ECON 400 FINAL EXAM

Mean Reversion

A process shows regression to the mean if its shocks are not persistent over time.

d) Imperfectly mobile

What term best describes a resource that cannot "sell itself" to the highest bidder? a) Isolated b) Value-creating c) Scarce d) Imperfectly mobile e) Profit maximizing

b) Shock

What term best refers to fundamental changes that lead to major shifts of competitive positions in a market? a) Jump b) Shock c) Alteration d) Bolt e) Shift

b) Inputs

Which of the following is measured by a report card that assesses the components of a product? a) Process b) Inputs c) Warrantees d) Outcomes e) Longevity

Customers often lie in consumer surveys

Which of the following is not a reason for customer survey bias in quality measures? Different customers may use different measurement criteria Customers may have an incentive to inflate ratings to influence the average score Customers often lie in consumer surveys Customers are reluctant to leave negative feedback Consumer feedback is unverifiable.

product viability

positive economic value =

Firm-specific assets

such as patents and trademarks, brand-name reputation, installed base, and organizational culture

benefits of report cards

1. High-quality sellers are easily identified 2. Quality improves as high-quality sellers are identified 3. High-quality sellers' product supply may not be large enough for increased demand

360-degree peer review

A review that occurs when an employee's supervisor, co-workers, and subordinates are all asked to provide information regarding that employee's performance.

dynamic capabilities

Ability for a firm to maintain and adapt capabilities create new sources of competitive advantage

Matrix Organization

An organizational form in which employees are subject to two or more sets of managers at once.

d) Certification bias

Conflicts of interest in the certifier market often can lead to which of the following? a) Higher priced goods and services b) Lower competition between substitute goods c) A reduction in the number of competitive sellers d) Certification bias e) Less product choice for the consumer

search goods

Consumers can easily compare product characteristics. Search goods are often commodities, and consumers choose solely on the basis of price.

experience goods

Consumers cannot easily compare product characteristics and value information from others. Consumers learn about quality after purchasing and using the product.

credence goods

Consumers cannot easily evaluate quality even after purchasing and using the product.

implicit incentive contract

Contract based on information that cannot be observed by courts or arbitrators.

pay for performance

Contract by which the value of the compensation depends on the measured performance of the employee.

switching costs

Costs incurred by buyers when they switch to a different supplier.

risk neutral

Describes an agent who is indifferent between a sure thing and a gamble of equal expected value.

organizational structure

Describes how a firm uses a division of labor to organize tasks, specify how its staff performs tasks, and facilitate internal and external information flows.

generic strategy

Describes, in broad terms, how a firm positions itself to compete in the market it serves.

task interdependence

Extent to which two or more positions depend on each other to do their own work

share strategy

Firm underprices its competitors to gain market share at their expense. Involves charging the same price as competitors and exploiting the firm's benefit advantage by capturing a higher market share than competitors.

horizontal differentiation

Firms may alter certain aspects of their product so that some consumers perceive that it offers more benefits, while others perceive that it offers less.

vertical differentiation

Firms may enhance the benefit of their product for all consumers.

d) Concentrates decision making authority in a one or a small group of people

How does a centralized organization solve coordination problems? a) allows for face to face communication b) creates a smaller organization c) reduces the costs of business d) Concentrates decision making authority in a one or a small group of people e) information can take more time to trickle down

negative

If B-C is ________________ there is NO price consumers will be willing to pay for the product.

resource based theory

If all firms in a market have the same stocks of resources and capabilities, no strategy is available to one firm that would not be available to all other firms in the market.

sunk costs

Ignoring ________ ________ creates an inertia that favors sticking with current technologies.

performance measure

Piece of information on which an incentive contract (explicit or implicit) can be based.

e) Credence Goods

Products for which consumers cannot easily evaluate quality even after purchasing and using the product are called: a) Experience goods b) Search goods c) Retail goods d) Consumer goods e) Credence Goods

industry segmentation matrix

Shows industries can be broken down by products offered by firms and different types of customers

b) Demand conditions

Size, growth, and character of home demand for a firm's product are examples of what? a) Factor conditions b) Demand conditions c) Supply conditions d) Related supplier or support industries e) Strategy, structure, and rivalry

management by objective system

System whereby an employee and a supervisor work together to construct a set of goals for the employee.

consumer surplus

The difference between what a consumer would pay and how much the consumer actually paid

coordination

The flow of information within an organization to facilitate subunit decisions that are consistent with each other and with organizational objectives.

d) Even low quality sellers will disclose their product quality

Unraveling is an economic theory that describes which of the following? a) Low quality products will be quickly discovered and abandoned by buyers b) High seller concentration leads to the development of many substitute products c) Few sellers improve product quality once they have scale in production d) Even low quality sellers will disclose their product quality e) Consumers ultimately switch products regardless of quality

c) Gains from trade

What is another term for a "win-win" business opportunity? a) Economic profit b) Excess total surplus c) Gains from trade d) Consumer surplus excess e) Benefit - Benefit transaction

b) Value added analysis

What is one way to measure a firm's willingness-to-pay? a) Marginal profit per unit of production b) Value added analysis c) Cost-benefit analysis d) Input-output analysis e) Sales-per-cost analysis

c) Consumer surplus

What is the perceived benefit of a product per unit consumed minus the product's monetary price? a) Value creation b) Competitive advantage c) Consumer surplus d) Maximum willingness-to-pay e) Value chain

c) Margin strategy

What kind of strategy is one by which a firm maintains price parity with its competitors and profits from its benefit or cost advantage primarily through high price-cost margins, rather than through a higher market share? a) Pricing strategy b) Share strategy c) Margin strategy d) Focus strategy e) Generic strategy

c) Disclosure

What term best describes a firm informing customers about a product's benefits? a) Advertising b) Certification c) Disclosure d) Notice e) Broadcasting

e) Customer specialization

What term best describes a targeting strategy in which the firm offers a variety or related products to a particular class of customers? a) Broad-coverage strategy b) Focus Strategy c) Geographic specialization d) Product specialization e) Customer specialization

e) Cospecialized

What term best describes assets that are more valuable when used together than when separated? a) Isolating b) Value-creating c) Imperfectly mobile d) Scarce e) Cospecialized

b) efficiency wage

What term best refers to a wage payment made to an agent that exceeds his opportunity cost of working and discourages the agent from shirking? a) living wage b) efficiency wage c) minimum wage d) efficiency payment e) termination wage

d) Stuck in the middle

What term coined by Michael Porter describes a firm that pursues elements of cost leadership and benefit leadership at the same time and in the process fails to achieve either a cost advantage or a benefit advantage? a) Five forces b) Value creation c) Value chain d) Stuck in the middle e) Generic strategy

d) Resource-based theory of the firm

What term describes a framework used in strategy based on resource heterogeneity which posits that for a competitive advantage to be sustainable, it must be underpinned by resource capabilities that are scarce and imperfectly mobile? a) Persistence of profitability for the firm b) Capability-based theory of the firm c) Regression to the mean d) Resource-based theory of the firm e) Five-forces framework

d) Maximum willingness-to-pay

What term describes the price at which a consumer is indifferent between buying a product and going without it? a) Value creation b) Competitive advantage c) Consumer surplus d) Maximum willingness-to-pay e) Value chain

a) Regression to the mean

What term describes the situation where a firm does exceedingly well due to good luck or exceedingly poorly due to bad luck, but returns to normal performance following? a) Regression to the mean b) Competitive advantage c) Persistent performer d) Sustainable firm e) Predictable performance

d) Impediments to imitation

What type of isolating mechanisms impedes existing firms and potential entrants from duplicating the resources and capabilities that form the basis of the firm's advantage? a) Scarce b) Imperfectly mobile c) Early-mover advantages d) Impediments to imitation e) Cospecialized

d) promotion tournament

What type of performance measurement based process was used to determine Jack Welch's successor, Jeffrey Immelt, as CEO of GE? a) ratings compression b) merit rating system c) 360-degree peer review system d) promotion tournament e) management-by-objective system

e) Broad-coverage strategy

What type of strategy seeks to serve all customer groups in the market by offering a full line of related products? a) Generic strategy b) Margin strategy c) Focus strategy d) Share strategy e) Broad-coverage strategy

competitive advantage

When a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market.

a) Simultaneous search

When consumers learn about many products at once, it is known as a : a) Simultaneous search b) Parallel search c) Serial search d) Sequential search e) Divided search

d) Sequential search

When consumers learn about one seller at a time it is known as a : a) Simultaneous search b) Parallel search c) Serial search d) Sequential search e) Divided search

b) When it is more profitable for the high quality firm to offer it

When is a signal informative? a) When it is lightly advertised by the firm b) When it is more profitable for the high quality firm to offer it c) When there are many firms advertising substitute products d) When it is offered by the low quality firm e) When the first firm that signals is the low quality firm

d) Consumer surplus parity

When multiple firms' price-quality positions line up along the same indifference curve offering a consumer the same amount of consumer surplus, what term describes the situation? a) Price-quality parity b) Price matching c) Maximum willingness-to-pay d) Consumer surplus parity e) Consumer surplus

creative destruction

When quiet periods in markets are punctuated by fundamental "shocks" or "discontinuities" that destroy old sources of advantage and replace them with new ones.

e) Sourcing skills

Which of the following is a capability? a) Patents and trademarks b) Brand-name reputation c) Installed base d) Organizational culture e) Sourcing skills

b) Generic strategy

Which of the following is a concept developed by Michael Porter that describes, in broad terms, how it positions itself to compete in the market it serves? a) Value chain b) Generic strategy c) Benefit leadership d) Cost Leadership e) Focus

d) Workers with firm-specific expertise or know-how

Which of the following is a resource? a) Brand promotion skills b) Yield management capabilities c) Ability to manage sourcing and procurement functions d) Workers with firm-specific expertise or know-how e) Ability to integrate order-taking, procurement, manufacturing and out-bound logistics

d) Multitasking

Which of the following is another term for "teaching to the test?" a) Sample bias b) Test variance c) Teaching discrimination d) Multitasking

a) A firm following a strategy of cost leadership is following a generic strategy narrow in scope

Which of the following is false with respect to the strategy of cost leadership? a) A firm following a strategy of cost leadership is following a generic strategy narrow in scope b) A firm can follow a cost leadership strategy through achieving benefit parity by making products with the same B, but at a lower C than its rivals c) A firm can follow a cost leadership strategy through achieving benefit proximity by offering a B that is not much less than those of competitors d) A firm following a strategy of cost leadership creates more value than its competitors by offering products that have a lower C than those of its rivals e) A firm can follow a cost leadership strategy by offering a product that is qualitatively different from that of its rivals

e) shareholders/ IRS auditors of a company

Which of the following is not a principal/agent relationship? a) shareholders/company CEO b) shareholders/company employees c) company/hired counsel d) carmaker/auto part supplier e) shareholders/ IRS auditors of a company

c) Good report cards lead to more advertising

Which of the following is not a way in which consumers can benefit from report cards? a) Easy identification of high quality sellers b) Increases in demand elasticity incent sellers to improve quality c) Good report cards lead to more advertising d) Report cards improve sorting by consumers e) Consumers can more easily identify quality sellers

a) Creating a product line compatible with parts that are made by other manufacturers

Which of the following is not an example of a way a seller can increase switching costs? a) Creating a product line compatible with parts that are made by other manufacturers b) Offering coupons that tie discounts to the completion of a series of transactions c) Offering warranties if product is not serviced at authorized dealer d) Bundling complementary products that fit together in a product line e) Offering "frequent customer" points that tie promotions to the completion of a series of transactions

a) Contracting to use another firm's proprietary process

Which of the following is the weakest an example of a "shock"? a) Contracting to use another firm's proprietary process b) Product Innovations c) Discoveries of new sources of consumer value or market segments d) Shifts in demand e) Changes in public policy that enables firms to significantly shift their strategic position in a business

e) All of the above

Which of the following products and services depend on standards? a) Cellular communications b) Internet c) Video gaming d) High-definition television e) All of the above

a) Warrantee

Which of the following serves as a voluntary signal of quality? a) Warrantee b) Independent reviews c) Truth in Advertising d) Free product financing e) Public claims

a) Offers a variety of products and/or sells to a variety of customer groups within a narrow geography

Which of the following statements best describes a characteristic of geographic specialization focus strategies? a) Offers a variety of products and/or sells to a variety of customer groups within a narrow geography b) Offers an array of product varieties to a limited class of customers c) Caters to the particular needs of the customer group served d) Offers a limited set of products to an array of different customer groups e) Does an especially good job satisfying a subset of the needs of the consumer groups being served

b) risk sharing contract

Which of the following terms best describes a contract that guarantees an agent some payment, but provides enough incentive so that the agent does not shirk? a) certainty equivalent contract b) risk sharing contract c) risk premium contract d) variability reduction e) risk averse contract

e) The sunk cost effect

Which of the following terms best describes a phenomenon whereby a profit-maximizing firm sticks with its current technology or product concept even though the profit-maximizing decision for a firm starting from scratch would be to choose a different technology or product concept? a) The replacement effect b) Strategic intent c) Strategic stretch d) Hypercompetition e) The sunk cost effect

a) The replacement effect

Which of the following terms best describes a phenomenon whereby, despite equal innovative capabilities, an entrant is willing to spend more to develop an innovation? a) The replacement effect b) Strategic intent c) Strategic stretch d) Hypercompetition e) The sunk cost effect

c) Strategic stretch

Which of the following terms best describes an idea, developed by Gary Hamel and C. K. Prahalad, which combines commitment to the firm's ambitions with the flexibility to change with circumstances? a) Leveraging resources b) Strategic intent c) Strategic stretch d) Hypercompetition e) Global dominance

e) Dynamic capabilities

Which of the following terms best describes the ability of a firm to maintain and adapt the capabilities that are the basis of its competitive advantage? a) Riskiness of R&D b) Correlated research strategies c) Evolutionary economics d) Dynamic efficiency e) Dynamic capabilities

d) Hypercompetition

Which of the following terms best describes the situation when sources of competitive advantage in an industry are being created and eroded at an increasingly rapid rate? a) Leveraging resources b) Strategic intent c) Strategic stretch d) Hypercompetition e) Global dominance

b) implicit incentive contract

Which of the following terms describes a contract based on information that cannot be observed by courts or arbitrators? a) explicit incentive contract b) implicit incentive contract c) risk sharing contract d) compensation contract e) pay-for-performance

a) Multitasking

Which of the following terms describes when efforts to promote improvements on one dimension of performance are confounded by changes in other dimensions of performance? a) Multitasking b) Co-linearity c) Test bias d) Dimension bias e) Linking

e) Mean reversion

Which of the following terms describes when firms with high scores tend to have more than their share of luck in rankings? a) Measurement bias b) Process error c) Mean regression d) Multitasking e) Mean reversion

c) Value chain

Which of the following terms is a concept, developed by Michael Porter, which describes the activities within firms and across firms that add value along the way to the ultimate transacted good or service? a) Five forces b) Value creation c) Value chain d) Consumer surplus e) Producer surplus

e) Consumers believe non-profit sllers will be less likely to skimp on quality for profit.

Why do consumers tend to gravitate towards non-profit firms when evaluating credence goods? a) Consumers like giving to charities b) Non-profit firms charge lower prices c) Consumers can deduct some or all of the purchase price for tax purposes d) Non-profit firms offer goods and services not offered by for profit firms e) Consumers believe non-profit sllers will be less likely to skimp on quality for profit.

value created

__________ __________ = Consumer Surplus + Producer Surplus = (B - P) + (P - C) = B-C

selection

a firm may shun some consumers from purchasing so their score is not driven down by unhappy customer reviews

report card

a grade that can be used to evaluate quality

herding

a phenomenon whereby individuals ignore their own information about the best course of action and instead simply do what everyone else is doing

nonprofit

common in industries such as health care and education whose products may be described as credence goods not permitted to use any revenues in excess of costs

margin strategy

firm maintains price parity with its competitors and profits from its cost advantage primarily through high price-cost margins rather than through higher market shares

shock

fundamental changes that lead to major shifts of competitive positions in a market

multitasking

where report card measures some aspects of performance but not others (firms may only focus on what is being measured)

capabilities

• Activities a firm does especially well compared with other firms. • May reside within particular business functions • May be linked to particular technologies or product designs. • Might be in the ability to manage linkages between elements of the value chain or coordinate activities across it.

Accountability

• Aligning individual and group task with those of the firm and aligning incentives so that individuals and groups will consistently work in the same direction. • Structure also needs to be capable of adjusting to changes in both the firm's capabilities and its business environment.

sunk cost effect

• Asymmetry between a firm who is committed to a particular technology or concept and one that is planning a commitment.

certification bias

• Certifiers are relied upon for their neutrality • Potential conflicts of interest • Consumers are weary of most certifiers until the certifier has proven their neutrality and accuracy.

willingness to pay

• Consumers - depends on tastes & preferences • Firm's - more empirical as it is related to the impact of that input on profitability • Profits are easier to measure than tastes & preferences

economic value

• Created when a producer combines inputs to make a product whose perceived benefits, B, exceed the costs, C, incurred. • The difference between perceived benefit (B-C) where B & C are expressed in per unit of final products. • Value created must be split between consumers and producers • Consumer Surplus (B-P) • Producer Surplus (P-C) • Value Created = B-C • Price P determines how much of the value-created sellers capture as profit and how much buyers capture as consumer surplus.

value chain

• Depicts a firm as a collection of value-creating activities such as: • Production Operations • Marketing & Sales • Logistics

focus strategy

• Firm with this strategy offers either a narrow set of product varieties or serves a narrow set of customers or both. • Customer specialization: firm offers an array of related products to a limited class of customer. • Product specialization: firm produces a limited set of product varieties for a potentially wide set of customer groups. • Geographic specialization: firm offers a variety of related products within a narrowly defined geographic market.

resources

• Firm-specific assets, such as patents & trademarks • Brand-name reputation • A brand alone can equate to a huge portion of a firm's worth • Cannot easily be duplicated or acquired by other firms • Can directly affect the ability of a firm to create more value than other firms

risk adjustment

• Statistical process where raw outcomes, are adjusted for factors that are beyond the control of the seller. • Certifiers should perform whenever measured quality depends on the characteristics of the customer

simultaneous search

• Where consumers search and learn about multiple products at a time • Gathering information about many products before deciding which one to purchase. • Assures consumers they will find a product with high B - P