Ch8 Economics of Strategy Creating Test Questions & Answers

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1) Draw supply and demand curves for a product showing the equilibrium price and quantity. Illustrate what would happen if all the transaction costs in the market for the product were reduced. Generally, what is the impact of transaction costs on market operations?

2) In the area of international travel, the U.S. Government instituted a Global Entry Program to reduce the time it takes for “low-risk” fliers to enter the country. Generally speaking, the industry not only doesn't oppose these requirements, but even supports the government program. Why?

3) What happens to producer surplus and consumer surplus if transaction costs are reduced?

4) Many firms attempt to build fairly close relationships with competing firms. Why?

5) Let Q be the number of printer-computer combinations sold in the market and let MC of both these products equal $0. Let the demand for both the products be given as Q = 12 – (P _p + P _c), where P _p and P _c are the prices of printers and computers. What are the profits of each firm when they decide to cooperate, and what happens if they decide to go alone?

6) What is the relation between value creation and transactions cost?

7) What are the key components for creating market power in order to capture value?

8) Walmart tends to have the best retailing system, the best distribution system, and the best marketing system of the modern retailers. It also dominates the marketplace for retail sales to a greater extent than any other retailer. What is the source of Walmart's ability to capture value in the marketplace?

9) Beside barriers to entry, what are some of the other reasons for incumbents to maintain their profits?

10) Finding a way to create and capture value is part of

A) business strategy.
B) cost control systems.
C) management control, but not general management.
D) organizational structure.

11) Strategy refers to the general policies that managers adopt to increase

A) costs.
B) the number of client meetings.
C) the rate of technological change.
D) the generation of profits.

12) As opposed to corporate strategy, business strategy is focused on

A) increasing the elasticity of consumer demand.
B) the type of production technique to use.
C) the type of industry to produce in.
D) how to compete with other firms in the industry.

13) If transaction costs can be reduced in a marketplace, then total producer and consumer surplus will

A) increase.
B) stay the same.
C) decrease.
D) increase first and then decrease.

14) If consumers find that there are substantial transaction costs to purchasing a product, then

A) overall consumer demand is greater at each price.
B) overall consumer demand is the same at each price.
C) overall consumer demand is less at each price.
D) equilibrium price and quantity both fall.

15) In terms of business strategy, managers will attempt to adopt business strategies that

A) maximize transaction costs.
B) stabilize opportunity costs.
C) minimize transaction costs.
D) minimize sunk costs.

16) Dell Computer attempts to collect information about customers before purchase and assemble customized product for the customers. This process tries to

A) reduce transaction costs for both Dell and the customer.
B) reduce transaction costs for the customers only.
C) increase transaction costs for Dell so that it can reduce taxable profits.
D) increase transaction costs for customers so that IBM can also sell PCs.

17) The fast-food industry, from Back Yard Burgers to KFC, promises good food delivered quickly. The value of the consumer's time

A) is less important than production costs.
B) is a key component in creating value for the firm and the consumer.
C) is usually so low that fast food is unimportant in the marketplace.
D) must be discounted to make sure it is negative.

18) Walmart, like many companies in the new economy, uses a hub-and-spoke distribution system to

A) increase costs of stocking and inventory.
B) change consumer attitudes toward warehouse shopping.
C) decrease consumer demand.
D) decrease costs of stocking and inventory.

19) Putting together two goods—shaving cream and razors—to increase value is using the power of

A) complementary products.
B) substitute products.
C) unrelated products.
D) technologically advanced products.

20) Bundling of complements to create value strategically usually leads to lower prices for the consumer, ________.

A) greater volume sold, and lower profits
B) less volume sold, and lower profits
C) greater volume sold, and greater profits
D) less volume sold, and greater profits

21) Successful invention and innovation in the marketplace

A) can create value and are easy to capture.
B) cannot create value and are difficult to capture.
C) can create value but are often difficult to capture.
D) are not important to most company strategies.

22) A company can translate its assets into value if it effectively uses them in the marketplace. The three types of assets are tangible assets, intangible assets, and

A) preliminary assets.
B) current assets.
C) human assets.
D) fictitious assets.

23) Human resources, as a source of creating value in a modern company, are also referred to as

A) hardware.
B) software.
C) wetware.
D) dryware.

24) Paul Romer argues that "what underlies this process [economic success] . . . are instructions, formulas, recipes, and methods of doing things." He is referring to

A) hardware or tangible assets.
B) software or intangible assets.
C) wetware.
D) hardware or human resources.

25) With the creation of value, there is a

A) leftward shift of both the demand and supply curves.
B) leftward shift of the supply curve.
C) rightward shift of the demand curve.
D) leftward shift of the demand curve and a rightward shift of the supply curve.

26) Setting up a hub-and-spoke distribution towards inventory and retail delivery is an example of

A) increased consumer transactions cost.
B) increased producer transactions cost.
C) reduced consumer transactions cost.
D) reduced producer transactions cost.

27) Setting up outlet malls along rural highways is an example of

A) increased consumer transactions cost.
B) increased producer transactions cost.
C) reduced consumer transactions cost.
D) reduced producer transactions cost.

28) Manufacturers of printers and computers set prices independently. This means that they

A) use capital-intensive means of production.
B) use division of labor and specialization in production.
C) do not consider the effect of the prices on the demand for the products.
D) do not consider the negative effect that the high prices have on each other's profit.

29) Hardware, software, and wetware refer to

A) fixed costs, variable costs, and liabilities.
B) financial resources, buildings, and overhead.
C) buildings, computers, and financial resources.
D) physical assets, "intangible" assets such as its advertising strategies, and human resources.

30) A firm can capture value through market power or through superior factors of production. The rent earned through the use of superior factors of production is

A) housing rent.
B) monopoly rent.
C) Ricardian rent.
D) Bushian rent.

31) Which of the following is an important factor that helps in generating economic profit in an industry?

A) degree of rivalry within an industry
B) threats of complements
C) type of product manufactured in an industry
D) the means of production

32) In a corporation, one important source of value is that the “whole organization” is worth more than the sum of its parts. This is called

A) team production capabilities.
B) collective cost analysis benefits.
C) complementary goods value creation.
D) substitute goods value creation.

33) In a competitive market, a firm has a difficult time capturing value due to the large number of rivals. However, it can be successful in capturing value if the

A) firm's cost curves are higher than those of rivals.
B) firm's superior productivity is based on value of the whole organization.
C) firm's superior productivity is based on selected components of superiority within the firm.
D) demand for the firm's product is inelastic.

34) Profits will be

A) high, regardless of the degree of rivalry if there are no entry barriers.
B) high, when the degree of rivalry is high.
C) low, when the degree of rivalry is low.
D) low, when the degree of rivalry is high.

35) Degree of rivalry is

A) high when excess capacity of existing firms is low.
B) low when fixed costs of existing firms are high.
C) high when fixed costs of existing firms are low.
D) high when fixed costs of existing firms are high.

36) The profit earned by an industry is likely to be low if the

A) industry has only a few large customers.
B) industry has many customers.
C) product produced in the industry has only a few substitutes.
D) degree of rivalry among industries is low.

37) Economies of scope are said to exist when

A) one firm produces many products rather than separate firms for each.
B) many firms produce many products rather than one firm producing all.
C) many firms produce a single product rather than one firm.
D) one firm can produce multiple products at a lower cost than separate firms producing each.

38) Which of the following is a possible reason for diversification?

A) to promote the supply of complementary products
B) to promote the supply of substitute products
C) to increase social benefits
D) to internalize negative externalities

39) Which of the following is a potential cost of diversification?

A) Firms become bureaucratic and more expensive to manage as they grow.
B) The cost of production increases, thereby reducing profits earned by a firm.
C) The supply of labor reduces, thereby reducing the level of production.
D) Shareholders find it expensive and risky to hold a diversified portfolio.

40) Diversifying to reduce volatility is a good idea only if

A) shareholders can diversify within their own investment portfolios at low cost.
B) firms are willing to invest in capital formation.
C) firms account for social costs of production.
D) shareholders are willing to pay premium for a company in order to reduce return volatility.

41) Related diversification occurs when

A) a business serves itself first before serving others.
B) a business serves others first before serving itself.
C) a business serves itself and allows others to serve it.
D) a business serves itself and many other common businesses.

42) Which of the following is essential for the development and implementation of strategies by a firm?

A) an understanding of the firm’s resources and capabilities
B) an understanding of the professional backgrounds of its managers
C) investment in physical capital
D) a low tax rate