Managerial Economics Exam #1 Study

What term describes when a firm sells a combination of goods and services together but not individually

Bundling

What term describes a market where a monopolist cannot raise price above long run average cost

Perfectly contestable

What type of performance measurement based process was used to determine Jack Welch's successor, Jeffrey Immelt, as CEO of GE?

Promotion tournament

What term best describes an agent who is indifferent between a sure thing and a gamble of equal expected value

Risk Neutral

What are the two types of barriers to entry

Structural and strategic

The causal connection between firms is known as the:

Structure, conduct, performance paradigm

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, b & c: monitoring, performance-based incentives, & bureaucracy

Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers. Suppose your average variable cost C-$20/Unit, annualized cost of investment to build a hard drive factory I=$30 million, and the market price (bailout market price in the event Dell does not buy) Pm=$22/unit. If Dell agrees to purchase the 10 million hard drives at a price P*=$25/Unit, and subsequently renegotiates to only purchase for $22.50/unit, what has Dell increased its own profits by

$25 Million

Suppose the demand for a product faces by a monopolist firm is given by W=60-P/2. If the marginal cost of producing the product is $20, what is the profit maximizing price the firm should charge for the product? What are the firm's profits?

$70 $1250

In a three firm market where the market share split is 50%, 30%, & 20%, what is the Herfindahl index

0.38

What is the approximate observe median learning curve slope for typical firms

0.8

Based on Bresnahan and Reiss' study of the relationship between concentration and prices, how many firms did they determine generally need to be in a market for price competition to be as intense as it would likely get?

3

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales) c(e)=0 if e<40 (1/3)*(e-40)^2 if e > 40 A. If the firm offers a salary-plus-commission job of $500 per week plus 20% of sales, how can we write the employee's payoff function? b. What is the employee's total compensation for working a 46 hour workweek?

A. $500+0.20*(100e)-c(e) B. $1420

What type of entry exists if structural entry barriers are low, and either (1) entry-deterring strategies will be ineffective or (2) the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out?

Accommodated entry

Diversifying activity is most often measured by looking at which of the following?

Acquisition and merger activity

If a firm enjoys lower costs due to a complex labor-intensive process, which of the following statments would then be ture

An example of this process could be the practice of anti-trust law

What is a Market Firm?

An independent outsourcing partner

Which of the following processes is most representative of a less integrated firm on the "buy" end of the make-or-buy continuum?

Arm's length market transactions

What term best describes the paradox which says despite the conclusion that predatory pricing to deter entry appears irrational, many firms firms are commonly perceived as slashing prices to deter entry

Chain-store paradox

Which of the following is an example of a principal/agent relationship?

Company/Hired counsel

Which of the following is not a way managers generally enefit from acquisitions

Consolidation of other senior executives

Which of the following is not generally a potential benefit of diversification

Control systems rewarding/penalizing division managers based on business unit objectives

What institution within a firm must fail on some level for managers to be motivated to acquire another firm for the purposes of increasing their own compensation, shielding themselves against risk, or gaining prominence by running a larger firm

Corporate governeance

What are agency costs

Costs associated with slack effort and with the administrative controls to deter it

What empirical method generally is used to measure the degree to which products substitute for each other?

Cross-price elasticity

Which of the following has a downstream relationship with a Toyota Motor Corporation?

Dealerships

What type of organizational structure is typically used in planning courses for an MBA program?

Decentralized

Which U.S. agency is responsible for preventing anticompetitive conduct?

Department of Justice

Which of the following benefits of diversification explains the idea that a firm with many business lines can reduce swings in value because it receives only a small percentage of its revenue from any one of those business lines

Diversifying shareholder portfolios

Which of the following is not a reason a supplier might seek to sell in bulk

Each sale involves setting up a different production run

What are economies of density as referred to in the airline industry

Economies of scale along a given route

Which of the following benefits of diversification explains the idea that mergers are more likely when there is an expectation of positive changes in market share

Economies of scale and scope

Which of the following is a method firms can use to counteract price fluctuations and eliminate income risk?

Enter into futures contracts to hedge the price of raw materials

What type of research looks at the changes in market valuations in response to the announcement of diversifying acquisitions to assess the success of diversification

Event Studies

Which of the following issues makes it difficult for to managers to reign in dedicated "cost centers" in a firm?

Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization

Which of the following is a true argument regarding the make-or-buy decision process?

Firms should buy, rather than make, in general, because market firms are subject to the discipline of the market and must be efficient and innovative to survive

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

Herding

Which of the following benefits of diversification explains the idea that corporate diversification can provide situations where an acquiring firm determines the stock price for firm they intend to acquire is too low

Identifying undervalued firms

What group/type of preferences describes when tastes differ markedly from one person to the next and result in horizontal differentiation?

Idiosyncratic preferences

Which of the following is a potential risk of a brand umbrella

If a new product under the umbrella fails, consumers may become disenchanted with the entire brand

By satisfying which of the following conditions can shareholders prevent management driven acquisitions

If shareholders could determine which acquisitions will lead to increased profits and which will not

How dues umbrella branding aid economies of scale and scope

Increases effectiveness of advertising due to offering a broad product line under one name

What type of firm is one that is already operating in a particular market

Incumbent

What term describes existing firms in a monopolistically competitive market?

Incumbents

Herding is best described by which of the following?

Individuals ignore their own information about the best course of action and instead simply do what everyone else is doing

The Herfindahl index solves which problem with the N-Firm ratio?

Invariance with changes in the size of the largest firms

Which term describes the situation where a smaller firm and potential entrant can use the incumbents size to its own advantage

Judo Economics

Which of the following methods is believed to be used by Brazilian cement makers to prevent entry into the market

Limit Pricing

Which of the following terms refers to the practice whereby an incumbent firm discourages entry by charging a low price before entry occurs

Limit pricing

What kind of economies come from reductions in cost due to adoption of technology that has high fixed costs, but lower variable costs?

Long-run economies of scale

What primary agency cost problem plagued the partnership between Sony's hardware and software from 1998-2008 with regards to digital music?

Manager/worker slacking and lack of interest

What force does Manne indicate constrains the actions of managers so that they stay focused on the goals of owners

Market for corporate controls

What is defined by the number and size distribution of the firms in a market

Market structure

Examining which of the following is broadly considered one of the easiest ways to measure diversifying activity?

Mergers and acquisitions

Consolidation of managers often occurs due to which of the following

Mergers and aquisitions

How does carrying inventories contribute to economies of scale

Minimized the chance of stock-out

The minimum point on a U-shaped average cost curve is known as which of the following?

Minimum efficient scale of production (MES)

Which of the following factors is an effective tool for companies to use to mitigate hidden action and hidden information problems in agency relationships?

Monitoring

Which of the following best describes an incumbent firm

One that is already operating in a particular market

What is a key factor in determining how a firm resolves coordination problems?

Organizational Structure

How can incumbents legally erect entry barriers around novel and non-obvious products or production processes?

Patents

Which of the following terms describes a contract by which the value of the compensation depends on the measured performance of the employee?

Pay-for-performance

Which of the following management actions reflects agency problems due to the fact that information held by the agent is hard to observe?

Paying for services that seem excessive to the shareholders

Which of the following processes is most representative of a vertically integrated firm on the "make" end of the make-or-buy continuum?

Perform activity internally

Which of the following generally accompanies firms that survive as market entrants

Precipitous growth

The biotechnology industry is seeing a broad pattern of disintegration due to the fact that big pharma companies are less and less doing which of the following core functions?

Product innovation

What measure, that depends on how much of a firm's revenues are attributable to product market activities that have shared technological characteristics, production characteristics, or distribution channels, is used to determine how diversified a firm is at a given time?

Relatedness

What term best describes how a firm performs based on a comparison to another firm in its peer set within an industry

Relative Performance

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?

Risk-Sharing Contract

What criterion developed by the DOJ is used to identify all potential competitors within the market?

SSNIP

Which of the following best describes economies of scope

Savings are achieved when a firm produces a wider variety of goods

what is a reason that companies might want to "buy" instead of "make" talent from the market when looking to acquire employees with a particular skill set

Scale economies can result in fixed education costs while in house education methods may be more expensive

What kind of economies come from reductions in average costs due to increases in capacity utilization?

Short-run economies of scale

What is a benefit of the de-centralized organization coordination solution?

Takes advantage of localized information

What do the vertical boundaries of a firm refer to?

The activities the firm itself performs versus purchases from independent firms

Economies of scale are best described as which of the following

The average cost declines as output increases

Which of the following is a characteristic of economies of scale

The average cost declines as output increases

Which of the following is NOT a characteristic of a complete contract?

The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds *

What are influence costs?

The cost of activities aimed at affecting the distribution of benefits in an organization

Which of the following is not a product specific fixed cost

The cost of administrative expenses

Which of the following is not a condition under which an incumbent firm can successfully deter entry by holding excess capacity

The excess capacity investment must be recoverable prior to entry

What is the minimum efficient scale (MES) of Production

The minimum point on a U-shaped average cost curve

Which of the following is generally a way that LBOs can help a firm realize its potential value?

The transaction requires debt repayment with future free cash flow leaving management no discretion over the investment of these funds

Increased economies of scale and scope are helped by which of the following

Umbrella branding

Which of the following is NOT a method a firm could use to force vertical foreclosure?

Upstream competitor acquires downstream competitor and then the downstream competitor refuses to buy from other suppliers

Which of the following benefits of diversification explains the idea that combining unrelated businesses can allow firms to finance projects through cross-subsidization when they previously were unable to finance the same projects externally

Use of internal capital markets

Which of the following practices does not contribute to the strategic fit of Southwest Airlines

Use of multiple types of planes

What term describes the differentiation of a product when it is unambiguously better or worse than competing products?

Vertical differentiation

Which term describes a situation where two or more parties expend resources battling each other

War of attrition

Which of the following conditions may make predatory pricing by incumbents rational

When entrants are uncertain about market conditions

When is reputation a most effective entry barrier

When incumbents have long-standing relationships with suppliers and customers

Why might a large firm actually be at an advantage over a smaller firm with respect to labor

Worker turnover is generally lower

Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales): c(e)=0 if e<40 (1/3)*(e-40)^2 if e>40 A. What is the cost of effort for a 37 hour week? B. What is the cost of effort for a 43 hour week? C. If the firm offers a salary only job of $500/week, what is the employee's payoff net of effort costs for a 49 hour work week

a. $0 b. $3 c. $473

Which of the following is a source of diseconomies of scale at a large firm

all of the above

Which of the following is an exit barrier for firms in an industry

all of the above

Why is firm specific learning better in general for an organization

ensures worker knowledge is tied to current employment