Man Ec: #11

Question 1

Oligopolists recognize their mutual interdependence because

the product is differentiated

industry sales are large

there are few firms in the market

all of the above

Answer 1

c

Question 2

An important implication of the kinked demand curve model is

that oligopolists typically will refrain from price-cutting since they can expect matching cuts from rivals, which will nullify any profit gains

that collusion on prices is quite probable because of the ease with which rival products can be substituted

the forces are operating in oligopolistic markets that will result in more frequent price changes than in perfectly competitive industries

that each oligopolist has a strong incentive to charge a price corresponding to the output where MC = MR

all of the above

Answer 2

a

Question 3

Which of the following is an advantage to be derived by oligopolistic firms from collusion?

increased profits

decreased uncertainty

a better opportunity to control the entry of new firms

all of the above

Answer 3

d

Question 4

It is difficult to maintain a cartel for a long period of time. Which of the following is the more important reason explaining this result?

No firm has an incentive to cheat.

Firms outside the industry will encounter barriers to entry.

Some firms in the cartel will cheat.

Consumers will deplete the inventories of the cartel and the agreement collapses.

Answer 4

c

Question 5

The most distinguishing feature of oligopolistic markets is the

large advertising expenditures

long-run profitability

absence of non-price competition

interdependence of firms

Answer 5

d

Question 6

Suppose that a hitherto unorganized industry is formed into a cartel. What price will it charge?

The cartel may choose a price above the monopoly price.

The cartel will choose a price equal to the monopoly price.

The cartel must choose a price below the monopoly price and often above the competitive price.

Answer 6

b

The cartel is simply a monopoly organization uniting oligopolistic firms under a single management. The best it can do after organization is to charge a monopoly price.

Question 7

According to the kinked demand curve model,

none of these

profits are greater above the kink than below the kink

the higher the cost curves, the more pronounced is the kink in each firm’s demand curve

sellers have no incentive to increase or decrease the price

rival oligopolists will tend to make frequent, independent changes in price

Answer 7

d

Question 8

The kinked demand curve features a discontinuous

pricing impulse
economic rationale
marginal revenue curve
cost increase

Answer 8

c

Question 9

In game theory, a non-cooperative equilibrium is not possible.

true
false

Answer 9

false

Gains will usually be lower if players are not permitted to cooperate, but often the nature of the situation prohibits cooperation, just as it does in the prisoner’s dilemma game. That does NOT prohibit an equilibrium, however.

Question 10

In game theory’s Nash equilibrium, a player pursues his own best payoff without regard to what the rival(s) may do.

true
false

Answer 10

false

In a Nash equilibrium, each player does the best he can do GIVEN the behavior of the other players.

Question 11

An important implication of the kinked demand curve model is

that each oligopolist has no incentive to charge a price corresponding to the output where MC=MR

the forces are operating in oligopolistic markets that will result in more frequent price changes than in perfectly competitive industries

that oligopolists typically will refrain from price-cutting since they can expect matching cuts from rivals which will nullify any profit gains

that collusion on prices is quite probable because of the ease with which rival products can be substituted

Answer 11

c

Question 12

A repeated game is one in which the players have to decide on strategies about the same situation with the same rivals repeatedly.

true
false

Answer 12

true

This is precisely the situation with many games; they are not played on a one-time basis only.

Question 13

A key question in the prisoner’s dilemma is whether the player of a game can cooperate with rivals.

true
false

Answer 13

true

When the prisoner is facing the question of confessing and turning states evidence, the dilemma arises because he is not permitted to communicate with his partner criminal and, hence, to cooperate with him.

Question 14

Oligopoly is a market structure characterized by a

large number of firms selling a homogenous product

single source of supply

few firms and a great deal of interdependence

large number of firms selling a highly differentiated product

single source of demand

Answer 14

c

Question 15

If the aim of the cartel is to maximize cartel profits, it will allocate sales to firms in such a way that

sales are in accord with the firm’s productive capacity

sales are in accord with a firm’s level of sales in the past

those firms with the most influence receive the largest sales quotas

sales are evenly divided among the firms

the marginal cost of all firms is equal

Answer 15

This would assure that high-cost producers have the same production quota as low-cost producers, making the total industry cost of production higher than need be.

Question 16

In game theory, the prisoner’s dilemma is whether to deny involvement in a crime or to confess, turn state’s evidence, and incriminate your partner in crime.

true
false

Answer 16

true

This is a particular, original form of the problem; it captures the basic idea of the problem well.

Question 17

new chap

Answer 17

new chap

Question 18

We speak of market failure when

there are numerous bankruptcies

many firms exit the market

the market fails to reach an efficient equilibrium

its equilibrium point is less than one

Answer 18

c

Question 19

A benefit that is involuntarily imposed on another party is considered a

public benefit
negative externality
private cost
positive externality

Answer 19

d

Question 20

Which of the following is not a characteristic of the Coase theorem?

The outcome will be efficient if all assumptions are met.

Transactions costs must be present.

Property rights must be clearly assigned.

No bargaining costs can be involved.

Answer 20

b

Question 21

When the allocation of goods, services, and productive resources is such that no alternative allocation could improve the well-being of at least one party without reducing that of any other party, that allocation is said to be

efficient
a virtual corporation
in equilibrium
profit-maximizing

Answer 21

a

Question 22

The free-rider problem occurs when a choice is made by a firm to not pay for goods and services it has received.

true
false

Answer 22

false

This is just dishonest behavior. Defaulting on payments is not free riding. Free riding is when you are in a situation that you can participate in some public-good situation where you can’t be required to pay.

Question 23

The ultimate public good is

good water

national defense

the environment

the American dream, or the right to own your own home

Answer 23

c

Question 24

The Atlantic Ocean is not particularly endowed with properties associated with public goods.

true
false

Answer 24

false

It is difficult to exclude private individuals and institutions from its use, so it is like a public good.

Question 25

Which of the following would be an example of a positive externality?

the impact of the pollution created by chemical producers on nearby residents

sneezing in a crowded elevator

the close proximity of a fruit growing orchard to a farm that raises bees

Answer 25

c

Question 26

In the case of a positive externality, the market produces

too much of the good and should be taxed more heavily

too much of the good and should be subsidized

too little of the good and should be subsidized

too little of the good and should be taxed more heavily

Answer 26

c

Question 27

Public goods are characterized by nonrivalrous consumption and nonexcludability.

true
false

Answer 27

true

That individuals cannot be prohibited (excluded) from taking advantage of the benefits of public goods is what makes them public. It also makes free riding possible.

Question 28

If there is a negative externality in production, the market outcome (relative to the efficient outcome) will result in too much output at too high a price.

true
false

Answer 28

false

There will be too much output of the good (and, therefore, also of the negative effluent involved), but it will be sold at too low a price, which has encouraged too much product (and, therefore, also of the effluent involved).

Question 29

Public goods are characterized by nonrivalrous consumption and nontransferability.

true
false

Answer 29

false

Nonrivalrous consumption is correct, but nontransferability is not a salient characteristic of a public good since privatization is possible.

Question 30

Public goods are characterized by nonprofitable and nonrepetitious consumption.

true
false

Answer 30

false

These are not salient characteristics for public goods. Nonrepetitious consumption would also make them private goods since a second citizen could not enjoy them after the first one consumed it. It would in that instance not be public.

Question 31

Gasoline is not particularly endowed with properties associated with public goods.

true
false

Answer 31

true

People who do not pay for gasoline can generally be excluded from its use, so it is a private good.

Question 32

new chapter

Answer 32

new chapter

Question 33

1. Costs above and beyond the contract price, such as coordination and motivation costs, are known as ________ costs.transaction
   required
   third party
   additional

Answer 33

a

Question 34

If, in order to complete a contract, at least one party is required to tailor some of its resources to very unique and specific needs, the ________ dimension of transactions costs is relevant.

familiarity

asset specificity

relationship of the transaction to others

complexity and uncertainty

Answer 34

b

Question 35

Coordination costs do not include

costs associated with allocating workers for specific tasks

costs associated with bringing transactaion participants together

costs involved with imperfect commitments

costs involved with acquiring information about the location of different parties

Answer 35

c

Question 36

Adam Smith made perhaps the most valuable contribution to economics in his century with the notion of

cooperation
generalism
specialization
all of the above

Answer 36

c

Question 37

Antitrust action has historically been undertaken to curtail organizational change such as mergers or takeovers in industries where monopoly profit seeking endangers the consumer and public interests. If transaction costs are recognized as a key element in business organization and activity so that organizational changes reflect attempts to cut costs (rather than raise prices), one should expect less antitrust activity.

true
false

Answer 37

true

In fact, this has formally been announced as the policy and objective of antitrust agencies in the United States. The lack of antitrust action in the face of much merger activity, which we will discuss in future lessons, attests to this fact.

Question 38

The presence of significant transaction costs will preclude the market mechanism from achieving an efficient outcome.

true
false

Answer 38

true

If transactions costs are excessive, fewer transactions will occur, and that means that less will be produced than is efficient.

Question 39

If, in the completion of a contract, at least one party must tailor some of its resources to very unique and specific needs of the contract partner, we refer to this as constrained efficiency.

true
false

Answer 39

false

This phenomenon is known as “asset specificity.”

Question 40

If most buyers and sellers have good information and some have even more information than others, we cannot speak of imperfect or asymmetric information.

true
false

Answer 40

false

If even one buyer does not have information available to other parties, we can speak of imperfect or asymmetric information.

Question 41

The constrained efficiency postulate says that in spite of transactions costs and the bounded rationality of economic agents, there will be a tendency to reach efficient outcomes where parties can negotiate an agreement about resource use.

true
false

Answer 41

true

Even when transactions costs exist (which the Coase theorem assumes away) and economic agents have limited information and decision-making capacity, economists expect that when voluntary bargaining leads to an enforceable allocation, we can expect a tendency toward efficient outcomes.

Question 42

Vertical integration addresses the issue of what business a firm should be in. A vertically integrated firm is usually a multi-product firm that supplies goods related by consumer use or by a common set of inputs. A chemistry firm, for example, may supply plastics for toys, fertilizer for agriculture, and prescription drugs for the health industry.

true
false

Answer 42

false

This statement describes horizontal integration. Vertical integration is the case where a firm’s production processes control several portions or stages of production of a single commodity.

Question 43

It is possible that markets may be chosen as an alternative to firms when parties choose to coordinate economic activity.

true
false

Answer 43

true

Markets cause producers to supply the right amount of commodities to those who demand them at a price mutually acceptable to buyers and sellers. But this type of coordination doesn’t always occur with the right speed and with enough refinement. Thus, firms are organized to allocate resources where the market mechanism is not seen as adequate for a particular task.

Question 44

More horizontally structured firms are gradually replacing the large, highly integrated mass production firms created earlier in this century. Of these, the so-called “virtual corporation” seems to be the trend of the future. This would seem to indicate that the transaction costs of organizing activity in markets must be higher in today’s business environment than they were earlier in the century.

true
false

Answer 44

false

Lower transactions costs would make inter-firm cooperation and activity more prolific than otherwise.

Question 45

A virtual corporation is a temporary network of companies that come together quickly to exploit fast-changing opportunities.

true
false

Answer 45

true

The virtual corporation is a union of similarly motivated firms that work together on a project with the alliance ending when the need for the project no longer exists. Each company contributes what it does best.

Question 46

new

Answer 46

new

Question 47

Which of the following is not a solution to adverse selection in a contracting environment?

incentive-based contracting

the use of unbiased outside appraisers

altering the selection, or mix, of potential trading partners

target marketing to identify certain socio-demographic and economic groups

Answer 47

a

Question 48

Which of the following theoretical propositions is more likely to be relevant in describing bargaining behavior in the real world?

the constrained efficiency postulate

bounded rationality

the Coase Theorem

Answer 48

a

Question 49

When an agent seeks to pursue his own interests, he can best be described as exhibiting

strategic misrepresentation

reneging

opportunism

adverse selection

Answer 49

c

Question 50

Two types of ex post opportunism are

holdups and reneging

adverse selection and holdups

holdups and strategic misrepresentation

private information and adverse selection

Answer 50

a

Question 51

Buyers place a valuation price on a good that expresses their preferences, income, prices, and purchases of all their goods.

true
false

Answer 51

false

This is not called a valuation price but a reservation price.

Question 52

Two types of ex post opportunism are

holdups and strategic misrepresentation

private information and adverse selection

holdups and reneging

adverse selection and holdups

Answer 52

c

Question 53

Two types of ex ante opportunism are

adverse selection and reneging

holdups and private information

adverse selection and strategic misrepresentation

holdups and strategic misrepresentation

Answer 53

c

Question 54

Which of the following is a possible solution to transactions costs in a contract?

bounded rationality
relational contracts
rational consumption

Answer 54

b

Question 55

When people wish to sell their used car, they may not be anxious to inform potential buyers about all the car’s characteristics. Select the answer that is irrelevant from this chapter’s main concern with this problem

of pre-contractual opportunism

which exists for the buyer, since the car’s undisclosed problems might prompt a bad decision

of asymmetric information.

which exists for the market as a whole, since as the “Lemon Market” case of Akerloff demonstrates, industry-wide sales will be inefficiently low due to asymmetric information.

which exists for the seller, because the buyer’s post-contractual driving behavior may endanger him along with everyone else.

Answer 55

e

Question 56

Which of the following is consistent with credit rationing?

Banks and other lenders obtain a degree of corporate control in the firms that they make loans to.

Some categories of applications are simply denied credit.

Some applicants for funds are denied even though similar applicants are approved for loans.

Borrowers may receive loans for lower amounts than they requested.

all of the above

Answer 56

e

Question 57

For the managers of a firm, reneging and hold-up problems represent

transactions costs

the benefits of complete contracting

the benefits that arise because contract parties have risen above the temptation to be opportunistic.

cost-cutting opportunities

production costs

Answer 57

a

Question 58

A good example of adverse selection is found in the used car market. The problem, in this setting, is due to

no optimal price existing

sellers having an informational advantage

the majority of used cars being low-quality “lemons”

an excess supply in the market, which is the sign of efficiency

Answer 58

b

Question 59

new

Answer 59

new

Question 60

Given a situation where an employee cannot be perfectly monitored, we can assume that there is potential for (select all that apply)

human capital
marginal productivity
moral hazard

Answer 60

c

Question 61

Which of the following refers to the total costs that arise from the separation of ownership and management?

	an exit
	agency costs
	a proxy
	Deconglomeration
	an acquisition

Answer 61

b

Question 62

Who would be the best, most efficient choice to be appointed as a monitor for the firm?

a manager who abides by the rules

the owner who receives all of the profits

an individual hired from outside the company

a loyal and problem-free employee who has been with the company for twenty-five years

Answer 62

b

Question 63

Which of the following are instances or examples of moral hazard?

failure to give full effort on a work team

shirking on the job

the principal-agent problem

all of the above

Answer 63

d

Question 64

The example of the Savings and Loan crisis is remarkably rich for it involves moral hazard on the part of several distinct groups. Which of the following group(s) was able to exploit the taxpayer?

the depositors who enjoyed artificially high interest rates in select Savings and Loans

the S&L owners who took excessively risky investments and/or committed outright fraud

the politicians in both the legislative and executive branches who favored the industry (with either good or bad intentions) at the expense of the general taxpayer

all of these

Answer 64

d

Question 65

A poison pill is sometimes used by management threatened by a takeover. This is usually as effective as a bullet to the head but takes longer to achieve the desired effect.

true
false

Answer 65

false

The poison pill referred to here is not fatal at all. It is a takeover defense in which current shareholders are allowed to purchase additional shares in the firm once a third party acquires a given percentage of the ownership of the firm. It is designed to raise the cost of acquiring the firm, making a takeover more difficult for an invader.

Question 66

Which of the following is not considered descriptive of behavior consistent with the presence of moral hazard in some form or another in an economic relationship?

security brokers “churning” their clients’ portfolios

doctors practicing conservative medicine

a secretary spending large parts of every Friday cutting food coupons in preparation for the weekend shopping trip

a depository institution engaging in normally sound investment policies

managerial misbehavior arising from the different incentive schemes for the owners and managers of an organization

Answer 66

d

Question 67

Shirking cannot exist where markets are functioning properly.

true
false

Answer 67

false

If monitoring is possible and the principle knows what he can expect from the worker, competition will guarantee that workers will be found who will deliver. But if monitoring is not successful and the real production possibilities of a worker are unknown, shirking may become an ingrained problem not touched by competitive markets.

Question 68

The ________ problem is the tendency planners have to leave out of their decision calculus the costs and benefits their actions may have on the business after they have left the business.

forecasting
horizon
future-planning
projection

Answer 68

b

Question 69

Which of the following are instances or examples of moral hazard?

failure to give full effort on a work team

the principal-agent problem

shirking on the job

all of these

Answer 69

d

Question 70

The concept of team production is subject to many problems. A similar set of problems is described more generally by economic theory as it pertains to ________.

public goods
risk sharing
opportunism
production

Answer 70

a

Opportunism describes many kinds of behavior aside from that of this particular situation.

Question 71

Contracting problems in the insurance industry can be of the following type:

	asymmetric information
	moral hazard
	Neither a or b
	Both a and b
	None of these are true

Answer 71

d

Question 72

Attempting to monitor an individual worker and link that worker’s pay to realized productivity may damage the value created by the relationship between the worker and the firm.

true
false

Answer 72

true

Once a worker has been spoiled by enjoying unearned income, he tends to think of it as a rent to which he has a right by precedent. Giving up that kind of situation is unpleasant.

Question 73

The problem of shirking almost always reflects a lack of cultural indoctrination associated with capitalist economies. People shirk because they have not been trained to take their work responsibilities seriously.

true
false

Answer 73

false

This is sometimes a problem, but shirking is generally done because of opportunistic behavior in the face of a monitoring problem.

Question 74

In spite of all the corruption of the S&L case, it may be that the managers involved in the crisis were no less moral than corporate managers on average.

true
false

Answer 74

true

Certainly, all managers are not immoral. The thing that is noteworthy about the S&L case is the extent of moral hazard. The temptation for dishonest behavior was made extremely great by the situation involving moral hazard on the part of politicians, managers, and investors.

Question 75

Which of the following statements best describes a contracting situation plagued by moral hazard?

when one party puts forth less effort than it would if its actions were being effectively monitored

an exchange made subject to the standard neoclassical, competitive conditions

when at least one involved party fails to understand the ethics or morals of a given situation

when a party’s actions are perfectly observable and impact the value of the exchange to other parties

Answer 75

a

Question 76

new

Answer 76

new

Question 77

Consider the relationship between a firm and its stockholders. Which of the following parties in that relationship can best be said to be the “principal”?

stockholders

Securities and Exchange Commission

firm

board of directors

Answer 77

a

Question 78

Which of the following comes closest to describing the percentage of earnings traditionally retained by U.S. firms?

10-20%
35%
65-75%
90-95%

Answer 78

c

Question 79

The first Modigliani-Miller Theorem states that

a firm’s capital structure is independent of its total market value

ignoring bankruptcy, taxes, informational asymmetries, and managerial incentive problems, a firm’s capital structure is independent of its total market value

ignoring bankruptcy, taxes, informational asymmetries, and managerial incentive problems, a firm’s total market value is independent of its capital structure

a firm’s total market value is independent of its capital structure

Answer 79

c

Question 80

According to the efficient market hypothesis, the price investors are willing to pay for a share of stock depends on everything listed below except

the liquidity of that firm’s bonds

the size of the dividend

current profitability of the firm

expected capital gains

Answer 80

a

Question 81

According to the net present value concept, other things being equal, the expectation of receiving a dollar in one year is worth more today than the expectation of receiving a dollar in two years.

true
false

Answer 81

true

The basic idea of present value analysis is that today is better than tomorrow. Investors must be recompensed for having to wait.

Question 82

If market interest rates fall from 10 percent to 8 percent, the price of that firm’s bonds in the secondary market will fall.

true
false

Answer 82

false

When prices for a bond fall, the bond still commands its original face value. If the original price reflected a given potential interest rate gain and the market price of that bond later drops, the difference between the purchase and redemption price increases. That means the interest rate has effectually increased.

Question 83

If market interest rates rise from 10 percent to 12 percent, the value of that firm’s bonds will also rise.

true
false

Answer 83

false

When interest rates rise, it is because the market value or the price of the bonds has fallen. The relationship between interest rates and bond prices is an inverse one because lower prices paid for a bond mean that the gap between the acquisition or purchase price and the redemption price has increased, which is to say that the effective interest rate for the bond has increased.

Question 84

Over the past 10 years reported by the chart in the text, most of the funds used by corporations in the United States are from which of the following sources?

issuing of debt

issue of new equities

junk bonds

internal financing in the form of retained earnings

Answer 84

d

Question 85

A large firm whose shares are traded on the NYSE is planning a $100 million expansion. Currently, the market value of the firm’s shares outstanding is twice the amount of debt issued by the firm. If the firm raises the $100 million by issuing debt then, according to the first Modigliani-Miller theorem

the firm’s debt-equity ratio will change, but the total market value of the firm will not

the firm’s debt-equity ratio will change as will the total market value of the firm

neither the firm’s debt-equity ratio, or the firm’s total market value will change

the firm’s debt-equity ratio will not change, but the total market value of the firm will change substantially

Answer 85

a

Question 86

The stockholders of a corporation are liable for debts incurred by the CEO of the corporation.

true
false

Answer 86

false

Limited liability for corporations means that the firm’s owners can lose only as much as they invest.

Question 87

Which of the following are characteristics of debt issued by firms as a way of raising funds?

In the event of firm bankruptcy, debt holders are paid the amount of their investments before stockholders are paid theirs.

The holders of the debt are liable for expenses incurred by the firm in excess of the dollar amount of their holdings.

In the event of firm bankruptcy, stockholders are paid the amount of their investments before debt holders are paid theirs.

The actual payments to debt holders will vary across time while the payments to stock holders are legally required to be the same amount period to period.

Answer 87

a

Question 88

Of the following sources of financial capital, which of the following give their holders rights as residual claimants?

retained earnings
bonds
equities
secured mortgages

Answer 88

c

Question 89

_______ asserts that well organized equity markets, such as the NYSE, are efficient markets, at least as a practical matter.

The Coase theorem

The constrained efficiency hypothesis

The efficient market hypothesis

The Miller-Modigliani theorem

Answer 89

c

Question 90

One view of the total market value of a firm is that it is equal to the amount of the firm’s debts plus the market value of the firm’s outstanding shares.

true
false

Answer 90

true

The firm’s outstanding debts and market value together constitute total market value. Thus, Total Market Value = Market Value + Debt.

Question 91

________ receive fixed, stipulated payments while ________ are residual claimants on current and future profits.

Corporations, stockholders

Stockholders; stakeholders

Suppliers; producers

Debt holders; equity holders

Answer 91

d

This question obviously relates to the differences between holders of corporate debt (bonds) and equity (stocks). Consider even the first element of options a, b, and c. Suppliers, stockholders, and corporations do not receive fixed, stipulated payments. Fixed payments for what? Debt holders receive fixed, stipulated payments for their investment in corporate bonds.

Question 92

Outside investors frequently take part in a management buyout (MBO), perhaps even contributing a significant portion of the funds required to transfer ownership. These outside investors

often encourage management to invest only a small portion of their personal portfolios in the companies they manage

are typically not concerned with the size of investment made by the managers in their firms

often encourage management to invest a large portion of their personal investment portfolios in the companies they manage

Answer 92

c

Question 93

If the stock market feels that the managers of a large, publicly traded firm are not making efficient use of a firm’s assets, then which of the following statements regarding the market value of a firm and its book value is (are) true?

The market value of the firm is likely to increase while the book value is likely to stay constant.

The book value of the firm is likely to increase while the market value of the firm is likely to decrease.

The book value of the firm is likely to increase.

The market value of the firm is likely to decrease while the book value stays constant.

Answer 93

d

Question 94

A company, in the event of a possible takeover, will put in place a mechanism to pay its managers huge amounts of money if the “wrong” group of investors acquires the firm. This device is called a(n)

hostile takeover
golden parachute
economic suicide
poison pill

Answer 94

b

Question 95

Value-maximizing behavior by managers transfers wealth from

stockholders to the board of directors

the corporation to stockholders

the firm to the board of directors

stockholders to consumers

Answer 95

b

Question 96

new

Answer 96

new

Question 97

According to the textbook, an LBO is a legal bonding organization.

true
false

Answer 97

false

An LBO is a leveraged buyout.

Question 98

If a threatened management team adopts a poison pill, effectively blocking a hostile takeover attempt, overall economic efficiency is enhanced.

true
false

Answer 98

false

It would be foolish to pay takeover stock prices for a firm unless the invading firm is quite confident that it can manage the firm more effectively and increase profits substantially. We cannot, therefore, assume that a besieged management could increase efficiency by maintaining control over the firm.

Question 99

Over the period from 1973 to 1992, the ratio of market value to book value of large U.S. firms

declined to a point relatively far below historical values

fluctuated wildly but randomly

increased to a point relatively far above historical values

did not change significantly from previously established historical values

Answer 99

a

Question 100

Studies have determined that MBOs result in

unchanging levels of marketing activities for the firm

declining productivity of the firm

decreasing marketing activities for the firm

increasing productivity of the firm

increasing marketing activities for the firm

Answer 100

d

Question 101

From 1973 to 1992, the market value and the book value of large corporations in the U.S. increased, but the book value increased relatively much faster, causing the market to book ratio to decrease substantially.

true
false

Answer 101

true

This is exactly why, with stock prices depressed and managerial performance uninspiring, many firms had become appropriate takeover targets.

Question 102

A Board of Directors may issue special provisions for their upper management in terms of bonus, stock options, or just plain cash payments in the event of a corporate takeover. This is known as issuing a ________.

	perquisite
	takeover buster
	severance pay
	benefits package
	golden parachute

Answer 102

e

Question 103

From an efficiency standpoint, the primary role of the control mechanisms in our society that affect corporations is to

force managers to take on extremely high debt loads, which makes them pay close attention to the bottom line so that they can make their payments

provide a use of funds so that there will be demand sufficient to invest all that individuals have deposited in commercial banks

force exit of inefficient management

Answer 103

c

Question 104

One of the best known ways to spin off part of a firm by having management buy it is known as a management buyout.

true
false

Answer 104

true

The buyout may be done with debt, i.e., it may be leveraged, so the buyers are not limited to the managers, but the managers motivate and make the purchase, so we speak of it as a management buyout.

Question 105

The book value of a firm is best defined as

the amount that investors will pay for the firm’s outstanding shares less the firm’s liabilities

the accounting valuation of the firm’s liabilities less the amount of assets the firm has pledged as collateral on loans

the accounting valuation of a firm’s assets including investments and depreciation

the dollar value of all of the books in the firm’s library

Answer 105

c

Question 106

A conglomerate firm may lack efficiency because of the problem of too little specialization; the top managers must control diverse firms in fields where they have little or no managerial experience.

true
false

Answer 106

true

Division or department heads of acquired firms in the conglomerate may have the specialized knowledge needed, but most of the key decisions made by the firm for those specialized divisions will be made by the overly centralized management.

Question 107

When economists speak of the separation of ownership and control, the latter term refers to the regulatory controls of the anti-trust system.

true
false

Answer 107

false

They are referring to the fact that one group (of stockholders) owns while another group manages.

Question 108

new

Answer 108

new

Question 109

The competitive force of substitute products tends to be stronger in a given market when

buyers have high psychic costs in severing old supplier relationships and establishing new ones

buyers view the prices of the substitutes as being too high

the quality and performance of the substitutes is sub-par

the costs facing buyers to switch over to the substitutes are low

Answer 109

d

Question 110

The economic leverage and bargaining power of suppliers is greater when

the supplier industry is composed of a large number of relatively small suppliers

buyer switching costs are low

one or more suppliers pose a credible threat of forward integration into the business of the buyer industry

barriers to entry are low

Answer 110

c

Question 111

Which one of the following is not a characteristic of competition?

Competition is a process of moves and countermoves on the part of rival firms.

Competition is manifested by an independent striving among rival sellers for increased buyer patronage.

Competition may concern both price and nonprice variables.

Competition often leads to rival firms both creating and responding to new trends, buyer preferences, and market conditions.

Competition is primarily centered on the activities of buyers.

Answer 111

e

Question 112

The power of customers to exert a competitive influence over an industry is greater when

the item being bought is not an important component in the total consumption menu

the supplying industry is comprised of a small number of relatively large sellers

buyers purchase in small quantities

Answer 112

a

Question 113

Driving forces are the most important of the forces that cause changes in an industry and its competitive landscape; they create changes in markets and competitive conditions by creating incentives or pressures for change.

true
false

Answer 113

true

This is so by definition, as a check of the Porter literature or the chapter text shows.

Question 114

In the long-run, the process of competition is continuous since there are such things as a continuous stream of strategic opportunities and threats emerging from the possibilities for production variation, new tastes and preferences on the part of buyers, shifts in buying power, and new product availability.

true
false

Answer 114

true

This is the message of Porter and the reason firms require a competitive strategy that needs to be reevaluated from time to time.

Question 115

Ups and downs in the economy usually represent a driving force capable of producing significant changes in an industry.

true
false

Answer 115

false

All firms and industries must deal with periodic recessions and recoveries in similar fashion, so these will not usually affect an industries structure and situation as do the competitive forces emanating from within the industry or from that industry’s competitive forces.

Question 116

The strength of suppliers as a strong competitive force is increased when

buyer switching costs are high

buying firms pose a credible threat of backward integration into the suppliers’ business

buyers are important customers of suppliers

input suppliers have to compete with the substitute inputs of suppliers in other industries

Answer 116

a

Question 117

In most traditional industries the strategic interplay of rival firms tends not to be highly competitive because normal firms are inclined to employ strategies that are easily imitated and not very threatening.

true
false

Answer 117

false

Most firms seek to implement strategy options that are neither easily imitated nor easily defended, and the business environment is more competitive today than ever.

Question 118

Among the major sources of entry barriers are

a high selling price for the product

the presence of a large number of sellers in the market

the presence of important economies of scale

all of these

Answer 118

c

Question 119

The nature and strength of competition and competitive forces usually depend on the

power of customers and suppliers

threats of entry from new firms

price and availability of substitute products (e.g., aluminum for steel)

strategic moves and countermoves of rival firms

all of these

Answer 119

e

Question 120

The rivalry among competing firms tends to be stronger when

demand for the product is growing rapidly

products and services are strongly differentiated such that customers have high switching costs

rival firms all belong to the same strategic group and also have comparable priorities, resources, and corporate cultures

rivals are tempted to use price cuts or other marketing tactics to boost unit volume

Answer 120

d

Question 121

The competitive force of substitute products limits the price that sellers can charge for their product.

true
false

Answer 121

true

If two products are competitive, raising the price of one beyond narrowly defined limits would cause most of the buyers of that product to abandon it for the one with the more competitive price.

Question 122

The competitive force of substitute products is not much of a factor when firms have substantial economies of scale.

true
false

Answer 122

false

Substantial economies of scale permits firms to sell at much lower prices and still cover costs as their production grows. That means they could afford to reduce their price when competition requires it.

Question 123

new

Answer 123

new

Question 124

A focus strategy

tends to give firms a pricing advantage

makes it easy for the first-time buyers to try the product

is based on finding the least frequently traveled strategic path and the dictum “never follow the crowd”

is where a firm specializes in serving only a portion of the total market

Answer 124

d

Question 125

The strategy of striving to be the low-cost producer tends to be more appealing than a differentiation or focus strategy when

customers are not very price-sensitive

there are many differences among buyers and buyer groups

there are many ways to achieve product differentiation

the offerings of rival firms are essentially identical, standardized, commodity-like products

Answer 125

d

Question 126

Which of the following is not one of the three generic strategic plans?

low-cost producer
focus or specialization
differentiation
technological superiority

Answer 126

d

Question 127

Differentiation strategies are suited for situations

where customers are very price sensitive

when there are many ways to differentiate a product or service and these differences are perceived by buyers to have value

when the firm’s resources do not permit it to go after a wide segment of the total market and be a “full-line” producer

all of the above

Answer 127

b

Question 128

Achieving a cost advantage over rival firms may not require revamping the production-cost chain to eliminate or bypass some important activities in order to generate cost savings.

true
false

Answer 128

true

Question 129

If a firm differentiates its product in more than one way, it is likely that

the firm’s profits will be enhanced

the firm will be better insulated against competitors

it will penetrate specialized markets

it will confuse the customer

Answer 129

d

This option is not very likely since successful differentiation in a single characteristic can be very powerful and rewarding. To dilute the effort by emphasizing multiple differentiation facets makes each facet seem less significant on its own and will tend to confuse the customer as to specifically why it is he should choose the product in question.

Question 130

Achieving a cost advantage over rival firms requires controlling cost drivers better than competitors are able to do.

true
false

Answer 130

false

False. Controlling cost drivers is only one of the two ways to achieve a cost advantage. A firm may also achieve such an advantage by revamping the makeup of the production cost chain.

Question 131

The slogan “Budget Price/Good Value” is an example of a focus or specialization strategy.

true
false

Answer 131

false

This is an example of low-cost producer. A focus or specialization strategy would use a slogan indicating the differentiation characteristic used to appeal to the selected market segment.

Question 132

A competitive strategy based on focusing has merit when

a firm’s skills and resources don’t permit it to go after the total market

the five competitive forces are weak

the industry’s product is highly standardized

many other rivals are also using a focused approach

Answer 132

a

Question 133

The price premium that a differentiation strategy may be able to command is

a function of the difference between the actual value to the buyer and the buyer’s perceived value

a reflection of the value actually delivered to the buyer or perceived by the buyer

dependent on how many firms are using a differentiation strategy

dependent upon whether buyers have a clear idea of what they should be looking for in a supplier

Answer 133

not sure I put b

This option suggests a belief that buyers can be fooled. If repeat buying is the requirement for long-term profit performance, a firm had better not rely on this notion.

Question 134

When price is aggressively used by rivals, which strategy affords the best protection for the firm?

differentiation

focus or specialization

low-cost

All of the above are equally good.

Answer 134

c

Differentiation and focus may require higher-cost efforts to be achieved as ways are found to deliver appealing product characteristics rather than a low-cost product.

Question 135

A focus strategy is made more attractive when the

activity-cost chain designed to serve the target segment is also optimally suited to serving most of the other buyer segments as well

target buyer segments have good potential for growth

focuser’s skills are more suitable for achieving low-cost leadership than they are for achieving differentiation

target segments are crucial to the success of major competitors

Answer 135

b

Question 136

Achieving a cost advantage over rival firms requires, finally, that the buyer’s risk be lowered and the performance the buyer gets be increased.

true
false

Answer 136

false

If risk and performance need to be emphasized to conquer a market, the correct strategy will probably not be low-cost producer but differentiation. Achieving these things will sometimes preclude low-cost performance.

Question 137

A major risk of developing a focused based strategy is that the market is too small to provide sufficient profits for defense against competitors.

true
false

Answer 137

a

The chosen segment must be large enough to provide for growth of the firm and to finance the differentiation and marketing efforts that will win brand identification, consumer loyalty, etc.