Economics of Strategy
Mock Exam
Course Introduction
Economics of Strategy explores how firms develop and sustain competitive advantage through strategic decision-making grounded in economic principles. The course examines concepts such as market structure, game theory, pricing strategies, barriers to entry, and the role of transaction costs and firm boundaries. Students will analyze real-world business scenarios to understand the economic rationale behind strategic choices related to competition, vertical integration, diversification, and innovation. The goal is to provide a deep understanding of how economic reasoning informs effective business strategies in dynamic markets.
Recommended Textbook
Managerial Economics and Business Strategy 9th Edition by Michael Baye
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14 Chapters
2024 Verified Questions
2024 Flashcards
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Page 2
Chapter 1: The Fundamentals of Managerial Economics
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145 Verified Questions
145 Flashcards
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Sample Questions
Q1) When MB = 171 8Y and TC = 5Y<sup>2</sup> + 108,the optimal level of Y is:
A) 25.
B) 9.5.
C) 8.
D) 24.
Answer: B
Q2) Which of the following is the incorrect statement?
A) The marginal benefits curve is the slope of the total benefits curve.
B) dB(Q)/dQ = MB.
C) The slope of the net benefit curve is horizontal where MB = MC.
D) The difference in the slope of the total benefit curve and the total cost curve is maximized at the optimal level of Q.
Answer: D
Q3) Given the benefit function B(Y)= 200Y 3Y<sup>2</sup>,the marginal benefit is:
A) 600Y.
B) 200 3Y.
C) 200 6Y<sup>2</sup>.
D) 200 6Y.
Answer: D
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Page 3
Chapter 2: Market Forces: Demand and Supply
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149 Verified Questions
149 Flashcards
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Sample Questions
Q1) In a competitive market,the market demand is Q<sup>d</sup> = 60 6P and the market supply is Q<sup>s</sup> = 4P.A price ceiling of $3 will result in a:
A) shortage of 30 units.
B) shortage of 15 units.
C) surplus of 30 units.
D) surplus of 12 units.
Answer: A
Q2) Other things held constant,the higher the price of a good:
A) the lower the producer surplus.
B) the greater the producer surplus.
C) the higher the supply.
D) the lower the supply.
Answer: B
Q3) Which of the following would NOT shift the demand for good A?
A) Drop in price of good A
B) Drop in price of good B
C) Consumer income
D) Change in the level of advertising of good A
Answer: A
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Page 4
Chapter 3: Quantitative Demand Analysis
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167 Flashcards
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Sample Questions
Q1) The greater the standard error of an estimated coefficient:
A) the greater the t-value of the estimated coefficient.
B) the lower the t-value of the estimated coefficient.
C) the greater the R-square.
D) the greater the adjusted R-square.
Answer: B
Q2) The short-run response of quantity demanded to a change in price is usually:
A) the same as the long-run response.
B) less than the long-run response.
C) greater than the long-run response.
D) None of the preceding statements is correct.
Answer: B
Q3) Your firm's research department has estimated the income elasticity of demand for Art Deco lawn furniture to be 0.85.You have just learned that due to an upturn in the economy,consumer incomes are expected to rise by 5 percent next year.How will this event affect your ordering decision for PVC pipe,which is the main component in your furniture?
Answer: Using the formula for the income elasticity,we see that the demand for your lawn furniture will be reduced by 4.25 percent this year.You may want to order about 4.25 percent less PVC pipe.
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Chapter 4: The Theory of Individual Behavior
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183 Flashcards
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Sample Questions
Q1) Suppose an individual's marginal rate of substitution is three slices of pizza for one beer at the present bundle of beer and pizza she is consuming.If the price of beer is $1.00 and the price of a slice of pizza is $1.50,is the consumer maximizing her welfare? If not,how should she change her consumption?
Q2) A situation where a consumer says he does not know his preference ordering for bundles X and Y would violate the property of:
A) more is better.
B) completeness.
C) substitutability.
D) complementarity.
Q3) If bundles A,B,and C lie on the same indifference curve,then:
A)A B C.
B)B C A.
C)A B C.
D)A B C.
Q4) A consumer has a choice of spending $13,000 on a Honda or $9,000 on a Saturn.She is observed buying the Saturn.Does this mean the consumer prefers the Saturn? Explain your answer.
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Page 6
Chapter 5: The Production Process and Costs
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Sample Questions
Q1) If a firm's production function is Leontief and the wage rate goes up,the:
A) firm must use more labor in order to minimize the cost of producing a given level of output.
B) firm must use more capital in order to minimize the cost of producing a given level of output.
C) firm must use less labor in order to minimize the cost of producing a given level of output.
D) cost minimizing combination of capital and labor does not change.
Q2) In the text,we showed that the multiproduct cost function \(C \left( Q _ { 1 } , Q _ { 2 } \right) = f + a Q _ { 1 } Q _ { 2 } + \left( Q _ { 1 } \right) ^ { 2 } + \left( Q _ { 2 } \right) ^ { 2 }\) exhibits cost complementarity whenever \(a < 0\) and economies of scope whenever \(f - a Q _ { 1 } Q _ { 2 } > 0\) .
a.Can cost complementarity exist without economies of scope?
b.Can there be economies of scope when cost complementarities exist?
Q3) Changes in the price of an input cause:
A) isoquants to become steeper.
B) slope changes in the isocost line.
C) parallel shifts of the isocost lines.
D) changes in both the isoquants and isocosts of equal magnitude.
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Page 7
Chapter 6: The Organization of the Firm
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Sample Questions
Q1) A potential problem with piece-rate plans is that:
A) workers will have a tendency to under-produce the good.
B) workers have no incentive to work hard.
C) workers may put little emphasis on the quality of the good.
D) it is difficult for managers to enforce.
Q2) Long-term contracts become shorter:
A) when specialized investment becomes less important.
B) when the exchange environment is less complex.
C) when spot markets work poorly.
D) when marginal costs are increasing.
Q3) Vertical integration:
A) occurs when a firm purchases its inputs in a market.
B) is attractive when relationship-specific exchange is unimportant.
C) occurs when a firm produces its own inputs.
D) is a spot exchange phenomenon.
Q4) Relationship-specific investments include:
A) site specificity.
B) dedicated assets.
C) human capital.
D) All of the statements associated with this question are correct.
Page 8
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Chapter 7: The Nature of Industry
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Sample Questions
Q1) An electronics company purchases a food company.This is an example of:
A) vertical integration.
B) horizontal integration.
C) cointegration.
D) conglomerate integration.
Q2) The Dansby-Willig index measures the potential for a change in:
A) production cost.
B) firm's revenue.
C) firm's profit.
D) social welfare.
Q3) Monopolistic competition is characterized by:
A) heterogeneous products.
B) employing labor from a perfectly competitive labor market.
C) no free entry.
D) large markets.
Q4) Which of the following measures market structure?
A) Four-firm concentration ratio
B) Lerner index
C) Herfindahl-Hirschman index
D) All of the choices may be used to make inferences about market structure.
Page 9
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Chapter 8:
Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
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Sample Questions
Q1) You are the manager of a firm that produces output in two plants.The demand for your firm's product is P = 78 15Q,where Q = Q<sub>1</sub> + Q<sub>2</sub>.The marginal costs associated with producing in the two plants are MC<sub>1</sub> = 3Q<sub>1</sub> and MC<sub>2</sub> = 2Q<sub>2</sub>.What price should be charged in order to maximize revenues?
A) $39
B) $47
C) $52
D) $56
Q2) A firm has a total cost function of C(Q)= 50 + 10Q<sup>1/2</sup>.The firm experiences:
A) economies of scale.
B) constant returns to scale.
C) diseconomies of scale.
D) All of the statements associated with this question are correct, depending on the quantity.
Q3) Keds-the traditional maker of white canvas tennis shoes-was near oblivion in the early 1980s because competitors like Nike,Reebok,Adidas,and Brooks took away many of its customers.If you were at the helm of Keds,what would you have done to turn the company around?
Page 10
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Chapter 9: Basic Oligopoly Models
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Sample Questions
Q1) If firms are in Cournot equilibrium:
A) each firm could increase profits by unilaterally increasing output.
B) each firm could increase profits by unilaterally decreasing output.
C) firms could increase profits by jointly increasing output.
D) firms could increase profits by jointly reducing output.
Q2) An increase in firm 1's marginal cost will cause:
A) an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
B) a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
C) an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
D) a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
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11
Chapter 10: Game Theory: Inside Oligopoly
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142 Flashcards
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Sample Questions
Q1) It is easier to sustain tacit collusion in an infinitely repeated game if:
A) the present value of cheating is lower than collusion.
B) there are many players.
C) the interest rate is higher.
D) the present value of cheating is lower than collusion and the interest rate is higher.
Q2) Which of the following conditions are necessary for the existence of a Nash equilibrium?
A) The existence of dominant strategies for both players.
B) The existence of a dominant strategy for one player and the existence of a secure strategy for another player.
C) The existence of a secure strategy for both players.
D) None of the preceding answers is correct.
Q3) Which of the following is a factor(s)affecting collusion in an infinitely repeated pricing game?
A) Number of firms
B) Firm size
C) History
D) All of the statements associated with this question are correct.
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Chapter 11: Pricing Strategies for Firms With Market Power
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) You are the manager of a gas station and your goal is to maximize profits.Based on your past experience,the elasticity of demand by Ohioans for a car wash is 3,while the elasticity of demand by non-Ohioans for a car wash is 1.5.If you charge Ohioans $9 for a car wash,how much should you charge a man with a Kentucky license plate for a car wash?
A) $6
B) $15
C) $18
D) $9
Q2) A monopolist claims his profit-maximizing markup factor is 10.What is the price elasticity of demand for the firm's product?
A) 1.5
B) 2.0
C) 2.5
D) None of the answers are correct.
Q3) An auto dealer in Chicago recently told his mother that he makes no money on the sales of his cars but the markup on accessories is 200 percent.Can this possibly be a profit-maximizing strategy?
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Chapter 12: The Economics of Information
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147 Flashcards
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Sample Questions
Q1) In order to reduce the undesirable effects of moral hazard,an insurance company can:
A) introduce a deductible.
B) classify clients into different types according to their history.
C) reject the renewal of policies of those people with really bad records.
D) All of the statements associated with this question are correct.
Q2) Which of the following statements is NOT correct about information?
A) It is always desirable for some people to have more information than others.
B) Adverse selection will not occur if there is full information given to all market participants.
C) Information plays an important role in how the economy functions.
D) Asymmetric information may lead to the disappearance of a market.
Q3) Which of the following statements is NOT correct?
A) Information plays an important role in the economy.
B) Asymmetric information may lead to the disappearance of a market.
C) It is always desirable to have more information than the person one is trading with.
D) Adverse selection will not occur if there is no asymmetric information.
Q4) Will consumers spend more time searching when stores are located in a mall or when they are spread all over town?
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Chapter 13: Advanced Topics in Business Strategy
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90 Verified Questions
90 Flashcards
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Sample Questions
Q1) Limit pricing will effectively deter entry when:
A) the incumbent links the pre-entry price to post-entry profits.
B) the incumbent has incomplete information.
C) the entrant must commit to enter the market.
D) All of the statements associated with this question are correct.
Q2) 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
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15
Chapter 14: A Managers Guide to Government in the Marketplace
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Sample Questions
Q1) The main purpose of antitrust policy is to:
A) reduce market power.
B) control negative externalities.
C) help make information easily obtainable for producers and consumers.
D) All of the statements associated with this question are correct.
Q2) We learned in this chapter that there are laws against price discrimination.Yet,many firms openly engage in such practices.For instance,most hotel chains offer discounts to senior citizens that translate into prices that are about 10 percent lower than prices charged to other hotel guests.Why are such firms allowed to engage in such practices?
Q3) The domestic demand and supply for sugar are Q<sup>d</sup> = 60,000 400P and Q<sup>SD</sup> = 20,000 + 500P.The foreign supply is Q<sup>SF</sup> = 20,000 + 100P.How many units of sugar will domestic producers supply after the quota is imposed?
A) 35,000
B) 30,000
C) 58,000
D) 23,000
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Page 16