Economics of Business Strategy
Midterm Exam
Course Introduction
Economics of Business Strategy explores how firms use economic principles to inform and shape their competitive strategies in dynamic markets. The course covers topics such as market structure analysis, pricing strategies, barriers to entry, product differentiation, game theory, and the strategic behavior of firms in oligopolistic and monopolistic settings. Students learn to apply economic reasoning to strategic decision-making related to investments, innovation, mergers and acquisitions, and responses to regulatory environments. Case studies and real-world examples illustrate how economic concepts underpin effective business strategies, equipping students with analytical tools to assess opportunities and threats in domestic and global markets.
Recommended Textbook
Managerial Economics and Strategy 2nd Edition by Jeffrey M. Perloff
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Chapter 1: Introduction
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Sample Questions
Q1) Explain why economists might disagree on the content of a model.
Answer: Economists might have different theories or might make different simplifying assumptions.
Q2) A microeconomic model CANNOT be used to
A)evaluate the impact of a price change on a firm's revenue.
B)predict the impact of an increase in the minimum wage on unemployment.
C)evaluate the fairness of a proposal to nationalize health insurance.
D)evaluate the effect of an increase in stadium size on the price of a sport team's tickets.
Answer: C
Q3) Explain why a model that delivers good enough approximations is a good model.
Answer: Models make simplifying assumptions in order to make them less complex and complicated and therefore usable. But when we simplify, we do leave out parts of the real world that have an impact on the results. If a model gives predictions or approximations that are close to reality, then the model is useful.
Q4) Why might raising the price of a good by a dollar lead to higher profits?
Answer: If the extra profit margin made on the units sold covers the profit lost from selling fewer units, then profits will increase if the price is raised.
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Chapter 2: Supply and Demand
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Sample Questions
Q1) The above figure shows four different markets with changes in either the supply curve or the demand curve. Which graph best illustrates the market for coffee after severe weather destroys a large portion of the coffee crop?
A)Graph A
B)Graph B
C)Graph C
D)Graph D
Answer: C
Q2) The market supply curve is found by
A)horizontally summing all individual supply curves at a price.
B)vertically summing all individual supply curves at a quantity.
C)either A or B above since they both give the same answer.
D)None of the above.
Answer: A
Q3) Explain why the equilibrium price is called the market clearing price.
Answer: At the equilibrium price, sellers want to sell the exact amount consumers want to buy. There is no excess demand or excess supply. The market is exactly cleared of all goods.
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Chapter 3: Empirical Methods for Demand Analysis
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Q1) In Ordinary Least Squares Regression, the gap between the value of the dependent variable and the predicted value is called
A)the error term.
B)the minimizing coefficient.
C)the residual.
D)the explanatory variable.
Answer: C
Q2) Which of the following statements is TRUE?
A)If two variables X and Y are correlated, then X causes changes in Y.
B)If two variables X and Y are correlated, then Y causes changes in X.
C)If X causes changes in Y, then X and Y are correlated.
D)None of the above.
Answer: C
Q3) Omitted variables
A)can cause hypothesis tests to be unreliable.
B)require multiple regression analyses to find.
C)are usually those with t-statistics less than the critical value.
D)are usually outside the confidence interval.
Answer: A
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Chapter 4: Consumer Choice
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Sample Questions
Q1) The above figure shows Bobby's indifference map for juice and snacks. Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods. Which of the following points are on Bobby's demand curve for snacks?
A)p = 2, q = 10
B)p = 2, q = 13
C)p = 2, q = 5
D)p = 1, q = 20
Q2) Indifference curves are downward sloping because of the assumption of A)completeness.
B)transitivity.
C)more is better.
D)All of the above.
Q3) For which of the following pairs of goods would most people likely have convex indifference curves?
A)nickels and dimes
B)left shoes and right shoes
C)movie tickets and concert tickets
D)None of the above.
Q4) What is the difference between ordinal and cardinal measurement?
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Chapter 5: Production
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Q1) Lectures in microeconomics can be delivered either by an instructor (labor)or a movie (capital)or any combination of both. Each minute of the instructor's time delivers the same amount of information as a minute of the movie. Which graph in the above figure best represents the isoquants for lectures in microeconomics when units of capital per day is on the vertical axis and units of labor per day is on the horizontal axis?
A)Graph A
B)Graph B
C)Graph C
D)Graph D
Q2) The implementation of the assembly line is an example how
A)changes in the organization of production improve productivity.
B)neutral technical change improves productivity.
C)non-neutral technical change can decrease productivity.
D)labor saving technical change increases economy-wide unemployment.
Q3) Diminishing marginal returns lead to diminishing returns
A)when marginal returns fall but remain positive.
B)only in theory.
C)when marginal returns become negative.
D)when labor exceeds capital.
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Page 7
Chapter 6: Costs
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Sample Questions
Q1) Marginal cost is
A)positive or zero.
B)negative or zero.
C)positive or negative but not zero.
D)positive, negative, or zero.
Q2) If a particular production process is subject to diminishing marginal returns to labor at every level of output, then at every level of output
A)AC is upward sloping.
B)MC exceeds AVC.
C)AFC is constant.
D)None of the above.
Q3) If increasing returns to scale are present, the long-run average cost increases as more output is produced.
A)True
B)False
Q4) What are the functions for MC and AC if TC = 100q + 100q2? Are the returns to scale increasing, decreasing, or constant?
Q5) Explain how a firm can have constant returns to scale in production and economies of scale in cost.
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Chapter 7: Firm Organization and Market Structure
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Sample Questions
Q1) The board of a U.S. corporation usually includes
A)outside directors.
B)company executives.
C)former politicians.
D)All of the above.
Q2) A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.
A)$20,000, $20,000
B)$20,000, -$5,000
C)$25,000, -$5,000
D)$25,000, $20,000
Q3) If a competitive firm maximizes short-run profits by producing some quantity of output, which of the following must be TRUE at that level of output?
A)p = MC
B)MR = MC
C)p AVC
D)All of the above
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) Producer surplus is equal to
A)the area under the supply curve.
B)the difference between price and average cost for all units sold.
C)the difference between price and marginal cost for all units sold.
D)the firm's profit when fixed costs exist.
Q2) In a perfectly competitive market with 75 non-identical firms producing at market price p1
A)the supply curve is flatter than if there were only 35 identical firms.
B)the supply curve is more elastic than if there were only 25 identical firms.
C)the supply curve is more inelastic than if the firms were identical.
D)All of the above.
Q3) What is one reason activists might lobby the government for regulation limiting the production of a product to less than would normally be produced in a perfectly competitive market?
A)They value consumer surplus more than producer surplus.
B)They value producer surplus more than consumer surplus.
C)They seek to avoid future regulation.
D)They seek to minimize total surplus.
Q4) When is the profit a firm earns equal to the producer surplus? Explain.
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Chapter 9: Monopoly
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Sample Questions
Q1) For there to be positive network externalities
A)there must be a direct size effect.
B)there must be an indirect size effect.
C)introductory prices are required.
D)None of the above.
Q2) The above figure shows the demand and marginal cost curves for a monopoly. The deadweight loss of this monopoly equals A)h.
B)c.
C)c + f.
D)c + d + e + f.
Q3) The more elastic the demand curve, a monopoly
A)will have a larger Lerner Index.
B)will face a lower marginal cost.
C)will earn more profit.
D)will lose more sales as it raises its price.
Q4) Since a monopoly can set any price it wants, it always makes a profit?
A)True
B)False
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Chapter 10: Pricing With Market Power
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Sample Questions
Q1) Each identical consumer has the following demand for golf, q = 100 - p, where q is the number of rounds of golf played per year and p is the price per round. The only golf course in an isolated town incurs a marginal cost of $10 per round of golf. It wishes to charge a membership fee and a fee per round of golf. What price will it set for each fee?
Q2) Stores such as Costco and Sam's Club require an annual membership before you can shop there. This is a form of
A)two-part pricing.
B)price gouging.
C)tie-in sales.
D)anti-competitive behavior.
Q3) Airlines offer lower prices to vacationers than to business travelers because A)of government regulations requiring them to do so.
B)business travelers do not care at all about costs.
C)business travelers are less flexible in their travel plans than vacationers are.
D)airlines know that business travelers enjoy flying more than vacationers do.
Q4) Explain why a firm can earn more profit by price discrimination than from setting a uniform price.
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Page 12
Chapter 11: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.
A)True
B)False
Q2) Product differentiation
A)may allow firms to price above a competitive level.
B)generates value as consumers value more choices.
C)depends on perceived differences between products.
D)All of the above.
Q3) The specific oligopolistic model used in a market
A)depends on the pricing structure of the good or service sold.
B)depends on the characteristics of the market, such as time horizon for competition.
C)is usually a Cournot model, unless cartels are illegal.
D)All of the above.
Q4) Mergers often increase profit by
A)producing economies of scale.
B)producing economies of scope.
C)increasing efficiency of the firm.
D)All of the above.
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Chapter 12: Game Theory and Business Strategy
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Sample Questions
Q1) The above figure shows a payoff matrix for two firms, A and B, that must choose between a high-price strategy and a low-price strategy. Both firms setting a high price is NOT a Nash equilibrium because
A)setting a high price is the dominant strategy for each firm.
B)neither firm can improve its payoff by setting a low price given that the other firm is setting a high price.
C)there is no dominant strategy for either firm.
D)both firms can improve their payoff by setting a low price given that the other firm is setting a high price.
Q2) A coordination game
A)is a game with multiple Nash equilibria where players can credibly coordinate to select one of the equilibria.
B)is a game where players coordinate to maximize joint profits.
C)cannot be solved with cheap talk.
D)always has one Nash equilibrium and no dominated strategies.
Q3) In Dutch or first-price sealed-bid auctions, participants will bid less than their highest valuation.
A)True
B)False
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Page 14
Chapter 13: Strategies Over Time
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Sample Questions
Q1) In a repeated prisoners' dilemma game
A)the players act sequentially.
B)the outcomes are the same as in a static prisoners' dilemma game.
C)firms' choices are not influenced by their opponents' actions.
D)cooperation may result if the game is played indefinitely.
Q2) In the beauty contest where players predict the outcome of players choosing a number between 0 and 100
A)the Nash equilibrium is 0.
B)your prediction should be based on what you think the winning number will be.
C)the Nash equilibrium is 33.
D)there is no Nash equilibrium because people are not rational.
Q3) Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because
A)for potential entrants the cost is avoidable, while for the incumbent, it is not.
B)fixed costs will be greater for the potential entrant than for the incumbent.
C)fixed costs are zero for the incumbent.
D)incumbents will act to prevent entry at all costs.
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Chapter 14: Managerial Decision-Making Under Uncertainty
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Sample Questions
Q1) Explain why insurance companies usually do NOT offer earthquake insurance.
Q2) Although he is very poor, Al plays the million-dollar lottery everyday because he is certain that one day he will win. Al makes this calculation based upon
A)the frequency of past outcomes.
B)subjective probability.
C)knowledge of all possible outcomes.
D)tossing a coin.
Q3) People in a certain group have a 0.3% chance of dying this year. If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise, what is the expected value of a policy to the insurance company?
A)$0
B)$300
C)$3,000
D)$3,300
Q4) If a person is risk averse, then she has negative marginal utility of wealth.
A)True
B)False
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Chapter 15: Asymmetric Information
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Sample Questions
Q1) Many companies monitor their employees' Internet use and email. Why might they be doing this?
A)Because they like to spy.
B)In order to improve morale.
C)To gain inside information on new consumer trends.
D)To reduce shirking.
Q2) Moral hazard is due to
A)hidden characteristics.
B)hidden actions.
C)symmetric information.
D)adverse selection.
Q3) When a person has health insurance, they often have to pay nothing or very little (called a "copay")to see a doctor. This might result in
A)their being overly healthy.
B)a principal-agent problem.
C)some moral hazard, since people might overuse the benefit.
D)an adverse selection problem.
Q4) Explain how product liability laws can reduce adverse selection.
Q5) How can a warranty at the seller's expense signal that a product is of high quality?
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Chapter 16: Government and Business
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Sample Questions
Q1) Which of the following goods has the property of rivalry?
A)national defense
B)a highway
C)air to breathe
D)a digital music file
Q2) Markets tend to produce too little of an excludable public good because
A)transaction costs are high.
B)of the lack of rivalry.
C)these goods are depletable.
D)All of the above.
Q3) The total demand for a public good is found by
A)horizontally summing all individual demands.
B)vertically summing all individual demands.
C)finding the demand from the median voter.
D)dividing the marginal cost of the good by the number of voters.
Q4) Reparations for slavery in the United States would
A)be consistent with the Pareto principle.
B)be inconsistent with the Pareto principle.
C)have nothing to do with the Pareto principle.
D)would be unconstitutional.
Page 18
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Chapter 17: Global Business
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Sample Questions
Q1) The transfer price between subsidiaries that maximizes profit for the parent company
A)is the marginal cost of the producing subsidiary.
B)is the monopoly price of the producing subsidiary.
C)cannot be determined in the absence of non-production cost considerations such as taxes.
D)is the price that minimizes the purchasing subsidiary's marginal cost.
Q2) If the U.S. can produce pizza for $5 each and barrels of beer for $25 each, and Germany can produce pizza for $7 each and barrels of beer for $21 each, then the U.S.
A)a comparative advantage in the production of beer.
B)an absolute advantage in the production of beer.
C)a comparative advantage in the production of pizza.
D)a comparative advantage in the production of beer and pizza.
Q3) A firm becomes a multinational enterprise when
A)it lists its stock on a stock exchange other than the one in its home country.
B)it undertakes foreign direct investment.
C)it undertakes foreign portfolio investment.
D)Any of the above.
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