Question 1

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 network, they can potentially connect with every existing user on the network. Therefore, adding one additional user to a network with 1,000 users adds 1,000 potential connections. Thus, the best choice is B) 1,000 potential connections to the network.

Question 2

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...

Question 3

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 for the potential entrant, we first need to find the market demand curve by rearranging the given inverse demand equation: Q = (75 - P)/0.5 = 150 - 2P.
If the incumbent produces 20 units, the total market output (Q) would be 20 + potential entrant's output (q). Substituting Q = 20 + q in the market demand equation, we get: q = 150 - 2P - 20 = 130 - 2P.
Now, to find the inverse demand equation for the potential entrant, we rearrange the above equation to solve for P: P = (130 - q)/2 = 65 - 0.5q.
Therefore, the potential entrant's residual demand curve is P = 65 - 0.5Q, which is option D.

Question 4

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 5

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 6

Refer to the following payoff matrix:

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

If player 1 moves first, they will choose option A to receive $40 (Player 2's payoff is $2). If player 2 moves after, they will choose option X to receive $2 (Player 1's payoff is $0). Therefore, the equilibrium payoffs will be ($40, $2).

Question 7

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 is a negative externality resulting from congestion beyond the infrastructure capacity. This occurs when the demand for a particular resource exceeds its capacity to supply it, resulting in a slowdown or halt of the entire process. This can have negative effects on productivity, efficiency, and customer satisfaction.

Question 8

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 goes from the power plant to the homes and cannot be sent back to the power plant.

Question 9

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

To calculate the present value of Smyth's profits, we need to determine the future cash flows and discount them using the interest rate.

First, let's determine the future cash flows. If Smyth decides to price its product 50 percent below marginal cost for one year, it will lose $1 billion in profits. However, if this move successfully drives Jones Incorporated out of the market, Smyth can regain its monopoly position and earn $50 million annually in perpetuity.

To calculate the present value of these cash flows, we can use the perpetuity formula:

PV = C/(r-g)

Where PV is the present value, C is the cash flow, r is the interest rate, and g is the growth rate (which we assume to be zero since the cash flow is constant).

Using an interest rate of 5 percent and a cash flow of $50 million, we get:

PV = $50 million / (0.05 - 0) = $1 billion

This is the present value of Smyth's profits if it remains a monopolist.

Now let's consider the scenario where Smyth remains a duopolist with Jones Incorporated. In this case, Smyth earns $10 million annually. To calculate the present value of these cash flows, we can use the perpetuity formula again:

PV = $10 million / (0.05 - 0) = $200 million

Therefore, the present value of Smyth's profits if it remains a duopolist is $200 million.

Comparing the two options, remaining a monopolist has a higher present value of profits ($1 billion) compared to remaining a duopolist ($200 million). However, the plan to price its product 50 percent below marginal cost for one year and incur a loss of $1 billion is not a feasible strategy since it would require a significant amount of capital and may raise antitrust concerns. Therefore, Smyth Industries should focus on competing with Jones Incorporated in a way that does not violate antitrust laws instead of trying to regain its monopoly position through an unsustainable strategy.

Question 10

Refer to the following payoff matrix:

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

The answer of Refer to the following payoff matrix:

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Question 11

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

The current profit of Smyth Industries as a duopolist is $10 million annually. If they engage in predatory pricing, they will incur a loss of $1 billion. Even if they manage to drive Jones out of the market, it is not guaranteed that they will regain their monopoly position and previous profits. Additionally, engaging in predatory pricing has the potential to attract antitrust scrutiny and legal repercussions. Therefore, it is in Smyth Industries' interest to remain as a duopolist and continue earning $10 million annually. The option B is the only choice that reflects this logic.

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, 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 13

Refer to the following payoff matrix:

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

The answer of Refer to the following payoff matrix:

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Question 14

Refer to the following payoff matrix: 
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 plays High Q, player 2's best response is to play Low Q, which gives player 1 a payoff of 6. However, if player 1 moves first and plays Low Q, player 2's best response is to play High Q, which gives player 1 a payoff of -1. Therefore, strategy A leads to a first-mover advantage for player 1.

Question 15

Refer to the following payoff matrix: 
 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: 
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Question 16

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 occurs when the value of a good or service increases as more people use it directly. In this case, the two-way network is directly linked to the users, and the per-unit value increases as more people join the network. Therefore, it is a positive externality known as a direct network externality.

Question 17

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 raises firm 1's marginal cost, then firm 1 will produce less output for any given price level. This means that firm 1's reaction function will shift down, as it will be producing less output at each price level in response to the increase in its marginal cost.

Question 18

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 of a product leads to the development of complementary products or services, which in turn increases the value of the original product. In this scenario, the one-way network is the original product, and the complementary products and services that it leads to are examples of indirect network effects.

Question 19

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

Firm 2 lowering firm 1's marginal cost means that firm 1 can produce at a lower cost and thus will decrease their optimal price and quantity produced. This will cause firm 1's reaction function to shift up in response to the change in the market conditions.

Question 20

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

The New York Port Authority lobbying to increase the tolls on New York City's George Washington Bridge is an example of raising rivals' fixed costs.

A, B, and C are all examples of raising rivals' fixed costs. In A, existing doctors are lobbying to make it harder for new doctors to enter the field by requiring them to acquire new licenses. In B, Yellow Cab Company is lobbying to make it more expensive for potential competitors to enter the market by requiring all taxi cab drivers to pay for a medallion. In C, Federal Express is lobbying to increase the expenses of their competitors by increasing annual terminal fees.

Quiz 13: Advanced Topics in Business Strategy

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

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:

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?

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?

Refer to the following payoff matrix: 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 bottleneck is a:

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

Refer to the following payoff matrix: If the payoff matrix is a simultaneous-move production game, the Nash equilibrium is for:

Refer to the following payoff matrix: 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.

Refer to the following payoff matrix: 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.

Refer to the following payoff matrix: The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix 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:

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

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

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

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