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Flashcards in B5-3 Deck (83):
1

Considering the SCOR Model of supply chain operations, which of the following key management processes does managing accounts receivable and collections from customers fall into?

a.

Plan.

b.

Source.

c.

Deliver.

d.

Make.

 

Choice "c" is correct. The "deliver" process encompasses all the activities of getting the finished product into the hands of the ultimate consumers to meet their planned demand. Managing accounts receivable and collections from customers falls into the "deliver" process.

Choices "a", "b", and "d" are incorrect, per the above explanation.

2

Which of the following pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry?

a.

Collusive pricing.

b.

Dual pricing.

c.

Transfer pricing.

d.

Predatory pricing.

Which of the following pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry?

a.

Collusive pricing.

b.

Dual pricing.

c.

Transfer pricing.

d.

Predatory pricing.

3

Under pure competition, strategic plans focus on:

a.

Profitability from production levels that maximize profits.

b.

Maintaining the market share and planning for enhanced product differentiation.

c.

Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.

d.

Maintaining the market share and being responsive to market conditions related to sales price.

Choice "d" is correct. Under pure (or perfect) competition, strategic plans include maintaining the market share and responsiveness of the sales price to market conditions.

Choices "a", "b", and "c" are incorrect because they are characteristics of other types of market structures.

4

Which of the following is incorrect with regard to value chain analysis?

a.

Value chain analysis must be used in conjunction with the strategic plan of the organization.

b.

Value chain analysis is critical to assessing the competitive advantage of a firm.

c.

The value chain starts with the firm and goes all the way through to the end users of the product.

d.

Value chain analysis is a strategic tool that assists the firm in determining how important the perceived value of the buyers is with respect to the market the firm operates in.

Choice "c" is an incorrect (false) statement and the correct choice. The best description of a value chain is that value starts with the suppliers who provide the raw materials for a production process, continues with the firm and its strategic plan, continues with the value created by the customers, and then ends with the disposal and recycling of the materials.

Choices "a", "b", and "d" are incorrect, as all are correct (true) statements with regard to value chain analysis. The question stem asks for those statements that are false.

5

In the long run, a firm may experience increasing returns due to:

a.

Law of diminishing returns.

b.

Comparative advantage.

c.

The principle of substitution.

d.

Economies of scale.

 

Choice "d" is correct. In the long run, a firm may experience increasing returns due to economies of scale which come into full play only if a large enough number of units is being produced to make it worth while to set up a fairly elaborate productive organization.

Choice "c" is incorrect. The principle of substitution states that people tend to shift their buying from relatively expensive to relatively cheap goods. Thus, if the price of a product falls, people tend to buy more of it and less of other (relatively) more expensive products.

Choice "a" is incorrect. The law of diminishing returns states that an increase in labor or capital beyond a certain point causes a less-than-proportionate increase in production.

Choice "b" is incorrect. The principle of comparative advantage states that even if one of two regions is absolutely more efficient in the production of every good than is the other, if each region specalizes in the products in which it has a comparative advantage (greatest relative efficiency), trade will be mutually profitable to both regions. Real wages of productive factors will rise in both places. This principle is the basis for international trade.

6

A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on the company's situation?

a.

Quantity increases proportionally less than the price declines.

b.

Quantity increases proportionally more than the price declines.

c.

Price increases proportionally less than the quantity increases.

d.

Price increases proportionally more than the quantity declines.

 

Choice "b" is correct. Quantity increases will be proportionally more than price declines if product demand is significantly elastic. Price elasticity of demand is measured as the ratio of % change in quantity divided by the % change in price. Values of the price elasticity of demand ratio greater than 1.0 are considered to be elastic. The demand elasticity presumed by the fact pattern equates with a price elasticity measure greater than 1.0 and, therefore, proportional changes in quantity are greater than changes in price.

Choice "a" is incorrect. Quantity increases will be proportionally more than price declines if product demand is significantly elastic. Price elasticity of demand is measured as the ratio of % change in quantity divided by the % change in price. The demand elasticity presumed by the fact pattern equates with price elasticity measures greater than 1.0 and, therefore, proportional changes in quantity greater than changes in price.

Choice "d" is incorrect. Price changes will be proportionately less than quantity changes in instances where price elasticity of demand is determined to be elastic.

Choice "c" is incorrect. Price changes will be proportionately less than quantity changes in instances where price elasticity of demand is determined to be elastic. Price increases, however, would typically result in quantity decreases, not increases.

7

Elasticity of demand or supply is:

a.

A measure of how flexible the firm is with respect to responding to the needs of the consumers.

b.

A measure of how flexible the demand or supply of a product is when preferences change.

c.

A measure of how sensitive the demand for or supply of a product is to a change in its price.

d.

A measure of how well a firm's strategic plan is able to adapt to changes in demand or supply.

Choice "c" is correct. Elasticity of demand or supply is a measure of how sensitive the demand for or the supply of a product is to a change in its price.

Choices "a", "b", and "d" are incorrect because they are all measures of the success of strategic planning, but they do not define elasticity of demand or supply.

8

What is strategic planning?

a.

It establishes the general direction of the organization.

b.

It consists of decisions to use parts of the organization's resources in specified ways.

c.

It establishes the resources that the plan will require.

d.

It establishes the budget for the organization.

Choice "a" is correct. Strategic planning is the creation of an overall strategic plan for an organization to achieve its overall "business objectives." The strategic plan will establish the general direction of the organization. 

Choice "c" is incorrect. Strategic planning will not establish the resources that the plan will require. The resources that the plan will require are part of the implementation of the strategic plan, not part of the plan itself.

Choice "d" is incorrect. Strategic planning will not establish the budget for the organization. Budgets are even further down implementing the plan than are the resources that the plan will require.

Choice "b" is incorrect. Strategic planning does not consist of decisions to use parts of the organization's resources in specified ways. Again, these decisions are part of the implementation of the strategic plan, not part of the plan itself.

9

A firm is in heavy competition with a rival firm, and its rivals are consistently able to effectively respond to changes in consumer preferences by making strategic moves in an effort to win over the buyers and gain competitive advantage. Which of the five forces that affect the competitive environment and profitability of a firm does this best demonstrate?

a.

Barriers to entry.

b.

Existence of substitute products.

c.

Bargaining power of customers.

d.

Market competitiveness.

Choice "d" is correct. Market competitiveness is often the most significant of the five forces facing a firm. Firms need to be able to anticipate the strategic moves of rival firms. If a firm is in competition with other firms who are able to respond to changes in various components affecting business, the firm faces a strong competitive force of intensity of competition (market competitiveness).

Choice "a" is incorrect. Barriers to entry are "hoops" or other obstacles that a firm must combat when it attempts to enter a new market.

Choice "b" is incorrect. A firm faces heavy competition from substitute products when similar products exist in the marketplace, and consumers are easily able to switch from one product to another.

Choice "c" is incorrect. Bargaining power of the customers relates to the ability of the customer to directly impact the profitability of the firm by increasing the negotiating power of the customer.

10

Monopolistic competition is characterized by:

a.

A relatively large group of sellers who produce differentiated products.

b.

A relatively small group of sellers who produce differentiated products.

c.

One or two companies producing similar products.

d.

A relatively large group of sellers who produce a homogeneous product.

Choice "a" is correct. Monopolistic competition is characterized by a relatively large number of sellers who produce differentiated products. There are few barriers to entry and firms exert some influence over the price and the market. Best examples are brand name consumer products.

Choice "b" is incorrect. Relatively few sellers with differentiated products would indicate an oligopoly.

Choice "c" is incorrect. One company would be a monopoly, two an oligopoly.

Choice "d" is incorrect. A relatively large number of sellers and a standardized product indicates perfect competition.

11

A perfectly inelastic supply curve in a competitive market:

a.

Exists when firms cannot vary input usage.

b.

Means the equilibrium price must be zero.

c.

Says the market supply curve is horizontal.

d.

Implies a vertical demand curve.

Choice "a" is correct. Price elasticity of supply is calculated the same way as demand except that quantity supplied is measured:

Price elasticity

of supply (%)

=

% change in quantity supplied

change in price

Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes.

Perfectly inelastic supply curves would exist if firms cannot vary input usage. Regardless of price, the firm has to use all inputs if it produces at all.

Choices "b", "d", and "c" are incorrect.

12

Considering the SCOR Model of supply chain operations, which of the following key management processes does collecting and processing vendor payments fall into?

a.

Plan.

b.

Source.

c.

Make.

d.

Deliver.

 

Choice "b" is correct. Once demand has been planned, it is necessary to procure the resources required to meet it and to manage the infrastructure that exists for the sources. Collecting and processing vendor payments falls into the "source" process.

Choices "a", "c", and "d" are incorrect, per the above explanation.

13

Which of the following is incorrect with regard to government intervention in market operations?

a.

Rationing limits the availability of certain goods to a specified level, which lowers demand and prices for a given supply.

b.

A price ceiling is a price that is established above the equilibrium price, which causes a surplus to develop.

c.

Price floors are minimum prices established by law, such as minimum wages and agricultural price supports.

d.

Government intervention may create a price different from the market price, thus causing either a surplus or a shortage.

Choice "b" is correct. This is an incorrect (false) statement and is therefore the correct choice. A price ceiling is a price that is established below the equilibrium price, which causes a shortage to develop. This answer in choice defines a price floor.

Choices "d", "c", and "a" are incorrect. These statements are all true. The question stem asks for an incorrect statement so none of the true statements is the right answer.

14

Under an oligopoly structure, strategic plans focus on:

a.

Maintaining the market share and planning for enhanced product differentiation.

b.

Maintaining the market share and being responsive to market conditions related to sales price.

c.

Profitability from production levels that maximize profits.

d.

Maintaining the market share, ensuring product differentiation, and adapting to changes in price and/or production volume.

Choice "d" is correct. Under oligopoly, strategic plans focus on maintaining market share and call for the proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price changes or required changes in production volume.

Choices "c", "b", and "a" are incorrect because they are characteristics of other types of market structures.

15

A city ordinance that freezes rent prices may cause:

a.

The quantity supplied of rental space exceeds the quantity demanded.

b.

The quantity demanded of rental space exceeds the quantity supplied.

c.

The supply curve for rental space to rise.

d.

The demand curve for rental space to fall.

Choice "b" is correct. A city ordinance that freezes rent prices (such as rent control and rent stabilization in New York City) may cause the quantity demanded for rental space to exceed the quantity supplied. This occurs if the rent controlled price is set below the market clearing price. At the controlled price, the quantity supplied will be constrained due to the low rent prices for the rent-controlled and rent-stabilized properties; builders will not want to build and rent properties for less than they are worth on the open market. The quantity demanded for the rental space will still be artificially high due to the city ordinance, which sets the controlled price below the market price. Thus, the quantity demanded will exceed the quantity supplied. New York City rent control is a perfect example of the effect of a price ceiling and the problems that it can cause.

Choice "d" is incorrect. A city ordinance that freezes rent prices will not cause the demand curve for rental space to fall. Price changes cause movements along the demand curve, not shifts in the demand curve.

Choice "c" is incorrect. A city ordinance that freezes rent prices will not cause the supply curve for rental space to rise. Price changes cause movements along the supply curve, not shifts in the supply curve.

Choice "a" is incorrect. A city ordinance that freezes rent prices will not cause the quantity supplied to exceed the quantity demanded; it would cause the reverse effect.

16

Factors internal to the organization that impact strategy and are sources of strengths and weaknesses include all of the following, except:

a.

Innovation of product lines.

b.

Marketing effectiveness.

c.

Competence of management.

d.

Regulations and laws.

Choice "d" is correct. Regulations and laws are external factors of opportunities and threats that affect the overall industry.

Choices "b", "c", and "a" are incorrect, as internal factors (strengths and weaknesses) of an organization include marketing effectiveness, management competence, and product line innovation.

17

Which of the following is not true regarding strategic plans?

a.

Various levels of the organization will implement strategic plans differently.

b.

The process of strategic planning begins with the creation of the plan.

c.

Continual re-evaluation and revision of strategic plans is necessary.

d.

Strategic plans will vary by segment based on the characteristics of the segments.

 

Choice "b" is correct. The process of strategic planning actually begins with defining the firm's vision and mission statements and then moves to setting the goals and objectives of the firm before it considers creation of the strategic plan.

Choices "a", "c", and "d" are all incorrect because they are all true statements regarding strategic plans.

18

The demand curve for a product reflects which of the following?

a.

The impact of prices on the amount of product offered.

b.

The impact that price has on the purchase amount of two related products.

c.

The willingness of producers to offer a product at alternative prices.

d.

The impact that price has on the amount of a product purchased.

 

Choice "d" is correct. The demand curve illustrates the maximum quantity of a specific good that consumers are willing and able to purchase at each and every price, all else being equal. Thus, the demand curve reflects the impact that price has on the amount of a product purchased.

Choice "a" is incorrect. The supply curve, not the demand curve, measures the maximum quantity of a specific good that sellers are willing and able to produce at each and every price.

Choice "c" is incorrect. The movement of points along the supply curve, not the demand curve, represents a change in quantity supplied as a result of a change in price and is the measure of a willingness of producers to offer a product at alternative prices.

Choice "b" is incorrect. Cross elasticity, not the demand curve, measures the impact that price has on the purchased amount of two related goods (either substitute or compliment).

19

The local video store's business increased by 12 percent after the movie theater raised its prices from $9.50 to $11.00. This is an example of:

a.

Independent goods.

b.

Substitute goods.

c.

Complementary goods.

d.

Superior goods.

Choice "b" is correct. For substitute goods, as the price of one good goes up, the demand for another, substitute good increases as consumers desire the lower-priced substitute good.

Choice "d" is incorrect. Superior goods. Just as the demand for inferior goods declines with an increase in the income level of a consumer, superior goods will experience a spurt in demand as prices are raised.

Choice "c" is incorrect. The demands for mutually "complementary goods" fluctuate together (e.g., more cereal purchases are accompanied by an increase in the demand for milk).

Choice "a" is incorrect. Independent goods have unrelated demand functions (e.g., bread and vacuum cleaners).

20

Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors.

The large capital outlay necessary for the equipment is an example of a(n):

a.

Created barrier.

b.

External cost.

c.

Entry barrier.

d.

Minimum efficiency scale.

 

Choice "c" is correct. Large capital (money) requirements are the basic example of barriers to entry. A barrier to entry effectively prevents firms from entering the market to compete against existing firms.

Choice "d" is incorrect. Minimum efficient scale is the output level at which long run average costs are minimized. Here, Parker has not even been able to enter the industry.

Choice "a" is incorrect. A created barrier is made by firms already in the industry. Here, Parker's barrier was not created.

Choice "b" is incorrect. An external cost is a cost that the company does not account for, but passes on to the detriment of society.

21

In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute, the diabetic's demand curve is best described as:

a.

Elastic.

b.

Perfectly elastic.

c.

Perfectly inelastic.

d.

Indifferent.

Choice "c" is correct. When a good is demanded, no matter what the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the quantity demanded with price making no difference.

Choices "b" and "a" are incorrect. There is no such thing as perfect elasticity. However, the more elastic demand is, the greater the change in quantity demanded for price changes.

Choice "d" is incorrect. Diabetics are indifferent to changes in the price of insulin, and to economists, this is perfectly inelastic demand.

22

Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can gain market share from the two major competitors.

The market structure Karen Parker is attempting to enter is best described as:

a.

Pure competition.

b.

A natural monopoly.

c.

Monopolistic competition.

d.

An oligopoly.

Choice "d" is correct. Major competitors and substantial capital requirements (high barriers to entry) are oligopolistic market conditions.

Choice "a" is incorrect. Pure competition has small barriers to entry and numerous suppliers.

Choice "b" is incorrect. A natural monopoly suggests that economic conditions allow only one supplier for efficiency purposes.

Choice "c" is incorrect. Monopolistic competition has easier barriers to entry and more firms competing to supply the market than oligopoly.

23

The competitive model of supply and demand predicts that a surplus can only arise if there is a:

a.

Minimum price below the equilibrium price.

b.

Maximum price above the equilibrium price.

c.

Minimum price above the equilibrium price.

d.

Maximum price below the equilibrium price.

 

Choice "c" is correct. The competitive model, illustrated below, predicts a surplus is created when supply exceeds quantity demanded at that price. Hence, a surplus occurs when minimum price is set above equilibrium.

[Image 39f559ba110c34b2dca459c3782462c8]

Choices "b", "a", and "d" are incorrect, per the graph and explanation above.

24

Economic theory identifies two basic types of goods: inferior goods and superior goods. As consumer income rises, a lower percentage of earnings are expended on inferior goods while a higher percentage of earnings are spent on superior goods. Overall strategies for achieving organizational missions would most likely match with types of goods as follows:

a.

Cost leadership strategies for superior goods, differentiation strategies for inferior goods.

b.

Cost leadership strategies for inferior goods, differentiation strategies for superior goods.

c.

Cost leadership strategies would most likely be used for both inferior and superior goods.

d.

Differentiation strategies would most likely be used for both inferior and superior goods.

Rule: Overall strategies are divided into two different types that are defined as follows:

Cost leadership: Organization seeks to capture market share through maintaining the lowest cost.

Differentiation: Organization seeks to capture market share by demonstrating product value.

Choice "b" is correct. Organizations that sell economically inferior goods (necessities such as cotton swabs, light bulbs, etc.) are more likely to posture themselves as cost leaders than organizations that sell economically superior goods (luxuries such as cruise packages, fine china, jewelry, etc.) who will likely seek to differentiate the value of their product as part of their strategy.

Choices "a", "c", and "d" are incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products would likely be associated with differentiation.

 

25

Considering the SCOR Model of supply chain operations, which of the following key management processes does implementing changes in engineering fall into?

a.

Deliver.

b.

Plan.

c.

Source.

d.

Make.

 

Choice "d" is correct. The "make" process encompasses all the activities that turn the raw materials into finished products that are produced to meet a planned demand. Implementing changes in the engineering process falls into the "make" process.

Choices "b", "c", and "a" are incorrect, per the above explanation.

26

Under monopoly, strategic plans focus on:

a.

Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.

b.

Maintaining the market share and being responsive to market conditions related to sales price.

c.

Maintaining the market share and planning for enhanced product differentiation.

d.

Profitability from production levels that maximize profits.

Choice "d" is correct. Under monopoly, strategic plans ignore market share and focus on profitability from production levels that will maximize profits.

Choice "b" is incorrect. Continuous price responses to maintain market share is a characteristic of perfect competition.

Choice "c" is incorrect. Under monopolistic competition, strategic plans include maintaining the market share (as with pure competition), but they also likely include plans for enhanced product differentiation and allocation of resources to advertising, product research, etc.

Choice "a" is incorrect. Coordinating production volume and price changes along with product differentiation is a characteristic of oligopoly.

27

In applying the Supply Chain Operations Reference (SCOR) Model, a company would include all of the following in its planning except for:

a.

Selecting vendors.

b.

Assessing capacity concerns and capabilities.

c.

Making make/buy decisions.

d.

Determining demand requirements.

Choice "a" is correct. Selecting vendors is a source decision, not a plan decision. The SCOR model includes a series of processes or steps defined as plan, source, make, and deliver. The process of planning consists of developing a way to properly balance aggregate demand and aggregate supply within the goals and objectives of the firm and plan for the necessary infrastructure. Selecting vendors is a "source" step that implements that plan.

Choice "d" is incorrect. Determining demand requirements is an example of an activity performed in the plan stage of the SCOR model.

Choice "b" is incorrect. Assessing capacity concerns and capabilities is an example of an activity performed in the plan stage of the SCOR model.

Choice "c" is incorrect. Making make/buy decisions is an example of an activity performed in the plan stage of the SCOR model.

28

When the supply of and demand for a good both increase:

a.

Equilibrium price will increase.

b.

Equilibrium price will decrease.

c.

Equilibrium quantity may increase, decrease, or remain unchanged.

d.

Equilibrium price may increase, decrease, or remain unchanged.

Choice "d" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. However, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged (as illustrated above). However, if demand increases by more than supply, price will increase. Conversely, if supply increases by more than demand, price will decrease.

[Image 939224722e31f3e47316ce8767d23745]

Choices "a" and "b" are incorrect, since the impact on price is indeterminate.

Choice "c" is incorrect, since equilibrium quantity will increase.

29

An increase in the demand and the supply for a product will cause which of the following?

I.

The equilibrium quantity to increase.

II.

The equilibrium quantity to remain unchanged.

III.

The equilibrium price to remain unchanged.

IV.

The equilibrium quantity to decrease.

a.

I only.

b.

I and III only.

c.

II only.

d.

II and III only.

 

Choice ''a'' is correct. The equilibrium quantity will certainly increase, but the effect on price cannot be determined; it may increase, decrease, or remain unchanged.

Choices ''d'', ''c'', and ''b'' are incorrect, per the above explanation.

30

If a group of consumers decide to boycott a particular product, the expected result would be:

a.

An increase in the product price to make up lost revenue.

b.

A decrease in the demand for the product.

c.

That companies in the industry would experience higher economic profits.

d.

An increase in product supply because of increased availability.

Choice "b" is correct. A consumer boycott will decrease demand for the product being boycotted.

Choice "a" is incorrect. Increasing price will further reduce the quantity demanded. The effect on revenue is uncertain.

Choice "d" is incorrect. Supply will be unaffected by a boycott.

Choice "c" is incorrect. A boycott of a particular product will reduce the overall profits of the industry.

31

In competitive markets, an increase in an effective minimum wage will:

a.

Decrease the supply of labor.

b.

Increase unemployment.

c.

Have a neutral effect on the demand for labor.

d.

Decrease unemployment

Choice "b" is correct. When the "minimum" wages are increased, employers may elect to hire fewer employees thereby increasing unemployment.

Choice "c" is incorrect. An increase in the minimum wage will have an effect on the demand for labor.

Choice "a" is incorrect. The supply of labor will likely go up as the wage being paid increases.

Choice "d" is incorrect. As the minimum wage increases, unemployment will increase.

32

Which of the following characteristics would indicate that an item sold would have a high price elasticity of demand?

a.

Changes in the price of the item are regulated by governmental agency.

b.

The item is considered a necessity.

c.

The item has many similar substitutes.

d.

The cost of the item is low compared to the total budget of the purchasers.

 

Choice "c" is correct. If an item has many similar substitutes, its price elasticity of demand will be high. Customers can always switch to a substitute, so a change in price may affect demand substantially. 

Choice "d" is incorrect. If the cost of an item is low compared to the total budget of the purchasers, it will make little difference how much it costs. For example, in a business the cost of paper clips will probably not be a significant factor. 

Choice "b" is incorrect. If an item is considered a necessity (e.g., insulin to diabetics), the price elasticity of demand will be relatively low (i.e., inelastic). Purchasers will buy it regardless of the cost, and demand will not change all that much.

Choice "a" is incorrect. If the price of an item is regulated by a government agency, the demand may not be highly price elastic because any price changes (if made) will be controlled and implemented gradually over time.

33

An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?

a.

Price will rise and quantity will rise.

b.

Price will fall and quantity will fall.

c.

Price will rise and quantity will fall.

d.

Price will fall and quantity will rise.

 

Choice "c" is correct. Crude oil is an input to the production of gasoline. When the price of an input increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.

Choice "d" is incorrect, since price will rise and quantity will fall.

Choice "b" is incorrect, since price will rise.

Choice "a" is incorrect, since quantity will fall.

34

If the federal government were to regulate a product or service in a competitive market by setting a maximum price that is below the equilibrium price, then in the long run this action will:

a.

Result in a shortage.

b.

Cause a decrease in price.

c.

Result in a surplus.

d.

Have no effect on the market.

 

Choice "a" is correct. Setting a maximum or ceiling price, which is below the equilibrium price dictated by a competitive market, would result in a shortage as a result of excess demand.

Choices "c", "b", and "d" are incorrect, per the above explanation.

35

Considering the SCOR Model of supply chain operations, which of the following key management processes does assessing the ability of the suppliers to supply resources fall into?

a.

Source.

b.

Plan.

c.

Deliver.

d.

Make.

 

Choice "b" is correct. The process of planning consists of developing a way to properly balance aggregate demand and aggregate supply within the goals and objectives of the firm and plan for the necessary infrastructure. Assessing the ability of the suppliers to supply resources is part of the "plan" process.

Choices "a", "d", and "c" are incorrect, per the above explanation.

36

Which of the following statements regarding competitive advantage is not correct?

a.

If the total costs of a firm are less than those of close rivals, then the firm has a competitive market advantage.

b.

Differentiation advantage may best be obtained by a firm when it builds market share or decreases its price.

c.

Cost leadership advantage may best be obtained by a firm when it builds market share or matches the price of its rivals.

d.

The two major forms of competitive advantage are differentiation and cost leadership.

Choice "b" is correct. This is an inaccurate statement as a differentiation advantage may be best obtained by a firm that builds market share or increases (not decreases) its price.

Choices "d", "a", and "c" are incorrect, as they are all true statements. Competitive advantage is generally defined as either differentiation or cost leadership. As to cost leadership, a firm enjoys a competitive advantage when it is able to match the prices of its rivals or has a cost structure that is lower than its rivals.

37

Under monopolistic competition, strategic plans focus on:

a.

Maintaining the market share and being responsive to market conditions related to sales price.

b.

Maintaining the market share and planning for enhanced product differentiation.

c.

Profitability from production levels that maximize profits.

d.

Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.

Choice "b" is correct. Under monopolistic competition, strategic plans include maintaining the market share (as with pure competition), but they also likely include plans for enhanced product differentiation and allocation of resources to advertising, product research, etc.

Choice "c" is incorrect. Profit maximization is a characteristic of monopoly.

Choice "a" is incorrect. Continuous price responses to maintain market share is a characteristic of perfect competition.

Choice "d" is incorrect. Coordinating production volume and price changes along with product differentiation is a characteristic of oligopoly.

38

An increase in the market supply of beef would result in a(n):

a.

Increase in the quantity of beef demanded.

b.

Decrease in the quantity of beef demanded.

c.

Decrease in the demand for beef.

d.

Increase in the price of beef.

Choice "a" is correct. As illustrated below, a shift outward (increase) in supply, increases quantity demanded (Q2) at equilibrium, accompanied by a decline in price. Thus, an increase in the market supply of beef would result in an increase in the quantity of beef demanded.

[Image 9122aa9400bca3137370e55dac3d258f]

Choices "b" and "d" are incorrect, as seen in the graph above. There is an increase in the quantity of beef demanded and a decrease in the price of beef.

Choice "c" is incorrect, because there is no information in the question pertaining to any "shift" in the beef demand curve or in the demand for any complimentary products (e.g., pork).

39

In order to sell at the rate of output in markets controlled by monopolists, price is set where:

a.

Marginal revenue equals marginal cost.

b.

Price equals marginal cost.

c.

Marginal revenue equals average total cost.

d.

Price equals average total cost.

Choice "a" is correct. No matter which model is representative of the industry in which the firm operates, the firm will maximize profits by producing at MR = MC. In order to sell at the rate of output in markets controlled by monopolists, the price is set where marginal revenue equals marginal cost. The monopolist's price will be higher than MR resulting in large profits.

Choice "b" is incorrect. Price exceeds both MR and MC.

Choices "c" and "d" are incorrect, which are far-out distractors.

40

Under which of the following conditions is the supplier most able to influence or control buyers?

a.

When the purchasing industry is an important customer to the supplying industry.

b.

When the industry is controlled by a large number of companies.

c.

When the supplier does not face the threat of substitute products.

d.

When the supplier's products are not differentiated.

Choice "c" is correct. When there are few good substitutes for a supplier's product, the supplier has market power (think of a monopoly). As a result, the supplier is better able to control buyers and act as a price setter rather than a price taker.

Choice "d" is incorrect. When supplier's products are not differentiated, buyers will be indifferent about which supplier they purchase from. In other words, if firms sell identical products (think of perfect competition) the product of one firm is a perfect substitute for the product of another firm. In this case, firms are price takers, not price setters.

Choice "b" is incorrect. When there are a large number of firms, no one firm has much market power. This is the case of either perfect competition (if all firms sell identical products) or monopolistic competition (if all firms sell slightly differentiated products).

Choice "a" is incorrect. If the purchasing industry is an important customer of the supplier, thepurchasing industry (i.e., the buyer) will have some market power. This will diminish the ability of the supplier to influence or control the buyer.

41

If the demand for a normal good is inelastic, then the sales price of the product would increase following a(n):

a.

Increase in the supply of the product.

b.

Decrease in the price of a substitute good.

c.

Increase in the number of suppliers of the product.

d.

Decrease in the supply of the product.

Choice "d" is correct. If demand is perfectly inelastic (or not price sensitive), there will be no change in quantity demanded for a change in price. This means that consumers of the product will demand a constant quantity, regardless of the price. If the quantity supplied is reduced (presumably below an equilibrium point where supply equals demand), there will be excess demand for the product and sales price will go up. The increase in sales price will have no impact on demand (because demand is assumed to be perfectly price inelastic).

Choices "b", "a", and "c" are incorrect, per the above explanation.

42

The kinked demand curve is associated with:

a.

The analysis of oligopoly.

b.

The analysis of pure competition.

c.

The analysis of agricultural markets.

d.

The analysis of monopolistic competition.

 

Choice "a" is correct. The demand curve for any individual oligopolist is kinked sharply downward. This occurs because, in oligopoly market conditions, the other firms in the market will match any price reduction so they do not lose market share but will not match any price increase of an individual firm. Therefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quickly buy from other firms in the market and demand will drop off sharply creating a kinked demand curve.

Choices "c", "d", and "b" are incorrect, per the above explanation.

43

The impact of a government price support program would most likely result in which of the following?

a.

Lead to shortages.

b.

Lead to surpluses.

c.

Improve the rationing function of prices.

d.

Not influence the rationing function of prices.

 

Choice "b" is correct. A government price support program acts as a subsidy that will encourage suppliers to increase supply beyond an equilibrium point (the point where supply and demand curves intersect). This excess of supply over demand will create surpluses in the market.

Choices "a", "c", and "d" are incorrect, per the above explanation.

44

A basic determinant of the elasticity of demand for a normal good is the:

a.

Number of sellers of the product.

b.

Number of substitutes available for the product.

c.

Length of time producers have to respond to market changes.

d.

Number of complements available for the product.

Choice "b" is correct. The change in demand for a product, based upon a given change in that product's price, is dependent on whether or not other (presumably cheaper) goods can be substituted for the product.

Choice "c" is incorrect. The elasticity of supply (not demand) would take into account the response time producers might have to market changes.

Choice "a" is incorrect. The number of sellers is irrelevant when calculating the elasticity of demand.

Choice "d" is incorrect. A complement good's demand is the same as the primary good. For example, an increase in the demand for a given food would cause the demand for its complement to also increase. The increased demand of the complement is irrelevant when calculating the elasticity of demand.

45

A natural monopoly exists because:

a.

The firm owns natural resources.

b.

Other firms are unable to enter the industry.

c.

The government is the only supplier.

d.

Economic and technical conditions permit only one efficient supplier.

 

Choice "d" is correct. A natural monopoly exists when economic and technical conditions permit only one efficient supplier.

Choice "a" is incorrect. Owning natural resources, even if they are unique, would not create a monopoly. Substitutes for the resource may be available.

Choice "c" is incorrect. Government control may create a monopoly, but not a natural monopoly. This is a regulated monopoly.

Choice "b" is incorrect. Barriers to entry help create a monopoly, but the product must be unique.

46

In microeconomics, the distinguishing characteristic of the long run on the supply side is that:

a.

Only demand factors determine price and output.

b.

All inputs are variable.

c.

Only supply factors determine price and output.

d.

Firms are not allowed to enter or exit the industry.

 

Choice "b" is correct. In microeconomic analysis, in the long run all supply side inputs are variable. In accounting terms, this means that in the long run all costs are variable. (e.g., the fixed cost of depreciation of a factory building becomes a variable cost when a second factory building is added.)

Choices "c" and "a" are incorrect. Output and price are ultimately determined by market factors (supply and demand) and the power a firm has in the market.

Choice "d" is incorrect. In competitive markets (including monopolistic competition), firms rather easily enter and exit the market.

47

Which of the following is not considered a factor that increases the bargaining power of the customer?

a.

The firm is unable to change suppliers easily.

b.

Buyers have low switching costs of changing products.

c.

One group of customers makes up a large volume of the firm's business.

d.

Much information is available to the customer to compare and contrast features of all products on the market.

Choice "a" is correct. When a firm is unable to change suppliers easily, that is a factor that increases the bargaining power of the suppliers.

Choices "d", "c", and "b" are incorrect because they all are factors that increase the bargaining power of the customer, which are:

Customers make up a large volume of a firm's business.

There is much information available to customers.

The buyers have low switching costs.

There are a high number of alternate suppliers.

48

Which of the following is not a feature of a firm operating in a monopolistic competition environment?

a.

The firm is able to influence prices.

b.

The firm faces a downward sloping and fairly inelastic demand curve.

c.

Other companies produce similar products.

d.

The firm faces few barriers to entry.

Choice ''b'' is correct. A downward sloping, fairly elastic (not inelastic) demand curve is a feature of a firm in monopolistic competition.

Choices ''d'', ''a'', and ''c'' are incorrect as they are all features of monopolistic competition.

Note: Firms in a monopolistically competitive market produce "similar" goods; however, unlike in a perfectly competitive market, the goods are NOT identical or perfect substitutes. The definition of being able to "influence prices" is that the firm has a downward sloping demand curve. A firm in a monopolistic competition environment has little market control, but it is still able to influence prices. It cannot influence them as much as a pure monopoly can, but the influence is still there. The firm is still not a price-taker; it is a price-maker (hence the downward-sloping demand curve), so, again, it is able to influence to some degree.

49

Which of the following statements is true assuming that demand for a product is price unit elastic:

a.

An increase in price will result in a decline in total revenue.

b.

An increase in price will have no effect on total revenue.

c.

An increase in price will result in an increase in total revenue.

d.

An increase in price will result in a decline the quantity demanded that is less than the increase in price.

Choice "b" is correct. If demand is unit elastic, a change in price will have no effect on total revenue.

Choices "a", "d", and "c" are incorrect, per the above statement.

50

Which of the following statements is true assuming that demand for a product is price elastic?

a.

An increase in price will result in an increase in total revenue.

b.

An increase in price will result in a decline the quantity demanded that is less than the increase in price.

c.

An increase in price will result in a decline in total revenue.

d.

An increase in price will have no effect on total revenue.

Choice "c" is correct. If demand is price elastic, an increase in price will result in a decline in total revenue (negative relationship).

Choice "b" is incorrect. When demand is price elastic, an increase in price results in a decline in quantity demanded that is proportionately larger than the increase in price, thus having the result of a decline in total revenue (price multiplied by quantity).

Choices "a" and "d" are incorrect, per the above statement.

51

In competitive markets, an increase in demand for a product causes a(n):

a.

Increase in product supply.

b.

Increase in the price of the product.

c.

Reduction in the number of buyers of the product.

d.

Reduction in purchases by consumers.

Rule of economic reasoning: "Draw the graph!"

[Image f362500c404464a4d3de90ae8915f743]
Choice "b" is correct. When demand increases and supply has not increased (as implied by the question), suppliers will raise the price of the product and more product will be bought (but the supply curve does not change). Because consumers are demanding more product than is available, they are "willing" to pay a higher price.

Choice "a" is incorrect. Although buyers would pay higher prices and purchase more products, the supply "curve" has not changed. Therefore, the quantity supplied remains the same.

Choice "d" is incorrect. Because consumer demand has increased (not decreased).

Choice "c" is incorrect. An increase in demand has an indeterminate (and irrelevant) impact on the number of buyers. For example, there could be the same number of buyers in the market, but that each demands a higher quality.

52

Which one of the following statements about supply and demand is true?

a.

If demand increases and supply increases, equilibrium quantity will fall.

b.

If demand increases and supply remains constant, equilibrium price will fall.

c.

If demand increases and supply decreases, equilibrium price will increase.

d.

If supply increases and demand remains constant, equilibrium price will rise.

 

Choice "c" is correct. If quantity demanded for a product goes up, this drives price up. Additionally, if supply decreases, this will also drive prices up. Therefore, it is a certainty that price will be driven up, given an increase in demand and a decrease in supply.

Choice "d" is incorrect. Increased supply will reduce (not increase) prices, assuming demand remains constant.

Choice "a" is incorrect. Increased demand will increase price, and increased supply will reduce price. The net impact on price cannot be determined without more facts.

Choice "b" is incorrect. Increased demand will increase (not reduce) price, assuming supply remains constant.

53

If the elasticity of demand for a normal good is estimated to be 1.5, then a 10% reduction in its price would cause:

a.

Demand to decrease by 10%.

b.

Quantity demanded to rise by 15%.

c.

Total revenue to fall by 15%.

d.

Total revenue to fall by 10%.

Choice "b" is correct. The elasticity of demand is calculated as:

% change in demand

% change in price

If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a normal good is always negative), then a 10% price reduction would cause an increase in the quantity demanded by 15% (a ratio of 15 to 10 or 1.5).

Choices "d", "c", and "a" are incorrect, per explanation above.

54

When do cost leadership strategies fail?

a.

New entry firms are able to influence buyers to switch to their product by cutting the price of their product for a period of time in an effort to gain market share and increase profits.

b.

Buyers have large amounts of bargaining power in the market.

c.

Heavy price competition exists in the market.

d.

Buyers become less price sensitive and start to have brand loyalty.

Choice "d" is correct. If firms overlook the fact that few customers care about the fact that a product is priced lower than others and care more about brand loyalty, cost leadership strategies will fail.

Choices "b", "c", and "a" are incorrect, as these are all situations in which cost leadership strategies work well.

55

In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output where:

a.

Average costs are minimized.

b.

Marginal cost equals marginal revenue.

c.

Price equals average cost.

d.

Price equals marginal cost.

Choice "b" is correct. Firms produce up to the point where marginal cost equals marginal revenue, whether the markets are perfectly competitive or imperfectly competitive.

Choice "d" is incorrect. The relevant comparison to marginal cost is marginal revenue, not price. It is assumed that revenue is not fixed on a unit basis.

Choice "a" is incorrect. Beyond the point of average costs being minimized, marginal cost will rise. Still, it will make sense to increase production until marginal cost equals marginal revenue.

Choice "c" is incorrect. Marginal revenue, not price, as revenue is assumed to vary on a per unit basis, and not average cost, since it will increase profits to expand production until marginal revenue equals marginal cost.

56

Which one of the following is not a factor contributing to economies of scale?

a.

Efficient utilization of capital equipment.

b.

Utilization of by-products.

c.

Labor specialization.

d.

Diminishing returns.

Choice "d" is correct. The theory of economies of scale states that, as a production process gets larger, the process becomes more efficient and productivity increases. The theory of diminishing returns is the opposite of economies of scale in that it holds that, as more product is produced, the factory gets less productivity out of its workforce and machinery. Factors contributing to economies of scale include:

Labor specialization

Managerial specialization

Utilization of by products (or joint products)

Efficient use of capital equipment

Volume discount purchasing

Choices "c", "b", and "a" are incorrect, per above explanation.

57

Which one of the following is not a key assumption of perfect competition?

a.

There is freedom of entry into and exit out of the industry.

b.

Each firm can price its product above the industry price.

c.

The level of a firm's output is small relative to the industry's total output.

d.

Customers are indifferent about which firm they buy from.

Choice "b" is correct. A key assumption of perfect competition is that the firm is a "price taker," that is, it cannot fix the price. Accordingly, it is not true that each firm can price its product above the industry price.

Key assumptions of perfect competition include:

d.

Customers are indifferent about which firm they buy from.

c.

The level of a firm's output is small relative to the industry's total output.

a.

There is freedom of entry into and exit out of the industry.

58

Which one of the following changes will cause the demand curve for gasoline to shift to the left?

a.

The price of cars decreases.

b.

The price of gasoline increases.

c.

The supply of gasoline decreases.

d.

The price of cars increases.

Choice "d" is correct. A shift left in any demand curve represents a decrease in demand (at all price levels) for that product. Because gasoline and cars are considered complementary goods, the demand for gasoline is directly impacted by the demand for cars. If the price for cars increases, the demand for cars will decrease, causing the demand for gasoline to decrease, and the gasoline demand curve to shift left.

Choice "b" is incorrect. An increase in the price for gasoline will decrease the quantity demanded but will not affect overall demand across all price levels and quantities (as represented by a left shift in the demand curve).

Choice "c" is incorrect. A change in the supply curve will not cause a shift in the demand curve.

Choice "a" is incorrect. A decrease in the price of cars would have the opposite effect and cause a right shift in the demand curve.

59

Entry into monopolistic competition is:

a.

Difficult, with significant obstacles.

b.

Rare, as significant capital is required.

c.

Frequent, as no obstacles exist.

d.

Relatively easy, with only a few obstacles.

 

Choice "d" is correct. The characteristics of monopolistic competition include:

Numerous firms with differentiated products.

Ease of entry - few barriers.

Firms exact some influence over price and market.

Non-price competition is frequent and critical.

Choice "c" is incorrect. Monopolistic competition has a few obstacles. A market with no obstacles is in perfect competition.

Choice "a" is incorrect. Significant obstacles are characteristic of oligopoly.

Choice "b" is incorrect. Significant capital requirements represent a significant barrier to entry, which is a characteristic of an oligopoly.

60

Each of the following business functions is considered part of a company's value chain, except:

a.

Research and development.

b.

Customer service.

c.

Marketing.

d.

Accounting.

Choice "d" is correct. A value chain can be thought of as a chain of activities that a firm performs in order to deliver a good or service to a given market. Each activity on the chain must be evaluated to determine the value added to the customer as a result of the activity. Accounting is a central office function that adds value to the company overall, but not to the specific good or service delivered to the customer.

Choice "b" is incorrect. Customer service is clearly a business function that will add value to the customer.

Choice "c" is incorrect. Marketing is a critical function that allows a company to effectively reach and service its target market of customers.

Choice "a" is incorrect. Research and development (R&D) involves trying to create and develop products that will add value to potential customers.

61

If a nation has superior conditions in which to grow coffee beans and firms are able to grow them at very low costs, which of the four major factors that Michael Porter has indicated impact the global competitive environment would allow this nation to fare better with respect to global competitive advantage?

a.

Conditions of the factors of production.

b.

Conditions of domestic demand.

c.

Related and supporting industries.

d.

Firm strategy, structure, and rivalry.

Choice "a" is correct. If a nation has a strong set of factors of production (such as low cost, high quality raw material inputs), that are required in a given industry, it will fare better with regard to competitive advantage.

Choice "b" is incorrect. Conditions of domestic demand relate to the nation's domestic demand for the product, which is directly related to the ability of the nation to fare better with regard to competitive advantage.

Choice "c" is incorrect. The factor of related and supporting industries deals with whether there are suppliers of material inputs that exist within a nation or whether there are rival firms who are competitive in the international environment, both of which would increase the nation's competitive advantage.

Choice "d" is incorrect. The factor of firm strategy, structure, and rivalry relates to the practices of a nation with respect to how the companies are managed and organized, along with the laws of the nation that regulate the formation of the companies, and how intense the rivalry is with respect to competing firms in the nation.

62

The manufacturer of a high priced car emphasizes the prestige, performance, and safety of the vehicle. The strategy pursued by the manufacturer can be best characterized as:

a.

Differentiation focused on a broad range of buyers.

b.

Differentiation focused on a narrow range (niche) of buyers.

c.

Cost leadership focused on a narrow range (niche) of buyers.

d.

Cost leadership focused on a broad range of buyers.

Choice "a" is correct. The manufacturer's attempt to appeal to prestige, performance, and safety targets a broad range of motivations in the automotive market and markets to wealthy individuals, corporations, etc. The manufacturer seeks to differentiate itself from other vehicles with various superlatives, however, there is not one feature that is specifically emphasized. The differentiation of the product is focused on a broad range of buyers.

Choice "d" is incorrect. Cost leadership focused on a broad range of buyers would emphasize price to a large number of buyers, not various features.

Choice "c" is incorrect. Cost leadership focused on a narrow range (niche) of buyers would emphasize price to a specific group interested in price.

Choice "b" is incorrect. Differentiation focused on a narrow range (niche) of buyers would differentiate the product within the context of a very few buyers and might specifically emphasize one feature such as prestige (for the status conscious professional), performance (for the auto enthusiast), or safety for families, etc.

63

The Waymand family typically ate hamburger as a regular staple in their diet. In the last few years, the family income has doubled, and they have now replaced hamburger with steak as a regular staple in their diet. This is an example where the demand for hamburger:

a.

Is perfectly elastic.

b.

Responds as an inferior good.

c.

Is perfectly inelastic.

d.

Is relatively elastic.

Choice "b" is correct. An inferior good is one for which the demand declines as income increases. A normal good would experience an increase in demand in response to an increase in income. Because the demand for hamburger went down as income increased, it is an inferior good.

Choices "d", "a", and "c" are incorrect. The elasticity of demand for a good is calculated by measuring the change in quantity demanded over the change in price (not income). The question does not have sufficient information to calculate the elasticity of the demand for hamburger.

64

When do differentiation strategies fail?

a.

The value of the firm's differentiation premium does not exceed its cost.

b.

The various rival firms have chosen different features on which to differentiate their products.

c.

Customers are able to see (or perceive) a value in the firm's product compared to products of other firms.

d.

The firm's product appeals to different people for different reasons.

Choice "a" is correct. If a firm must pay a higher cost for the premium related to the differentiation than it is able to recoup in the market for that feature, then its profits will decrease, the firm will lose competitive advantage, and the differentiation strategy will fail.

Choices "d", "c", and "b" are incorrect, as these are all situations in which differentiation strategies work well.

65

When applying value chain analysis, a firm sends its production manager to visit the operations of its major supplier in an attempt to determine if there are cost-savings capabilities that could be implemented at the supplier's warehouse. The firm is performing which form of value chain analysis?

a.

Internal differentiation analysis.

b.

Vertical linkage analysis.

c.

Internal costs analysis.

d.

None of the answer choices are correct.

 

Choice "b" is correct. Analyzing the vertical linkage of a firm means understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firm's operations. The production manager's visit to the supplier's location is vertical linkage analysis.

Choice "a" is incorrect. The firm may analyze its ability to create value through differentiation (e.g., what are the sources of differentiation and what are the related costs?) when the customer perceives that the firm's product is superior to those of its rivals. The production manager's visit to the supplier's location is external, not internal, and represents vertical linkage analysis.

Choice "c" is incorrect. In order to determine the internal value-creating ability of a firm, the sources of profit and costs of the internal activities within the firm must be analyzed. The production manager's visit to the supplier's location is external, not internal, and represents vertical linkage analysis.

Choice "d" is incorrect, per the above explanation.

66

Demand for a product tends to be price inelastic if:

a.

Few good complements for the product are available.

b.

People spend a large share of their income on the product.

c.

Few good substitutes are available for the product.

d.

The product is considered a luxury item.

Choice "c" is correct. Demand for a product tends to be price inelastic if few good substitutes are available for the product. Even if price increases, consumers are unable to switch to substitute goods, because they don't exist. 

Choice "d" is incorrect. Luxury items may have good substitutes available.

Choice "a" is incorrect. Complementary goods are those whose demand fluctuates in unison; substitute goods are more relevant here.

Choice "b" is incorrect. If consumers spend a large share of their income on the product, they will be very sensitive to any price changes and hence product demand would be more "elastic."

67

An industry that is oligopolistic would be best characterized by:

a.

One firm selling a product with no close substitutes.

b.

Horizontal or flat demand curves for the output of individual firms.

c.

The absence of significant economies of scale.

d.

Significant barriers to entry.

Choice "d" is correct. Oligopoly market conditions are characterized by:

Few firms in the market

Significant barriers to entry

Differentiated products

Fixed (or semi fixed) prices

Kinked demand curves

Choice "a" is incorrect. This is an example of monopoly.

Choice "b" is incorrect. Horizontal demand curves represent demand that is perfectly price elastic (buyers will only pay one price for any quantity of a product). This occurs in perfectly competitive markets.

Choice "c" is incorrect. This is characteristic of perfect competition, as there are no barriers to entry ("size doesn't matter") in perfect competition.

68

In a competitive market, an increase in the minimum wage will likely have which of the following effects?

a.

Firms paying at the current minimum wage rate would generally be unaffected if the marginal revenue produced by the lowest paid workers does not exceed the new higher cost of the worker. Many firms would thus be forced to work more efficiently.

b.

If a marginally more expensive form of capital is available to substitute for labor (e.g., due to technological advances), firms will reduce their use of labor.

c.

Total employment will likely decrease in affected industries and generate unemployment. Employers will demand a smaller number of workers while a larger number of workers will be attracted by the higher wage.

d.

Firms currently paying above the new minimum wage would generally raise their pay rates (although the new minimum wage creates a new floor for employee wage bargaining purposes).

Choice "c" is correct. With an increase in the minimum wage, total employment will likely decrease in affected industries and generate unemployment. Employers will demand a smaller number of workers while a larger number of workers will be attracted by the higher wage.

Choice "d" is incorrect. Firms currently paying above the new minimum wage would generally be unaffected, not raise their pay rates.

Choice "a" is incorrect. Firms paying at the current minimum wage rate would attempt to reduce labor, not generally be unaffected.

Choice "b" is incorrect. If a marginally cheaper, not more expensive, form of capital is available to substitute for labor, firms will reduce their use of labor.

69

Which of the following statements is true assuming that demand for a product is price inelastic?

a.

An increase in price will result in an increase in total revenue.

b.

An increase in price will have no effect on total revenue.

c.

An increase in price will result in an increase the quantity demanded that is more than the increase in price.

d.

An increase in price will result in a decrease in total revenue.

Choice "a" is correct. If demand is price inelastic, an increase in price will result in an increase in total revenue (positive relationship).

Choices "d" and "b" are incorrect, per the above statement.

Choice "c" is incorrect. When demand is price inelastic, an increase in price results in a decrease in quantity demanded that is proportionately smaller than the increase in price, thus having the result of an increase in total revenue (price multiplied by quantity).

70

Which of the following statements regarding the existence of substitute products is correct?

a.

If few substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available.

b.

When the cost of buyers switching to new products is high, the effect of substitutes on the competitive environment of a firm is high.

c.

The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are difficult for customers to obtain.

d.

If few substitutes exist, buyers may have a limit on the maximum price that they are willing to pay and may choose to not purchase the firm's product if the price is too high.

Choice "a" is correct. If few substitutes exist, buyers have little choice of products and may be willing to pay a higher price for the products that are available.

Choice "c" is incorrect. The impact of substitutes will have more of an effect on the competitive environment of a firm if the substitutes are readily available to consumers (not difficult to obtain).

Choice "b" is incorrect. When the cost of buyers switching to new products is low (not high), the effect of substitutes on the competitive environment of a firm is high.

Choice "d" is incorrect. If many (not few) substitutes exist, buyers may have a limit on the maximum price that they are willing to pay and may choose to not purchase the firm's product if the price is too high.

71

Which of the followng statements is true with respect to price elasticity of demand?

a.

The shorter the time period, the more product demand becomes elastic because less choices are available.

b.

Product demand is more elastic when more substitutes are available.

c.

Product demand is more elastic when fewer substitutes are available.

d.

Product demand is more inelastic when more substitutes are available.

Choice "b" is correct. Product demand is more elastic when more substitutes are available.

Choice "a" is incorrect. The longer the time period, the more product demand becomes elastic because more choices are available.

Choice "c" is incorrect. Product demand is more elastic when more substitutes are available, not fewer substitutes.

Choice "d" is incorrect. Product demand is more inelastic when few substitutes are available.

72

Suppose the equilibrium wage for low skilled workers in California is $6.00 an hour. If the government increases the minimum wage to $7.00 an hour, what would be the effect on the market for low skilled labor?

a.

An excess demand for labor would result.

b.

The demand for labor would decrease.

c.

The supply of labor would increase.

d.

An excess supply of labor would result.

Choice "d" is correct. A minimum wage that is set above the equilibrium wage will result in an excess supply (or surplus) of labor.

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Choice "a" is incorrect. The quantity demanded of labor at $7 is less than the quantity supplied, implying an excess supply not an excess demand.

Choice "b" is incorrect. An increase in the minimum wage causes a decrease in quantity demanded of labor, not a decrease in the demand (shift in demand) for labor.

Choice "c" is incorrect, per the above explanation.

73

When does competition not become an even stronger force impacting the profitability of a firm?

a.

The market is fast-growing.

b.

The costs of exiting the market exceed the costs of continuing to operate.

c.

The market consists of several equal-sized firms.

d.

Customers do not have strong brand preferences.

Choice "a" is correct, as it is not a factor that would cause market competitiveness to be even stronger.

Choices "c", "d", and "b" are incorrect because they are all reasons that competition becomes an even stronger force that impacts the firm's profitability. The following are situations that would cause competition to be an even stronger force impacting the profitability of a firm:

The market is not growing fast.

There are several equal-sized firms in the market.

Customers do not have strong brand preferences.

The costs of exiting the market exceed the costs of continuing to operate.

Some firms profit from making certain moves to increase market share.

The various firms in the market use different types of strategic plans.

74

Which of the following is not correct regarding best cost provider strategies?

a.

The overall lowest cost in the industry is not a viable option in best cost strategies because the firm could not compete profit-wise with its differentiation strategy component.

b.

The best cost strategy is a combination of the benefits of the cost leadership and differentiation strategies.

c.

When generic products are not acceptable to buyers, yet they still remain price sensitive to the value they are receiving for their money, the best cost strategy may work well.

d.

The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the highest cost among its closest competitors with a quality differentiated product in an effort to obtain the highest profits.

Choice "d" is correct. This is an incorrect statement because the best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the lowest (not highest) cost among its closest competitors while matching them on the features desired by consumers.

Choices "a", "c", and "b" are incorrect, as they are all true statements regarding best cost provider strategies.

75

Any business firm that has the ability to control the price of the product it sells:

a.

Has a demand curve that is horizontal.

b.

Faces a downward-sloping demand curve.

c.

Has a supply curve that is horizontal.

d.

Does not have any entry or exit barriers in its industry.

 

Choice "b" is correct. Any business firm that has the ability to control the price of the product it sells faces a downward-sloping demand curve for the firm. Only the firm in a competitive market is a price-taker facing a horizontal demand curve at the market equilibrium price.

Choice "d" is incorrect. Firms in competitive industries have no entry or exit barriers and are price-takers.

Choice "c" is incorrect. A firm controlling the price of the product it sells would not cause a horizontal supply curve.

Choice "a" is incorrect. Only firms in perfectly competitive markets (price-takers) face horizontal demand curves.

76

Michael Porter identified five forces that affect profitability. Which of the following was not one of those forces?

a.

Barriers to market entry.

b.

Existence of a substitute product.

c.

Existence of complementary products.

d.

Bargaining power of customers.

Choice ''c'' is correct. The existence of complementary products was not one of Porter's 5 forces.

Choices ''b'', ''d'', and ''a'' are incorrect. These are three of Porter's five forces. The two remaining are market competitiveness and the bargaining power of suppliers.

77

Which of the following is an assumption in a perfectly competitive financial market?

a.

Information about borrowing/lending activities is only available to those willing to pay market prices.

b.

Trading prices vary based on supply only.

c.

Some traders can impact market prices more than others.

d.

No single trader or traders can have a significant impact on market prices.

Choice "d" is correct. The inability of market participants (a single trader in this instance) to influence market prices is an attribute of perfect (pure) competition. Attributes of perfect competition also include a large number of suppliers, customers acting independently, very little product differentiation (homogeneous products), and no barriers to entry exist.

Choice "c" is incorrect. Market participants cannot influence prices in perfectly competitive markets.

Choice "b" is incorrect. Trading prices are based on both supply and demand in perfectly competitive markets.

Choice "a" is incorrect. Pricing information is available to all market participants in perfectly competitive markets.

78

An increase in the quantity demanded for a product would be associated with a(n):

a.

Increase in average household income.

b.

Decrease in the price of a substitute product.

c.

Increase in the price of a complementary product.

d.

Decrease in the price of that product.

Choice "d" is correct. The fundamental law of demand holds that there is an inverse relationship between price of the product and the quantity demanded. We move along the demand curve D-D.

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Choice "c" is incorrect. An increase in complementary product prices would decrease the demand curve (e.g., if PC prices increase, the demand for printers and other peripherals decrease).

Choice "a" is incorrect. Increases in consumers and consumer income shift the demand curve itself.

Choice "b" is incorrect. A decrease in price for a substitute product (like Pepsi) decreases demand for the other product (Coke).

79

Having identified their mission, overall strategy, and critical success factors, organizations often review the internal and external factors that will contribute to their success. This analysis is often referred to as:

a.

SWOT analysis.

b.

TOC evaluation.

c.

Balanced scorecard review.

d.

Brainstorming.

Choice "a" is correct. Evaluation of internal and external factors contributing to an organization's success is referred to as Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis. Strengths and weaknesses focus on internal factors while opportunities and threats relate to external factors.

Choice "b" is incorrect. The acronym TOC stands for Theory of Constraints, which is an evaluation technique for optimizing throughput time, it does not relate to overall strategy evaluation.

Choice "d" is incorrect. Brainstorming is a meeting technique used to generate ideas. Although brainstorming could be used as part of an organization's approach to SWOT analysis, it is not, itself, the evaluation of internal and external factors.

Choice "c" is incorrect. A review of the balanced scorecard, which summarizes measures of achievement of critical success factors, does not represent the objective review of internal and external factors that may impact achievement of strategy

80

Which of the following concepts can best be used to understand oligopoly behavior?

a.

Game theory model.

b.

Interindustry competition.

c.

Concentration ratio.

d.

Herfindahl index.

Choice "a" is correct. Game theory is a study of mathematical models of conflict and cooperation between rational decision makers. There are several versions of game theory models that are used to evaluate participant behavior under oligopolies.

Choice "c" is incorrect. A concentration ratio is a quantitative indicator of industry concentration that measures the market share of the leading firms in an industry relative to all firms in the industry. It is an indicator of an oligopoly, rather than a concept used to understand oligopoly behavior.

Choice "b" is incorrect. Interindustry competition involves firms from different industries competing against one another. Understanding oligopoly behavior focuses on companies within the same industry.

Choice "d" is incorrect. The Herfindahl index is a measure of the size of firms relative to the industry that gives more weight to larger firms. It may be used as an indicator of an oligopoly, but would not be used to understand oligopoly behavior.

81

In the long run in a competitive market, a maximum or ceiling price set below the equilibrium price will:

a.

Result in a decrease in price.

b.

Have no effect on the market.

c.

Cause a shortage to be created.

d.

Cause a surplus to be produced.

 

Choice "c" is correct. Setting a ceiling price below the price dictated by market forces (which is the equilibrium price set by the supply and demand curves) would create excess demand for the product (at its reduced price) and, consequently, a shortage.

Choice "d" is incorrect. A surplus would be produced if a floor price (under which no supplier could sell) were set above the equilibrium price, because suppliers would supply excess product at the inflated price.

Choices "b" and "a" are incorrect, per the above explanation.

82

When markets are perfectly competitive, consumers:

a.

Must choose the brands they buy solely on the basis of informational advertising.

b.

Have goods and services produced at the lowest cost in the long run.

c.

Must search for the lowest price for the products they buy.

d.

Do not receive any consumer surplus unless producers choose to overproduce.

Choice "b" is correct. Since price is barely sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible. In addition, every firm is forced to produce at the most efficient output rate.

Choice "a" is incorrect. Brand differentiation is present in monopolistic competition, not perfect competition.

Choice "d" is incorrect. This is not an appropriate application of the "consumer surplus" concept.

Choice "c" is incorrect. Individual consumers are also price takers at the market equilibrium price.

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