoff of \$30 for Player 2. However, if Player 1 moves first and plays Low Q, then Player 2's best response is to play Low Q, resulting in a payoff of \$35 for Player 2. Thus, Player 2 has a first-mover advantage by playing High Q.

Question 6

A two-way network linking 15 users creates how many potential network connections?
A) 225
B) 100
C) 210
D) 300

Accepted Answer

For two-way communication between 15 users, we can use the formula: 
n(n-1)/2, where n is the number of users. 
So substituting the value of n = 15, we get: 
15(15-1)/2 = 210. Thus, there are 210 potential network connections. Therefore, the best choice is C.

Question 7

Consider an incumbent that is a monopoly currently earning $2 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 $1.2 million annually.To keep potential entrants out of the market,the incumbent lowers its price to the point where it is earning $1.6 million annually for the indefinite future.If the interest rate is 10 percent,does it make sense for the incumbent to limit price to prevent entry?
A) No, since $4 million > $400,000.
B) Yes, since $4 million > $400,000.
C) No, since $2 million > $200,000.
D) Yes, since $2 million > $200,000.

Accepted Answer

By limiting the price and earning $1.6 million annually, the incumbent is sacrificing $400,000 ($2 million - $1.6 million) in profits. However, if a new entrant were to enter the market and reduce the incumbent's profits to $1.2 million annually, the incumbent would lose $800,000 ($2 million - $1.2 million) in profits. Using a discount rate of 10 percent, the present value of sacrificing $400,000 annually indefinitely is $4 million ($400,000 / 0.10), which is greater than the present value of losing $800,000 annually indefinitely, which is $8 million ($800,000 / 0.10). Therefore, it makes sense for the incumbent to limit its price to prevent entry.

Question 8

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { a}  & \text { b}  \
\hline & & \
\text { A } Q & \$ 50, \$ 5 & \$ 25, \$ 30 \
\hline & & \
\text { B } Q & \$ 40, \$ 2 & \$ 20, \$ 1\
\hline
\end{array}
\end{array}$ 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 9

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 increase its output.
B) firm 2 will gain market share.
C) firm 2 will enjoy lower profits.
D) All of the statements associated with this question are correct.

Accepted Answer

In a Cournot duopoly, if firm 2 adopts a strategy that increases firm 1's marginal cost, firm 1 will produce less, leading to firm 2 gaining market share as it can capture the portion of the market that firm 1 loses due to its increased costs.

Question 10

Suppose the inverse market demand is given by P = 105 − Q.If the incumbent continues to produce 40 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 − Q
D) P = 65 − Q

Accepted Answer

To find the residual demand curve for the potential entrant, we need to subtract the quantity produced by the incumbent from the total market quantity at each price level.

At a price of P, the total market quantity is given by:

Q_total = 105 - P

Since the incumbent is producing 40 units, the quantity available to the potential entrant is:

Q_potential entrant = Q_total - 40 
Q_potential entrant = (105 - P) - 40 
Q_potential entrant = 65 - P

Now we can express the potential entrant's residual demand curve as:

P = 65 - Q_potential entrant

P = 65 - (65 - P)

P = P

This means that the potential entrant faces a horizontal residual demand curve at the market price level.

Therefore, the best choice is option D, which has a residual demand curve of P = 65 - Q.

Question 11

Which of the following is a strategy that can be used only by vertically integrated firms?
A) Vertical foreclosure
B) Predatory pricing
C) Limit pricing
D) Penetration pricing

Accepted Answer

Vertical foreclosure, also known as vertical integration foreclosure, occurs when a vertically integrated firm uses its control over an upstream input to harm downstream rivals by restricting their access to the input. This strategy can only be used by firms that control both the upstream and downstream stages of the production process, i.e., vertically integrated firms. Predatory pricing, limit pricing, and penetration pricing can be used by both vertically integrated and non-integrated firms.

Question 12

A single firm that charges the monopoly price in the market earns $800.If another firm successfully enters the market,the incumbent's profits fall to $500 and the entrant earns $450.If the incumbent engages in limit pricing,its profits are $600.For what interest rate,i,is limit pricing a profitable strategy for the incumbent?
A) i < 0.5
B) 0.5 < i < 1.0
C) 1.0 < i < 1.5
D) i > 1.5

Accepted Answer

If the incumbent continues to charge the monopoly price, its profits will be $800. 
If the entrant successfully enters the market, the incumbent's profits fall to $500 and the entrant earns $450. Together, they earn $950. 
If the incumbent engages in limit pricing, its profits are $600, while the entrant earns $0.

Therefore, the incumbent's decision is between earning $600 (limit pricing) or $500 (if the entrant successfully enters the market). 
The incumbent's profit if it continues to charge the monopoly price is irrelevant since the question asks about the profitability of limit pricing.

We can set up an equation to solve for the critical interest rate:

$600 = $500/(1+i) + $450(1/(1+i))
Solving for i, we get i = 0.5, which is less than the interest rate on investment.

Therefore, limit pricing is a profitable strategy for the incumbent at an interest rate less than 0.5. The answer is A.

Question 13

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { Low } Q & \text { High } Q \
\hline & & \
\text { Low } Q & \$ 10, \$ 35 & \$ 25, \$ 30 \
\hline & & \
\text { High } Q & \$ 30, \$ 7 & \$ 20, \$ 6\
\hline
\end{array}
\end{array}$ 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 Nash equilibrium, each player's strategy is the best response to the other player's strategy. Here, if Player 2 chooses Low Q, Player 1's best response is High Q ($30 > $10). If Player 2 chooses High Q, Player 1's best response remains High Q ($20 > $25). For Player 2, if Player 1 chooses Low Q, the best response is Low Q ($35 > $30). If Player 1 chooses High Q, Player 2's best response is Low Q ($7 > $6). Thus, the Nash equilibrium is where Player 1 chooses High Q and Player 2 chooses Low Q.

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 lose market share.
C) firm 2 will enjoy lower profits.
D) None of the preceding statements is correct.

Accepted Answer

If firm 2 raises firm 1's marginal cost, then firm 1's profit-maximizing output level will decrease, as it will become more expensive for firm 1 to produce each unit. This is because the marginal revenue curve will shift downwards, resulting in lower profits for firm 1. Therefore, firm 1 will reduce its output.

Question 15

A single firm that charges the monopoly price in the market earns $1,300.If another firm successfully enters the market,the incumbent's profits fall to $700 and the entrant earns $575.If the interest rate is 0.5,how high must the firm's profits from limit pricing be for limit pricing to be a profitable strategy for the incumbent? A) π^L > $200 B) π^L > $500 C) π^L > $900 D) π^L > $1,000

Accepted Answer

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

Question 16

A potential entrant knows that it faces a (inverse)residual demand curve given by P = 90 − 3Q.While the entrant does not know the inverse market demand,it does know that the incumbent committed to producing 10 units.Using this information,which of the following equations best summarizes the inverse market demand curve?
A) P = 60 − 3Q
B) P = 80 − 3Q
C) P = 50 − 3Q
D) None of the preceding statements is correct.

Accepted Answer

The inverse market demand curve is P = 90 - 3Q. The incumbent is producing 10 units, so the residual demand curve faced by the potential entrant is P = 90 - 3Q - 3(10) = 60 - 3Q.

Question 17

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 equilibrium strategies leading to an advantage are {(low output); (if low output, high output), (if high output, high output)}.
B) Player B has a first-mover advantage. The equilibrium strategies leading to an advantage are {(low output); (if low output, high output), (if high output, low output)}.
C) Player B has a first-mover advantage. The equilibrium strategies leading to an advantage are {(high output); (if low output, high output), (if high output, low output)}.
D) Player B does not have a first-mover advantage in the game.

Accepted Answer

The answer of Using the following sequential-move production game,determine whether...

Question 18

Firms 1 and 2 compete in a Cournot duopoly.If firm 1 adopts a strategy that raises firm 2's marginal cost:
A) firm 2 will increase its output.
B) firm 1 will increase market share.
C) firm 1 will suffer lower profits.
D) All of the statements associated with this question are correct.

Accepted Answer

When Firm 1 adopts a strategy that raises Firm 2's marginal cost, Firm 2 will produce less, allowing Firm 1 to increase its market share.

Question 19

A monopolist earns $50 million annually and will maintain that level of profit indefinitely,provided no other firm enters the market.If another firm successfully enters the market,the incumbent's profits remain at $50 million the first period,but fall to $25 million annually thereafter.The opportunity cost of funds is 10 percent,and profits in each period are realized at the beginning of each period.What is the present value of the firm's current and future earnings if entry occurs?
A) $300 million
B) $250 million
C) $400 million
D) $500 million

Accepted Answer

The present value of the firm's current and future earnings if entry occurs is $300 million. This is calculated as follows:PV = $50 million / 0.10 + $25 million / 0.10^2 = $300 million

Question 20

Refer to the following payoff matrix:
$\begin{array}{r}
\text { Player } 2\
\text { Player } 1
\begin{array}{|l|l|l|} 
\hline& \text { a}  & \text { b}  \
\hline & & \
\text { A } Q & \$ 50, \$ 5 & \$ 25, \$ 30 \
\hline & & \
\text { B } Q & \$ 40, \$ 2 & \$ 20, \$ 1\
\hline
\end{array}
\end{array}$ Suppose the simultaneous-move game depicted in this 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) ($25, $30)

Accepted Answer

In the sequential-move game, if player 1 chooses action A, player 2 will choose action a to receive the higher payoff. If player 1 chooses action B, player 2 will choose action b to receive the higher payoff. Therefore, player 1's best choice is B, which leads to the equilibrium of ($40, $2) as both players will choose their best responses.

Quiz 13: Advanced Topics in Business Strategy

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

Predatory pricing is a strategy:

A price-cost squeeze is a tactic used:

A two-way network linking 15 users creates how many potential network connections?

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

Suppose the inverse market demand is given by P = 105 − Q.If the incumbent continues to produce 40 units of output,which of the following equations best summarizes the potential entrant's residual demand curve?

Which of the following is a strategy that can be used only by vertically integrated firms?

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

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:

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