Business Strategy
Exam Practice Tests
Course Introduction
Business Strategy is a comprehensive course designed to equip students with the analytical tools and frameworks necessary to understand, formulate, and implement effective strategies within a competitive business environment. Through a combination of theoretical concepts and real-world case studies, students will explore key topics such as competitive advantage, industry analysis, strategic positioning, corporate diversification, and innovation. The course emphasizes decision-making processes that drive long-term organizational success, preparing students to assess market dynamics, evaluate the strengths and weaknesses of competitors, and align organizational resources to achieve strategic objectives.
Recommended Textbook
Economics of Strategy 5th Edition by David Besanko
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18 Chapters
450 Verified Questions
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Page 2
Chapter 1: Basic Microeconomic Principles
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Sample Questions
Q1) Suppose a firm's plant produces Q units in any given year.The plant itself operates with annualized costs of $10M and other annual fixed expenses totaling $3M.In addition,the firm's variable costs depend on Q and are given by the formula 5Q²+3Q.What is the formula for the firm's Short-Run (i.e.one year)Average Costs?
Answer: SAC(Q)= \( 5 Q+3+\frac{13}{Q} \)
Q2) In what special situation might the law of demand not hold?
A)In a perfectly competitive market
B)When there is a high price elasticity of demand
C)When MR=MC
D)At the Nash Equilibrium
E)If high prices confer prestige
Answer: E
Q3) If TC(Q)=1000Q²+100Q+10,what is the formula for AC(Q)?
A)2000Q+100
B)2000Q²+100Q
C)1000Q²+100Q+10
D)1000Q+100+10/Q
E)100Q+10+1/Q
Answer: D
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Page 3
Chapter 2: Economies of Scale and Scope
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Sample Questions
Q1) If a firm enjoys lower costs due to a complex labor-intensive process,which of the following statements would then be true?
A)Cutbacks in volume will always raise unit costs
B)The firm is unconcerned with labor turnover
C)An example of this process could be the practice of anti-trust law
D)The firm's average cost rises due to moving down the learning curve
E)The process is likely a repetitive manufacturing process such as two-piece aluminum can manufacturing
Answer: C
Q2) How does carrying inventories contribute to economies of scale?
A)Increases the interest on the expenses to produce the inventory
B)Inventory depreciates in value while waiting to be used or sold
C)Increases the storage facilities necessary
D)Increases competition with rivals for customers
E)Minimizes the chance of stock-out
Answer: E
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Chapter 3: Agency and Coordination
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Sample Questions
Q1) Which of the following management actions reflects agency problems due to the fact that information held by the agent is hard to observe?
A)Enriching managers themselves even if shareholders do not benefit
B)Avoiding risky strategic initiatives even if shareholders view them as "reasonable"
C)Paying for services that seem excessive to the shareholders
D)Pumping up the firm's short-run performance even if shareholders are harmed in the long-run
E)Giving work a mediocre effort so managers do not have to work excessive hours
Answer: C
Q2) Which of the following is not a performance based incentive?
A)A Nordstrom salesperson being paid a commission
B)A Kraft brand manager receiving an end of year bonus
C)A CEO receiving a stock option
D)A recurring standard percentage end of year pay raise
E)An employee receiving a special parking privilege award for the month
Answer: D
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5
Chapter 4: The Power of Principles - an Historical Perspective
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Sample Questions
Q1) Which of the following government regulations on business conditions did not increase circa 1910?
A)Regulation on corporate governance
B)Securities markets regulation
C)Antitrust regulation
D)Regulations on disability insurance provisions
E)Regulations on insurance for widows and children
Q2) What does it mean for a manufacturing firm to vertically integrate?
A)Expand using established product technologies to offer a wider variety of products
B)Reorganize management into semi-autonomous divisions
C)Produce raw materials and distribute finished goods on their own
D)Geographic distance between buyers and sellers
E)Use management consultants to optimize processes
Q3) What was the major role of private banks in the early 1800s?
A)Serve as an institution for deposits
B)Issue credit
C)Reduce the risk of price fluctuation
D)Create futures markets
E)Sell stocks
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Chapter 5: The Vertical Boundaries of the Firm
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Sample Questions
Q1) Which of the following issues makes it difficult for to managers to reign in dedicated "cost centers" in a firm?
A)Cost centers have no dedicated "customer"
B)Cost centers are easy to judge against market counterparts performing similar functions
C)Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization
D)Firms are always looking to cut costs when they retain an advantage insulting it from the market
E)Managers of costs centers have significant latitude to complete their jobs
Q2) Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers.Suppose your average variable cost C=$20/unit,annualized cost of investment to build a hard drive factory I=$30 million,and the market price (bailout market price in the event Dell does not buy)Pm=$22/unit.If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and subsequently renegotiates to only purchase for $22.50/unit,what is your company's new "rent"?
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Chapter 6: Organizing Vertical Boundariesvertical
Integration and Its Alternatives
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Q1) What term describes when a firm is using the least-cost production process?
A)Agency efficiency
B)Technical efficiency
C)Lean compliant
D)Economizing
E)Six sigma compliant
Q2) Which of the following is not a benefit of tapered integration?
A)It expands the firm's input and/or output channels without requiring substantial capital outlays
B)Allows the firm to use information about the cost and profitability of its internal channels to help negotiate contracts with independent channels
C)Lets the firm motivate its internal channels by threatening to expand outsourcing and, at the same time, motivate its external channels by threatening to produce more in-house.
D)Allows the firm to produce most efficiently in all circumstances
E)Helps the firm protect itself against holdup by independent input suppliers
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Chapter 7: Diversificationpart Threemarket and Competitive Analysis
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Q1) Which of the following benefits of diversification explains the idea that combining unrelated businesses can allow firms to finance projects through cross-subsidization when they previously were unable to finance the same projects externally?
A)Use of internal capital markets
B)Economies of scale and scope
C)Economizing on transaction costs
D)Diversifying shareholder portfolios
E)Identifying undervalued firms
Q2) What type of research compares market valuations of diversified firms to those of undiversified firms to assess the success of diversification?
A)Event studies
B)Valuation studies
C)Diversification studies
D)Market studies
E)Acquisition studies
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Chapter 8: Competitors and Competition
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Q1) What term does Sutton use to describe the costs of establishing a credible brand?
A)Brand investment
B)Cost of brand establishment
C)Cost of advertising
D)Endogenous sunk cost
E)Market establishment cost
Q2) Based on Bresnahan and Reiss' study of the relationship between concentration and prices,how many firms did they determine generally need to be in a market for price competition to be as intense as it would likely get?
A)1
B)2
C)3
D)4
E)5
Q3) In a two firm market,let the marginal cost of producing a product be $20,the market demand be given by the function Q=60-P/2 and the market quantity be equal to Q +Q .What is the Cournot equilibrium quantity each firm would produce in this market?
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Page 10
Chapter 9: Strategic Commitment
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Q1) What is the most likely reason a firm would pursue the "mad-dog" commitment strategy of making a tough commitment when tactical variables are strategic complements,a strategy with harmful strategic effects?
A)For deterrence of new entrants by creating capacity competition
B)To exploit intangible weaknesses of other firms
C)To test the response of other market firms
D)For deterrence of new entrants by increasing price competition
E)They are following another firm
Q2) What type of option exists when a decision maker has the opportunity to tailor a decision to information that will be received in the future?
A)Real option
B)Commitment option
C)Project option
D)Decision option
E)Future option
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11
Chapter 10: The Dynamics of Pricing Rivalry
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Q1) Why do price-sensitive buyers tend to harm cooperative pricing in a market?
A)They cause an increase in detection lags because competitor prices become more difficult to monitor
B)There is a resultant decrease in the frequency of interaction between competitors
C)There is an increase in the probability of misreads
D)The is an increase in temptation to cut price, even if competitors are expected to match
E)There is an increase in detection lags because prices of competitors are more difficult to monitor
Q2) Which special case term describes the situation where for sufficiently low discount rates,any price between the monopoly price and marginal cost can be sustained as an equilibrium in the infinitely repeated prisoner's dilemma game?
A)Collusive agreement
B)Centipede Game
C)Folk Theorem
D)War of Attrition
E)Focal Point
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Chapter 11: Entry and Exit
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Q1) When is predatory pricing a most effective entry barrier?
A)When the incumbent has incurred them and the entrant has not
B)When incumbents have long-standing relationships with suppliers and customers
C)When channels are few and hard to replicate
D)When a firm has a reputation for toughness or competes in multiple markets
E)When marginal costs are low and flooding the market causes large price reductions
Q2) Which of the following is not an exit barrier for firms in an industry?
A)Sunk costs
B)Labor agreements or commitments to purchase raw materials
C)Obligations to input suppliers
D)Excess capacity
E)Government restrictions
Q3) What term describes a situation where two or more parties expend resources battling each other?
A)Predatory pricing
B)War of attrition
C)Dumping
D)Capacity Expansion
E)Puppy Dog Ploy
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Page 13
Chapter 12: Industry Analysispart Fourstrategic Position and Dynamics
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Q1) Which of the following is not a part of the five-forces framework?
A)Supplier Power
B)Internal rivalry
C)Regulation
D)Buyer Power
E)Substitutes and Complements
Q2) What type of entrant would be described as a new entrant with no current brand identity,distribution channels or presence within an industry?
A)Fast follower
B)Passive
C)Aggressive
D)Innovator
E)De novo
Q3) Which of the following conditions does not tend to heat up price competition?
A)Many sellers in the market
B)Products are differentiated/buyers have high switching costs
C)Some firms have excess capacity
D)The industry is stagnant or declining
E)There are large/infrequent sales orders
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Chapter 13: Strategic Positioning for Competitive Advantage
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Q1) What term coined by Michael Porter describes a firm that pursues elements of cost leadership and benefit leadership at the same time and in the process fails to achieve either a cost advantage or a benefit advantage?
A)Five forces
B)Value creation
C)Value chain
D)Stuck in the middle
E)Generic strategy
Q2) What term describes the situation when a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market?
A)Industry effect
B)Competitive advantage
C)Business unit effect
D)Competitive position
E)Market profitability economics
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Chapter 14: Sustaining Competitive Advantage
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Q1) What term best describes assets that are more valuable when used together than when separated?
A)Isolating
B)Value-creating
C)Imperfectly mobile
D)Scarce
E)Cospecialized
Q2) What term describes a framework used in strategy based on resource heterogeneity which posits that for a competitive advantage to be sustainable,it must be underpinned by resource capabilities that are scarce and imperfectly mobile?
A)Persistence of profitability for the firm
B)Capability-based theory of the firm
C)Regression to the mean
D)Resource-based theory of the firm
E)Five-forces framework
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Q1) Which of the following is not part of Porter's "diamond",four attributes in a firm's home market that promote or impede a firm's ability to achieve competitive advantage in global markets?
A)Factor conditions
B)Demand conditions
C)Supply conditions
D)Related supplier or support industries
E)Strategy, structure, and rivalry
Q2) Which of the following terms best describes a phenomenon whereby a profit-maximizing firm sticks with its current technology or product concept even though the profit-maximizing decision for a firm starting from scratch would be to choose a different technology or product concept?
A)The replacement effect
B)Strategic intent
C)Strategic stretch
D)Hypercompetition
E)The sunk cost effect
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Chapter 16: Performance Measurement and Incentives in Firms
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Q1) What term best describes how a firm performs based on a comparison to another firm in its peer set within an industry?
A)Absolute performance
B)Comparative performance
C)Proportional performance
D)Performance measurement
E)Relative performance
Q2) What term best describes a payment above and beyond the expected outcome of a gamble which must be offered to a risk-averse individual to willingly accept the gamble?
A)Certainty equivalent
B)Risk equivalent
C)Risk premium
D)Risk preference payment
E)Certainty payment
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Page 18
Chapter 17: Strategy and Structure
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Q1) Which of the following terms involves the flow of information within an organization to facilitate subunit decisions that are consistent with each other and with organizational objectives?
A)Complex hierarchy
B)Coordination
C)Control
D)Hierarchy of authority
E)Departmentalization
Q2) Which of the following modes of task interdependence exists between two or more workers,positions,or groups when one depends on the outcome of others,but not vice versa?
A)Technology interdependence
B)Environment interdependence
C)Reciprocal interdependence
D)Sequential interdependence
E)Pooled interdependence
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Chapter 18: Environment, power, and Culture
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Q1) Which of the following is least true with regard to presidential power?
A)Presidential power is the ability to influence the people who make and implement government policies
B)Presidential power only consists of the president taking direct action on some front
C)The bargaining advantage that comes with the presidential office enables the president to persuade others to work in his interest
D)A source of presidential power is professional reputation, which comprises the expectations of professional politicians, bureaucrats, and others in the political community regarding the president's power and his willingness to use it
E)The president's prestige among the public is a source of presidential power
Q2) What is the source from which a person derives legitimate or formal power?
A)Due to status
B)Possession of specialized knowledge
C)Ability to punish
D)Ability to grant rewards
E)Position within a hierarchy
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