MGMT 493 Chapter 5

Taking advantage of the pricing flexibility inherent in the wholesale model, Amazon offered many books (especially e-books) below the cost that other retailers had to pay to publishers. By doing this, Amazon showed how business models can be affected through A. combination. B. evolution. C. disruption. D. combustion.

C. disruption. (Amazon severely disrupted the traditional wholesale model for publishers.)

The management team for SafeCare Chemicals Inc. came up with the following vision statement: "SafeCare Chemicals will conscientiously track its financial performance to ensure profits for its investors, enhance its community through employment and supporting charities, and dispose of waste in a manner that will not harm the environment." This vision statement is most likely based on the A. accounting profitability approach. B. economic value creation approach. C. triple-bottom-line approach. D. balanced-scorecard approach.

C. triple-bottom-line approach. (Triple-bottom-line stresses a combination of economic, social, and ecological concerns that can lead to a sustainable strategy, which are reflected in the vision statement for SafeCare Chemicals.)

_____ is best described as the difference between a buyer's willingness to pay for a product or service and a firm's total cost to produce it. A. Economic value created B. Break-even point C. Consumer surplus D. Cost of capital

A. Economic value created (Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.)

The ratio Cost of goods sold/Revenue indicates how efficiently a company can A. produce a good. B. sell a good. C. advertise a good. D. design a good.

A. produce a good. (The ratio Cost of goods sold/Revenue indicates how efficiently a company can produce a good)

Which of the following approaches to assess competitive advantage is based on the view that noneconomic factors can have a significant impact on a firm's financial performance? A. the triple-bottom-line approach B. the economic value creation framework C. the accounting profitability approach D. the balanced-scorecard

A. the triple-bottom-line approach (The triple-bottom-line approach considers a combination of economic, social, and ecological concerns that can lead to a sustainable strategy.)

_____ are the legal owners of public companies. A. Employees B. Shareholders C. Category captains D. Creditors

B. Shareholders (Shareholders—individuals or organizations who own one or more shares of stock in a public company—are the legal owners of public companies.)

Value is determined by the perceived benefits a good or service provides to a(n) A. manufacturer. B. buyer. C. investor. D. retailer.

B. buyer (Value is determined by the perceived benefits a good or service provides to a buyer)

A watchmaking company has priced one of its wristwatches at $210. Most of its competitors sell similar watches at $180. Selling anything less than $150 would result in a loss for the company. However, the absolute maximum a customer is willing to pay for it is $170. In this scenario, what is the reservation price of the wristwatch? A. $150 B. $180 C. $170 D. $210

C. $170 (The absolute maximum a customer would be willing to pay for a product is referred to as its reservation price, which in this case is $170.)

A firm has 30 million shares outstanding, and each share is traded at $100. Also, each shareholder gets a dividend of $2,000 annually. In this case, the market capitalization is A. 30,000 shares, that is, 30 million shares/$100. B. $200,000, that is, $2,000 × $100. C. $3 billion, that is, 30 million shares × $100. D. 20:1, that is, $2,000/$100.

C. $3 billion, that is, 30 million shares × $100. (Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price). Therefore, market cap is equal to $3 billion, that is, 30 million shares × $100.)

In order to achieve a competitive advantage, a firm should be able to A. increase its payable turnover. B. keep its producer surplus low. C. increase the difference between the value created and the cost to produce it. D. increase the difference between consumer surplus and its profits.

C. increase the difference between the value created and the cost to produce it. (Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the consumer's willingness to pay, and C, the cost to produce the good or service.)

_____ is a business model in which the manufacturer sets a fixed price on a product, but the retailer is to free set its own price. A. Agency B. Freemium C. Bundling D. Wholesale

D. Wholesale (Wholesale is a business model in which the manufacturer sets a fixed price on a product, but the retailer is free to set its own price.)

How is the triple-bottom-line approach different from the traditional approaches to measuring competitive advantage? A. The triple-bottom-line takes a more integrative and holistic view in assessing a company's performance than traditional approaches do. B. The triple-bottom-line places less emphasis on financial success in assessing a company's performance than traditional approaches do. C. The triple-bottom-line uses a more one-dimensional approach in assessing a company's performance than traditional approaches do. D. The triple-bottom-line relies more on internal factors in assessing a company's performance than traditional approaches do.

A. The triple-bottom-line takes a more integrative and holistic view in assessing a company's performance than traditional approaches do. (The triple-bottom-line takes a more integrative and holistic view in assessing a company's performance.)

Which of the following questions challenges managers to come up with strategic objectives that ensure future competitiveness? A. How do customers view us? B. How do we create value? C. What core competencies do we need? D. How do shareholders view us?

B. How do we create value? (The question "How do we create value?" challenges managers to come up with strategic objectives that ensure future competitiveness, innovation, and organizational learning. It focuses on the business processes and structures that allow a firm to create economic value)

Triple-bottom-line is a combination of economic, social, and _____ concerns that can lead to a sustainable strategy. A. cultural B. ecological C. investment D. aesthetic

B. ecological (Triple-bottom-line is a combination of economic, social, and ecological concerns that can lead to a sustainable strategy.)

By selling a laptop at $1,000 for which consumers are willing to pay up to $1,200, a consumer electronics firm makes a profit of $400 per unit. In this scenario, the amount $600, that is ($1200 - $1000) + $400, is the A. opportunity cost. B. economic value created. C. reservation price. D. consumer surplus.

B. economic value created. (Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus.)

TravelCheap Inc. is a car rental business that charges customers based on how many miles they put on a car on a daily basis. As result, a person who uses a car to travel from Chicago to Denver during a week is charged much more than a person who uses a car only to travel one mile to the grocery store six times a week. TravelCheap uses a business model called A. freemium. B. pay-as-you-go. C. agency. D. bundling.

B. pay-as-you-go. (TravelCheap uses a business model called pay-as-you-go. In the pay-as-you-go business model, users pay for only the services they consume.)

Apple Watch retailed for $349 in 2015, and the firm was predicted to sell millions of units. The firm's total cost in terms of materials and labor for the Apple Watch was no more than $84. Thus, Apple's profit for each watch sold is an estimated $265, with a profit margin of _____ percent. A. 215 B. 265 C. 315 D. 365

C. 315 (Apple's profit for each watch sold was an estimated $265, with a profit margin of 315 percent)

Which of the following describes a peer-to-peer technique? A. A company offers a cleaning service free of charge on a first-time trial basis. B. A company offers a package of cleaning supplies at a discount. C. A company matches an individual with a cleaning service. D. A company places a low retail price on low-selling cleaning supplies.

C. A company matches an individual with a cleaning service. (The peer-to-peer model matches individuals with a needed product or service, such as car rental, house cleaning, or travel accommodations.)

Which of the following statements is not true of competitive advantage? A. Competitive advantage is reflected in superior firm performance. B. Competitive advantage is a multifaceted concept. C. Competitive advantage is an absolute measure. D. Competitive advantage has been linked to a firm's triple-bottom-line.

C. Competitive advantage is an absolute measure. (We always assess competitive advantage relative to a benchmark, either using competitors or the industry average.)

Smart Feet Inc. produces shoes that are better quality and cost more to make than the shoes of its competitors. Smart Feet realizes that there will be a large difference between the cost to produce the shoes and the consumer's willingness to pay for them. Even so, Smart Feet decides to charge the same price as its competitors. Which of the following will most likely be the result of this action? A. Smart Feet will go out of business. B. Smart Feet will increase its marketability. C. Smart Feet will gain market share. D. Smart Feet will be bought by a competitor.

C. Smart Feet will gain market share. (A large difference between the consumer's willingness to pay and the cost to produce the good or service gives the firm two distinct pricing options: (1) it can charge higher prices to reflect the higher product value and thus increase its profitability, or (2) it can charge the same price as competitors and thus gain market share.)

The receivables turnover of VK Products Inc. is 13.6 and that of its competitor DL Goods Inc. is 6.0. What does this financial data primarily imply? A. VK Products is less efficient than DL Goods in collecting accounts receivables. B. DL Goods pays its creditors more quickly as compared to VK Products. C. VK Products collects accounts receivables faster than AP Goods does. D. DL Goods has a larger value gap as compared to VK Products.

C. VK Products collects accounts receivables faster than AP Goods does. (In this scenario, the receivables turnover of VK Products Inc. is 13.6 and that of its competitor, DL Goods Inc., is 6.0. Higher ratios of receivables turnover (Revenue/Accounts receivable) imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers (the time until payments are due))

The tenet behind the triple-bottom-line is that A. a firm should solely focus on increasing the economic value created to/for its customers. B. a firm's primary objective should be increasing the total returns to its shareholders. C. a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy. D. a firm's return on revenue can be broken down into three ratios: COGS/Revenue, R&D/Revenue, and SG&A/Revenue.

C. a firm should achieve positive results along the economic, social, and ecological dimensions to gain a sustainable strategy. (Three dimensions—economic, social, and ecological—make up the triple-bottom-line. According to this approach, achieving positive results in all three areas can lead to a sustainable strategy—a strategy that can endure over time.)

The balanced-scorecard can accommodate A. only short-term performance metrics. B. only long-term performance metrics. C. both short- and long-term performance metrics. D. neither short- or long-term performance metrics.

C. both short- and long-term performance metrics. (The balanced-scorecard can accommodate both short- and long-term performance metrics. It provides a concise report that tracks chosen metrics and measures and compares them to target values. This approach allows managers to assess past performance, identify areas for improvement, and position the company for future growth.)

In an economic context, strategy for producers is primarily about A. distributing the economic value created equally between consumers and themselves. B. reducing the difference between consumer's willingness to pay for a product and the cost to produce it. C. capturing the economic value created as much as possible. D. lowering producer surplus and increasing consumer surplus.

C. capturing the economic value created as much as possible. (In an economic context, strategy is about (1) creating economic value, and (2) capturing as much of it as possible.)

Hugo Books Inc. is a retailer that buys books at a fixed price from publishers. Recently, Hugo offered a deal in which customers could buy a package of three mystery books at a discounted rate. Which of the following business models has Hugo Books combined? A. agency and freemium B. wholesale and agency C. wholesale and bundling D. agency and bundling

C. wholesale and bundling (With the wholesale model, a producer sells products to a retailer at a fixed price. Then the retailer sets its own price for the consumer. Bundling involves selling products in a package or bundle at a discounted rate. Hugo Books has combined both of these business models)

Nicki paid $900 for a camera that she thought was worth $1100 for all the features included in it. For the consumer electronics firm selling the camera, however, the cost of producing the camera was only $350. What is the consumer surplus in this scenario? A. $900 B. $1,100 C. $550 D. $200

D. $200 (Consumer surplus is the difference between the value a consumer attaches to a good or service (V), and what he or she pays for it (P), or (V - P), that is, $1100 - $900 = $200.)

Which of the following ratios best expresses inventory turnover? A. Inventory/Working capital B. Annul profits/Inventory C. Inventory/Per unit cost of production D. Cost of goods sold/Inventory

D. Cost of goods sold/Inventory

How does a sustainable strategy typically help a firm? A. It helps the firm focus solely on its financial goals. B. It reduces the need for corporate social responsibility within the firm. C. It facilitates the firm in effectively isolating its external stakeholders. D. It helps the firm achieve positive results along the social and ecological dimensions.

D. It helps the firm achieve positive results along the social and ecological dimensions. (A sustainable strategy is a strategy that can endure over time. A sustainable strategy produces not only positive financial results, but also positive results along the social and ecological dimensions.)

Which of the following is a disadvantage of the balanced-scorecard approach? A. It fails to link the strategic vision to responsible parties within the organization. B. It fails to translate the vision into measureable operational goals. C. It provides limited guidance for designing and planning business processes. D. It provides limited guidance about which metrics to choose.

D. It provides limited guidance about which metrics to choose. (The balanced-scorecard approach provides only limited guidance about which metrics to choose. Different situations call for different metrics.)

The translation of strategy into action takes place in the firm's _____, which details the firm's competitive tactics and initiatives. A. scorecard model B. economic value creation C. shareholder's value creation D. business model

D. business model (The translation of strategy into action takes place in the firm's business model, which details the firm's competitive tactics and initiatives.)

Which of the following competitively important assets is typically excluded from a firm's balance sheet? A. land and building B. accounts payable C. patents D. customer experience

D. customer experience (Today, the most competitively important assets tend to be intangibles such as innovation, quality, and customer experience, which are not included in a firm's balance sheets. Intangibles that are not captured in accounting data have become much more important in firms' stock market valuations over the last few decades)

A firm incurs $400 to manufacture a television. In the market, customers are willing to pay a maximum of $600 for the television priced at $500. The difference of $200 ($600 minus $400) is the A. consumer surplus. B. total return to shareholders. C. customer lifetime value. D. economic value created.

D. economic value created. (In this scenario, the difference of $200 ($600 minus $400) is the economic value created. Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it.)

Kerry the Kangaroo Inc. specializes in producing and selling a stuffed kangaroo named Kerry. Although the stuffed kangaroo has sold well, the clothes that can be bought to dress the kangaroo have not sold as well as expected. As a result, Kerry the Kangaroo has warehouses full of hats, pants, sweaters, and shoes to dress Kerry. This firm used a _____ to determine how much of its capital is tied up in these accessory items. A. payables turnover B. receivables turnover C. fixed asset turnover D. inventory turnover

D. inventory turnover (Inventory turnover (COGS/Inventory) indicates how much of a firm's capital is tied up in its inventory, such as the accessory items for Kerry the Kangaroo.)

Which of the following is not a factor that makes total return to shareholders and market capitalization unreliable measures of company performance? A. the volatility of stock prices B. the effects of the unemployment rate C. variations in interest and exchange rates D. the unpredictability of return on revenue

D. the unpredictability of return on revenue (Because overall macroeconomic factors, such as the unemployment rate, economic growth or contraction, and interest and exchange rates, all have a direct bearing on stock prices, using total return to shareholders and firm market capitalization to measure firm performance is not recommended. Other factors also make this method a drawback, including the volatility of stock prices and, at times, the irrational mood of investors. Return on revenue is not an external factor.)

After trying on a dress, a consumer assesses it to be worth a maximum of $100 and is willing to pay that amount for the dress. However, the dress was priced at $80. What is the amount, $100, referred to as? A. the producer surplus B. the firm's cost (C) in manufacturing the dress C. the consumer surplus D. the value (V) the consumer attaches to the dress

D. the value (V) the consumer attaches to the dress (The amount, $100, is referred to as the value (V) the consumer attaches to the dress. Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer's willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.)

Which of the following is an external performance metric? A. return on revenue B. fixed assets turnover C. inventory turnover D. total return to shareholders

D. total return to shareholders (Unlike accounting data, total return to shareholders is an external performance metric. It essentially indicates how the stock market views all available public information about a firm's past, current state, and expected future performance (with most of the weight on future growth expectations).)

The cost of capital to create a product is a fixed cost because it is A. directly proportional to the output level. B. uniform throughout all firms and industries. C. not a part of the profit calculations. D. unaffected by consumer demand.

D. unaffected by consumer demand. (Fixed costs are independent of consumer demand—for example, the cost of capital to build computer manufacturing plants or an online retail presence to take direct orders.)

The working capital turnover of Tesva Systems Corp. is 6.0. What does this financial data suggest? A. For every $6.00 Tesva Systems puts to work, the company incurs a cost of $1.00. B. For every $6.00 Tesva Systems puts to work, the company realizes sales of $1.00. C. For every dollar Tesva Systems puts to work, the company realizes $6.00 in loss. D. For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales.

For every dollar Tesva Systems puts to work, the company realizes $6.00 of sales. (From the given data, it can be concluded that for every dollar Tesva Systems puts to work, the company realizes $6.00 of sales. A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used by a firm to generate revenue.)

The working capital of a small home-based business is $200,000. The revenues generated account to $600,000, and the profits incurred are $300,000. What would be the company's working capital turnover? A. 3, that is, $600,000/$200,000 B. $300,000, that is, $600,000 - $300,000 C. 2, that is, $600,000/$300,000 D. $100,000, that is, $300,000 - $200,000

A. 3, that is, $600,000/$200,000 (The company's working capital turnover would be 3, that is, $600,000/$200,000. A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used to generate revenue. Working capital turnover is expressed as revenue/working capital.)

In 2014, Apple turned over its inventory more than 53 times. In stark contrast, Microsoft turned over its inventory only about 10 times during the year. Which of the following best explains this difference? A. Apple had a more effective management of its global supply chain than Microsoft. B. Microsoft had a stronger demand for its tablet computer than Apple did for its tablet computer. C. Apple operated its own production facilities and therefore had lower production costs than Microsoft. D. Microsoft had production facilities in countries with lower production costs than Apple.

A. Apple had a more effective management of its global supply chain than Microsoft. (Apple benefited from strong demand for its products, as well as an effective management of its global supply chain. The vast majority of Apple's manufacturing is done in China by low-cost producer Foxconn, which employs over 1.2 million people.)

The fixed asset turnover of a company is 8.3. What do you infer from this? A. Every dollar spent on the company's fixed assets generates $8.30 of revenue. B. 8.3% of the company's revenue is invested in fixed assets. C. The return on fixed assets will break even in 8.3 years. D. The cost of capital invested on fixed assets is 8.3% of the total profit.

A. Every dollar spent on the company's fixed assets generates $8.30 of revenue. (From the given data, it can be concluded that every dollar spent on the company's fixed assets generates $8.30 of revenue. Fixed asset turnover (Revenue/Fixed assets) measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).)

Which of the following expressions accurately describes market cap? A. It is the product of the number of outstanding shares and the share price. B. It is the difference between the book value and the market value of a firm's assets. C. It is the ratio of a firm's equity finance and its debt finance. D. It is the difference between a firm's account receivables and account payables.

A. It is the product of the number of outstanding shares and the share price. (Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price).)

Which of the following is a disadvantage of measuring firm performance through total return to shareholders and firm market capitalization? A. Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term. B. These tools fail to indicate how the stock market views all available public information about a firm's expected future performance. C. These tools measure competitive advantage in absolute terms rather than relative terms. D. Only the book value of the share prices is taken into account when applying these measures, and not the market value.

A. Market volatility makes it difficult to assess firm performance through these measures, particularly in the short-term. (Stock prices can be highly volatile, making it difficult to assess firm performance, particularly in the short-term. This volatility implies that total return to shareholders is a better measure over the long-term due to the "noise" introduced by market volatility, external factors, and investor sentiment.)

_____ indicates how much a firm benefits from interest-free loans extended by its suppliers and creditors. A. Payables turnover B. Receivables turnover C. Assets turnover D. Inventory turnover

A. Payables turnover (Payables turnover (Revenue/Accounts payable) indicates how fast a firm is paying its creditors and how much it benefits from interest-free loans extended by its suppliers.)

Which of the following is an advantage of a triple-bottom-line approach? A. The approach takes an integrative and holistic view in assessing a company's performance. B. The approach does not rely on an external view of a firm to assess its performance. C. The approach is more of a quantitative performance metric rather than a mere conceptual framework. D. The framework can help managers assess a firm's competitive advantage without taking into account the firm's performance along noneconomic dimensions.

A. The approach takes an integrative and holistic view in assessing a company's performance. (Like the balanced-scorecard, the triple-bottom-line takes an integrative and holistic view in assessing a company's performance.)

The market capitalization of a public company is $5 billion. Each share of the company is traded at $200. What do you infer from this financial data? A. The firm's number of outstanding shares is 25 million. B. The firm pays an annual dividend of 10 percent. C. The firm's total return to shareholder is $5 billion. D. The firm's economic value created is $5 billion.

A. The firm's number of outstanding shares is 25 million. (Market capitalization (or market cap) captures the total dollar market value of a company's outstanding shares at any given point in time (Market cap = Number of outstanding shares × Share price).)

_____, which is the return on risk capital, includes stock price appreciation plus dividends received over a specific period. A. Total return to shareholders B. Earnings per share C. Receivables turnover D. Dividend yield

A. Total return to shareholders (Investors are primarily interested in a company's total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period.)

GlobalCom Inc. is an Internet service provider. It provides a router free of charge when users sign up for a two-year wireless service plan. In this plan, users pay in advance irrespective of whether they use the Internet package during the two-year period or not. Which of the following business models does this scenario best illustrate? A. a combination of the razor-razor-blade model and the subscription-based business model B. the pay-as-you-go business model C. a combination of the freemium business model and the pay-as-you-go business model D. the direct sales business model

A. a combination of the razor-razor-blade model and the subscription-based business model (In this scenario, GlobalCom Inc. uses a combination of the razor-razor-blade model and the subscription-based business model. Telecommunications companies combine the razor-razor-blade model with the subscription-based business model. They provide a basic cell phone at no charge or significantly subsidize high-end smartphones when you sign up for a two-year wireless service plan. Telecom providers recoup the subsidy provided for the smartphone by requiring customers to sign up for lengthy service plans.)

Best Cut Inc. sells cutlery by having salespeople set up appointments with potential customers and give them a sales pitch for the product. When a salesperson sells cutlery, he or she gets a predetermined percentage commission. This type of business model is called A. an agency. B. bundling. C. wholesale. D. a freemium.

A. an agency. (In the agency business model, the producer relies on an agent or retailer to sell the product at a predetermined percentage commission.)

Which of the following is the most accurate characterization of stakeholder theory? A. an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return B. an approach to understanding a firm as being in a highly competitive industry, which requires the use of effective market capitalization to gain a competitive advantage C. an approach to understanding a firm, which involves balancing tangible assets and intangible assets to achieve high accounting profitability D. an approach to understanding a firm, which involves balancing multiple internal and external performance metrics in order to gain a competitive advantage

A. an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return (Stakeholder theory is an approach to understanding a firm as embedded in a network of internal and external constituencies that each make contributions and expect consideration in return.)

Jenny liked a pair of sapphire earrings and thought they would cost around $1,000. She was surprised to find that the price of the earrings was $1,500. However, she decided to buy the earrings anyway. This scenario describes A. consumer surplus. B. producer surplus. C. consumer profit. D. producer profit.

A. consumer surplus. (Consumer surplus is the difference between the value a consumer attaches to a good or service ($1,500) and what he or she pays for it ($1,500).)

Pilot Games Inc. allows users to play the trial versions of its games without any charge. However, users have to purchase the games to access the upgraded version of the games with advanced features. Which of the following business models is Pilot Games using in this scenario? A. freemium B. subscription-based C. pay-as-you-go D. razor-razor-blade

A. freemium (Pilot Games Inc. is using the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.)

Competitive advantage goes to the firm that achieves the A. largest economic value created. B. lowest producer surplus. C. highest payable turnover. D. highest Cost of goods sold/Revenue ratio.

A. largest economic value created. (Competitive advantage goes to the firm that achieves the largest economic value created, which is the difference between V, the consumer's willingness to pay, and C, the cost to produce the good or service.)

Manufacturers of electric fragrance diffusers sell the electric outer device at an extremely low price, sometimes even at a loss. However, they make their money on the product by charging a premium on the perfume refills that have to be replaced regularly. Which of the following business models does this best illustrate? A. razor-razor-blade B. subscription-based C. freemium D. pay-as-you-go

A. razor-razor-blade (This scenario best illustrates the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.)

From an investors' or shareholders' perspective, the measure of competitive advantage that matters most is the A. return on risk capital. B. economic value created. C. consumer surplus. D. inventory turnover.

A. return on risk capital. (From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.)

Return on risk capital primarily includes A. stock price appreciation plus dividends received over a specific period. B. consumer surplus plus firm profit. C. account receivables plus account payables. D. economic value created by a firm plus reservation price.

A. stock price appreciation plus dividends received over a specific period. (Investors are primarily interested in a company's total return to shareholders, which is the return on risk capital, including stock price appreciation plus dividends received over a specific period.)

A high percentage of R&D/Revenue ratio indicates a(n) A. strong focus on innovation to improve current products and services. B. inefficiency in the management to focus on new products. C. strong focus on marketing and sales to promote products and services. D. negligent investment toward research and development.

A. strong focus on innovation to improve current products and services. (The R&D/Revenue ratio indicates how much of each dollar that a firm earns in sales is invested to conduct research and development. A higher percentage is generally an indicator of a stronger focus on innovation to improve current products and services, and to come up with new ones.)

Which of the following business models has been traditionally used by the magazine and newspaper industry? A. subscription-based B. razor-razor-blade C. pay-as-you-go D. freemium

A. subscription-based (The subscription-based model has been traditionally used for (print) magazines and newspapers. Users pay for access to a product or service whether they use the product or service during the payment term or not.)

During the process of formulating an effective business model, a firm's managers should first A. transform their strategy of how to compete into a blueprint of actions and initiatives. B. implement their strategy at corporate, strategic business unit, and functional levels. C. implement their blueprint of actions and initiatives through structures, processes, culture, and procedures.

A. transform their strategy of how to compete into a blueprint of actions and initiatives. (To come up with an effective business model, a firm's managers first need to transform their strategy of how to compete into a blueprint of actions and initiatives that support the overarching goals. In a second step, managers implement this blueprint through structures, processes, culture, and procedures.)

Using the _____ approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance. A. triple-bottom-line B. economic value creation C. accounting profitability D. shareholder value creation

A. triple-bottom-line (Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance)

A defining characteristic of the pay-as-you-go business model is that the A. users pay for only the services they consume. B. users pay for access to a product or service whether they use it during the payment term or not. C. initial product is often sold at a loss in order to drive demand for complementary goods. D. the basic features of a service are provided free of charge, but the user must pay for premium services.

A. users pay for only the services they consume. (In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you-go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing.)

Andrew invested $200,000 in the shares of a company. At the end of a year, he had earned $7,000 as dividends on his shares along with a $1,000 appreciation in the overall value of his shares. However, if Andrew had invested the same amount on an asset, like gold, the appreciation in its value would have earned him $10,000 at the end of the year. In this scenario, which of the following is Andrew's opportunity cost? A. $7,000 B. $10,000 C. $2,000 D. $200,000

B. $10,000 (In this scenario, Andrew's opportunity cost is $10,000. Opportunity costs capture the value of the best forgone alternative use of the resources employed.)

Osion Electronics Inc. incurs a cost of $350 to produce one unit of a cell phone. The company's management has priced the product at $600 in the market. Considering the technological advancement of the cell phone, customers perceive its value to be around $800. What is the economic value created in this scenario? A. $350 B. $450 C. $800 D. $200

B. $450 (Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. In this case, the economic value created is ($800 - $600) + ($600 - $350) = $450.)

If a firm's market capitalization is $1 billion and the share price is $50, how many shares outstanding does the firm have? A. 20 thousand B. 20 million C. 500 thousand D. 50 million

B. 20 million (The firm has 20 million shares outstanding. Market capitalization = number of outstanding shares × share price. Therefore, to answer the question share price ($50) needs to be divided into the market capitalization ($1 billion).)

Which of the following statements is true of accounting data? A. Accounting data focus mainly on intangible assets, rather than tangible assets. B. Accounting data are historical data and thus backward-looking. C. Accounting data do not have to be adjusted in any manner to compare companies with different capital structures. D. Accounting data consider off-balance sheet items, such as pension obligations of a firm.

B. Accounting data are historical data and thus backward-looking. (All accounting data are historical data and thus backward-looking. Accounting profitability ratios show us only the outcomes from past decisions, and the past is no guarantee of future performance.)

In 2014, Apple had a return on revenue of 29.3 percent, and Microsoft had a return on revenue of 32 percent. Even so, Apple had a higher return on invested capital than Microsoft. Why did this happen? A. Apple had a higher cost structure than Microsoft. B. Apple was able to charge a much higher margin for its products and services than Microsoft. C. Apple spent more on research and development and marketing and sales than Microsoft. D. Apple had a much higher selling, general, and administrative expense that Microsoft.

B. Apple was able to charge a much higher margin for its products and services than Microsoft. (Apple was able to charge a much higher margin for its products and services than Microsoft. One reason for this is that Microsoft had a higher cost structure than Apple.)

_____ most precisely measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE). A. Working capital turnover B. Fixed asset turnover C. Fixed assets to equity ratio D. Capital leverage ratio

B. Fixed asset turnover (Fixed asset turnover (Revenue/Fixed assets) measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).)

When using the balanced-scorecard approach to assess a firm's performance, which of the following is not a key question that managers need to answer? A. How do customers view us? B. How do we reduce the economic value created? C. What core competencies do we need? D. How do shareholders view us?

B. How do we reduce the economic value created? (Managers using the balanced-scorecard develop strategic objectives and appropriate metrics by answering four key questions: (1) How do customers view us? (2) How do we create value? (3) What core competencies do we need? (4) How do shareholders view us?)

Which of the following is an advantage of applying the economic value creation perspective to assess a firm's performance? A. When the need for "hard numbers" arises, managers and analysts rely on economic value creation perspective to measure competitive advantage. B. In economic value perspective, analysts not only consider historical costs, but also opportunity costs. C. Arriving at the economic value created is easy because determining the value of a good in the eyes of consumers is a simple task. D. It is the most efficient tool for assessing corporate-level competitive advantage of highly diversified companies with large product portfolios.

B. In economic value perspective, analysts not only consider historical costs, but also opportunity costs. (Rather than merely relying on historical costs, as done when taking the perspective of accounting profitability, in the economic value creation perspective, all costs, including opportunity costs, must be considered.)

Which of the following is an advantage of the balanced-scorecard? A. It is a tool for both strategic formulation and strategic implementation. B. It allows managers to translate a firm's vision into measureable operational goals. C. The balanced-scorecard is independent of the skills of the managers responsible for its implementation. D. Its implementation is a one-time effort and does not require continuous tracking of metrics or updating of strategic objectives.

B. It allows managers to translate a firm's vision into measureable operational goals. (The balanced-scorecard approach is popular in managerial practice because it has several advantages. In particular, the balanced-scorecard allows managers to translate the vision into measureable operational goals.)

_____ are best described as the value of the best forgone alternative use of the resources employed. A. Variable costs B. Opportunity costs C. Social costs D. Switching costs

B. Opportunity costs (Opportunity costs capture the value of the best forgone alternative use of the resources employed.)

_____ indicates how fast a firm is collecting the credit amount extended by a firm to its customers. A. Payables turnover B. Receivables turnover C. Assets turnover D. Inventory turnover

B. Receivables turnover (Receivables turnover indicates how fast a firm is collecting the credit amount extended by the firm to its customers. Higher ratios of receivables turnover (Revenue/Accounts receivable) imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers (i.e., time until payments are due).)

Which of the following best expresses fixed asset turnover? A. Current assets/Fixed assets B. Revenue/Fixed assets C. Fixed assets/Total return to shareholders D. Fixed assets/Current liabilities

B. Revenue/Fixed assets (Fixed asset turnover (Revenue/Fixed assets) measures how well a company leverages its fixed assets, particularly property, plant, and equipment (PPE).)

Which of the following is not true of risk capital? A. From the shareholders' perspective, the measure of competitive advantage is primarily based on return on their risk capital. B. Risk capital invested in a firm can be legally recovered if the firm goes bankrupt. C. A person who provides capital to a firm gets equity shares in return. D. Return on risk capital includes stock price appreciation plus dividends received over a specific period.

B. Risk capital invested in a firm can be legally recovered if the firm goes bankrupt. (From the shareholders' perspective, the measure of competitive advantage that matters most is the return on their risk capital, which is the money they provide in return for an equity share, money that they cannot recover if the firm goes bankrupt.)

_____ denotes the dollar amount a consumer would attach to a good or service. A. Utility B. Value C. Consumer surplus D. Economic contribution

B. Value (Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer's willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.)

Unlike the financial ratios based on accounting data, total return to shareholders is A. backward-looking and historic in nature. B. an external performance metric. C. an absolute measure of competitive advantage. D. unaffected by market volatility or macroeconomic factors.

B. an external performance metric. (Unlike accounting data, total return to shareholders is an external performance metric. It essentially indicates how the stock market views all available public information about a firm's past, current state, and expected future performance (with most of the weight on future growth expectations).)

How does a firm capture its producer surplus for a good or service? A. as cost per unit sold B. as profit per unit sold C. as earnings per share D. as market price per share

B. as profit per unit sold (The difference between the price charged for a product (P), and the cost to produce it (C), is the producer surplus. Firms capture this amount as profit per unit sold.)

The value a consumer attaches to a product or service is captured in the A. least price a consumer is willing to pay for it. B. consumer's maximum willingness to pay for it. C. expenses incurred by the firm in manufacturing it. D. difference between the price charged for it and the cost to produce it.

B. consumer's maximum willingness to pay for it. (Value denotes the dollar amount (V) a consumer would attach to a good or service. Value captures a consumer's willingness to pay and is determined by the perceived benefits a good or service provides to the buyer.)

Janet is the CEO of Far Sight Inc., which uses a triple-bottom-line approach. As a result, Janet will tend to A. view superior financial performance as the sole objective of her firm. B. expect her company to be socially responsible. C. use fossil fuels to run her company's production plants. D. ignore the ecological dimension for her company.

B. expect her company to be socially responsible. (Janet is the CEO of Far Sight Inc., which uses a triple-bottom-line approach. As a result, Janet will tend to expect her company to be socially responsible. The triple-bottom-line approach emphasizes being socially and ecologically responsible.)

Photohome is a file hosting service that allows users to store up to 5GB of data with no restrictions or charges. However, users have to pay a fee for advanced features on the cloud storage system and additional storage space. Which of the following business models does this best illustrate? A. subscription-based B. freemium C. pay-as-you-go D. razor-razor-blade

B. freemium (This scenario best illustrates the freemium business model. The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.)

The ratio of SG&A/Revenue is an indicator of a firm's focus on A. researching to produce innovative products and services. B. marketing to promote its products and services. C. producing a good in an efficient manner. D. creating a good that is cost-effective.

B. marketing to promote its products and services. (SG&A/Revenue is an indicator of the firm's focus on marketing to promote its products and services.)

In the _____ business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. A. subscription-based B. razor-razor-blade C. pay-as-you-go D. direct sales

B. razor-razor-blade (In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.)

True Vibgyor Inc. sells its e-book readers at the cost price of $15 each. However, the company makes its profits when users have to download or buy books online. Which of the following business models is True Vibgyor implementing? A. subscription-based B. razor-razor-blade C. pay-as-you-go D. direct sales

B. razor-razor-blade (True Vibgyor is implementing the razor-razor-blade business model. In the razor-razor-blade business model, the initial product is often sold at a loss or given away for free in order to drive demand for complementary goods. The company makes its money on the replacement part needed.)

Mia has purchased an Internet package for three months, in which she can use 30 mbps Internet speed. However, for the service, she needs to pay a fee of $50 in advance irrespective of whether she uses the Internet during the service period or not. This arrangement best illustrates the _____ strategy. A. razor-razor-blade B. subscription-based C. pay-as-you-go D. freemium

B. subscription-based (The plan used by Mia best illustrates the subscription-based strategy. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs.)

A defining characteristic of the subscription-based business model is that the A. user pays for only the services he or she consumes. B. user pays for access to a product or service whether he or she uses it during the payment term or not. C. basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons. D. initial product is often sold at a loss or given away for free in order to drive demand for complementary goods.

B. user pays for access to a product or service whether he or she uses it during the payment term or not. (In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not.)

A firm incurs $100 to manufacture an office table. It fixes the market price of the table as $250, and discounts the price to $200. However, the maximum a person is willing to pay for it is $180. What is the amount of total perceived consumer benefits in this scenario? A. $250 B. $200 C. $180 D. $100

C. $180 (The amount of total perceived consumer benefits equals the maximum willingness to pay, which in this case is $180.)

_____ of receivables turnover imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers. A. Unsteady ratios B. Steady ratios C. Higher ratios D. Lower ratios

C. Higher ratios (Higher ratios of receivables turnover imply more efficient management in collecting accounts receivable and shorter durations of interest-free loans to customers.)

_____ precisely indicates how much of a firm's sales is converted into profits. A. Break-even price B. Working capital turnover C. Return on revenue D. Inventory turnover

C. Return on revenue (Return on revenue (ROR) indicates how much of a firm's sales is converted into profits)

_____ is the money shareholders provide in return for an equity share, which they cannot recover if the firm goes bankrupt. A. Tangible assets B. Value creation C. Risk capital D. Market capitalization

C. Risk capital (Risk capital is the money shareholders provide in return for an equity share, which they cannot recover if the firm goes bankrupt.)

Which of the following is not a limitation of the economic value creation framework? A. The framework falls short when managers are called upon to operationalize competitive advantage. B. The framework is not as effective as accounting profitability or shareholder value creation when the need for "hard numbers" arises. C. The framework fails to provide the foundation that will help firms decide between cost-leadership or differentiation strategies. D. The framework cannot be effectively applied for assessing corporate-level performance of diversified conglomerates.

C. The framework fails to provide the foundation that will help firms decide between cost-leadership or differentiation strategies. (The relationship between economic value creation and competitive advantage is fundamental in strategic management. It provides the foundation upon which to formulate a firm's competitive strategy of cost-leadership or differentiation.)

Both Vibrant Phones Inc. and Oryxo Inc. incur a cost of $200 to manufacture a single unit of a cell phone. However, Vibrant Phones creates more economic value than Oryxo does. What does this imply? A. Vibrant Phones and Oryxo have achieved a competitive parity. B. Oryxo has a competitive advantage over Vibrant Phones. C. Vibrant Phones sells its products at a better price than Oryxo. D. Oryxo's offering has greater total perceived consumer benefits than Vibrant Phones's offering.

C. Vibrant Phones sells its products at a better price than Oryxo. (Economic value created is the difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it. Since the cost of production is same for both the companies, the difference in economic value can only be possible when one company has been able to sell at a higher price than the other.)

_____ is best described as a measure of how effectively capital is being used by a firm to generate revenue. A. Return on revenue B. Risk capital C. Working capital turnover D. Revenue per employee

C. Working capital turnover (A component of return on invested capital is working capital turnover, which is a measure of how effectively capital is being used by a firm to generate revenue.)

The translation of strategy into action primarily takes place in a firm's A. mission statement. B. executive summary. C. business model. D. code of conduct.

C. business model. (The translation of strategy into action takes place in the firm's business model, which details the firm's competitive tactics and initiatives.)

Economic value creation is best expressed as A. producer surplus minus consumer surplus. B. consumer surplus minus cost of production. C. consumer surplus plus firm profit. D. producer surplus plus firm profit.

C. consumer surplus plus firm profit. (Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus.)

When GD Inc. declared a dividend of $20,000,000, its market value increased from $8 billion to $8.5 billion. However, it lost a chance to reinvest $20,000,000 in the research and development of a new product which would have earned a profit of $200 million. Thus, this $200 million is referred to as GD Inc.'s A. producer surplus. B. consumer surplus. C. opportunity cost. D. social cost.

C. opportunity cost. (GD Inc.'s opportunity cost is $200 million. Opportunity costs capture the value of the best forgone alternative use of the resources employed.)

Free Spirit Communications Inc. is a cellular service provider that charges its customers $1 for three hours of talk time. So, if a customer's talk time for a month is 60 hours, the company charges him or her $20 at the end of the month. Which of the following business models does this best illustrate? A. razor-razor-blade B. subscription-based C. pay-as-you-go D. freemium

C. pay-as-you-go (In this scenario, Free Spirit Communications Inc. uses the pay-as-you go business model. In the pay-as-you-go business model, the user pays for only the services he or she consumes. The pay-as-you go model is most widely used by utilities providing power and water and cell phone service plans, but is gaining momentum in other areas such as rental cars and cloud computing.)

Airbnb rents spaces that previously would have been unused to generate revenue, while also dramatically increasing the potential amount of accommodation space in the 191 countries. This business uses a _____ technique. A. offshoring B. crowdsourcing C. peer-to-peer D. binge watching

C. peer-to-peer (As stated in Strategy Highlight 5.2., Airbnb uses the peer-to-peer technique by renting spaces that previously would have been unused to generate revenue. The peer-to-peer model matches individuals with a needed product or service, such as car rental, house cleaning, or travel accommodations.)

The difference between the price charged for a product and the cost to manufacture it is referred to as the A. consumer surplus. B. break-even price. C. producer surplus. D. reservation price.

C. producer surplus. (The difference between the price charged for a product (P), and the cost to produce it (C), is the profit, or producer surplus.)

Best Fit Club, a chain of gyms and spas, requires its customers to pay a quarterly or an annual fee to use its services. Irrespective of whether they frequently use the services during the payment period or not, members have to pay in advance. Which of the following business models does this best illustrate? A. razor-razor-blade B. pay-as-you-go C. subscription-based D. freemium

C. subscription-based (Best Fit Club uses the subscription-based business model in this scenario. In the subscription-based model, users pay for access to a product or service whether they use the product or service during the payment term or not. Industries that use this model presently are cable television, cellular service providers, satellite radio, Internet service providers, and health clubs)

The top management at Parallela Pharma Inc., through rigorous testing, ensures that the company develops and sells drugs that are free of harmful side effects. Also, the company ensures that the chemical waste generated in the manufacturing process is kept to a bare minimum and is disposed of according to the regulations of the Environmental Protection Agency. The management assesses its overall performance based on these dimensions. Thus, the managers at Parallela Pharma are applying the _____ approach to measure firm performance. A. economic value creation B. shareholder value creation C. triple-bottom-line D. accounting profitability

C. triple-bottom-line (In this scenario, the managers at Parallela Pharma are applying the triple-bottom-line approach to measure firm performance. Using a triple-bottom-line approach, managers audit their company's fulfillment of its social and ecological obligations to stakeholders such as employees, customers, suppliers, and communities as conscientiously as they track its financial performance.)

In the freemium business model, the A. initial product is sold at a premium price and the complementary goods are given free. B. users are free to pay for the services in advance or after using the services. C. users are not charged for the basic features of a product or service, but the user must pay for premium advanced features or add-ons. D. users pay for access to a product or service whether they use it during the payment term or not.

C. users are not charged for the basic features of a product or service, but the user must pay for premium advanced features or add-ons. (The freemium (= free + premium) business model is a model in which the basic features of a product or service are provided free of charge, but the user must pay for premium services such as advanced features or add-ons.)

Which of the following statements about competitive advantage is true? A. Competitive advantage is an absolute measure; it is not relative. B. Competitive advantage is a one-dimensional concept. C. Competitive advantage is permanent and not transitory; once gained by a firm it stays with the firm. D. Competitive advantage can be assessed by measuring accounting profit, shareholder value, or economic value.

D. Competitive advantage can be assessed by measuring accounting profit, shareholder value, or economic value. (We can assess competitive advantage by measuring accounting profit, shareholder value, or economic value. More recently, competitive advantage has been linked to a firm's triple-bottom-line, the ability to maintain performance in the economic, social, and ecological contexts to achieve a sustainable strategy.)

Which of the following scenarios best illustrates bundling? A. Clean Brush Inc. sells its electric toothbrushes for a low cost, but charges a high price for replacement brushes. B. Cumulus Media Inc. sells its cloud computing network by having customers pay for the service as they use it. C. Sharp Cable Inc. sells its basic TV channels for free but charges high prices for any channels that customers add on later. D. Fresh Seeds Inc. sells seed packages, in which a person can buy a package of three types of seeds at a discounted price compared to buying the seeds individually.

D. Fresh Seeds Inc. sells seed packages, in which a person can buy a package of three types of seeds at a discounted price compared to buying the seeds individually. (The bundling business model sells products or services for which demand is negatively correlated at a discount. For example, in the Microsoft Office Suite, a user might value Word more than Excel and vice versa. Instead of selling both products for $120 dollars each, Microsoft bundles them in a suite and sells them combined at a discount, say $180.)

Which of the following statements is true of the balanced-scorecard? A. It is a more or less a one-dimensional metric of measuring competitive advantages of a firm. B. It is one of the traditional approaches of measuring firm performance. C. Its primary focus is to base a firm's strategic goals entirely on external performance dimensions. D. It attempts to provide a holistic perspective on firm performance.

D. It attempts to provide a holistic perspective on firm performance. (The three standard dimensions for measuring competitive advantage: economic value, accounting profitability, and shareholder value, are more or less one-dimensional metrics. However, conceptual frameworks like the balanced-scorecard and the triple-bottom-line attempt to provide a more holistic perspective on firm performance.)

Which of the following is not an advantage of the balanced-scorecard approach to assess firm performance? A. It allows managers to communicate and link the strategic vision to responsible parties within an organization. B. It helps managers to implement feedback and organizational learning in order to modify and adapt strategic goals when indicated. C. It provides a concise report that tracks chosen metrics and measures and compares them to target values. D. It is a tool which can be effectively used by managers for both strategic implementation and strategic formulation.

D. It is a tool which can be effectively used by managers for both strategic implementation and strategic formulation. (It is important to note that the balanced-scorecard is a tool for strategy implementation, not for strategy formulation. It is up to a firm's managers to formulate a strategy that will enhance the chances of gaining and sustaining a competitive advantage.)

The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & Development expense/Revenue, and A. Accounting profitability/Revenue. B. Economic value created/Revenue. C. Total return to shareholders/Revenue. D. Selling, general, & administrative expense/Revenue.

D. Selling, general, & administrative expense/Revenue. (The three financial ratios that constitute return on revenue are Cost of goods sold/Revenue, Research & Development (R&D) expense/Revenue, and Selling, general, & administrative (SG&A) expense/Revenue.)

Which of the following statements is true of the triple-bottom-line? A. It is more or less a one-dimensional metric of measuring competitive advantage of a firm. B. Its primary focus is to base a firm's strategic goals entirely on external performance dimensions. C. According to this approach, achieving positive results in any one of the dimensions, economic, social, and ecological, can lead to a sustainable strategy. D. Three dimensions, economic, social, and ecological, make up the triple-bottom-line.

D. Three dimensions, economic, social, and ecological, make up the triple-bottom-line. (Three dimensions—economic, social, and ecological—make up the triple-bottom-line. According to this approach, achieving positive results in all three areas can lead to a sustainable strategy.)

Genevieve is a recent fashion graduate. She started her own apparel store with an investment of $300,000. In the first year she made a profit of $60,000. If she had taken up a job as a fashion editor for a magazine, she would have earned $50,000 as salary per year. Also, she could have invested her capital, $300,000, in treasury bonds and earned an interest of $12,000. Thus, the amount $62,000 ($50,000 + $12,000) would be Genevieve's A. social cost. B. break-even price. C. reservation price. D. opportunity cost.

D. opportunity cost. (In the scenario, the amount $62,000 ($50,000 + $12,000) would be Genevieve's opportunity cost. An entrepreneur faces two types of opportunity costs: (1) forgone wages she could be earning if she were employed elsewhere, and (2) the cost of capital she invested in her business, which could instead be invested in, say, the stock market or U.S. Treasury bonds)

Which of the following frameworks used to measure competitive advantage relies on both an internal and an external view of a firm? A. the economic value creation model B. the accounting profitability model C. the shareholder value creation model D. the balanced-scorecard model

D. the balanced-scorecard model (By relying on both an internal and an external view of a firm, the balanced-scorecard combines the strengths provided by the individual approaches to assessing competitive advantage: economic value creation, accounting profitability, and shareholder value creation)

Which of the following is not an accurate expression of the economic value created per unit of a product sold? A. the sum of consumer surplus and producer surplus B. the difference between consumer's reservation price and firm's cost C. the sum of consumer surplus and firm profit D. the difference between the price charged and the firm's cost

D. the difference between the price charged and the firm's cost (Economic value creation equals consumer surplus plus firm profit, or the sum of consumer and producer surplus. It can also be expressed as the difference between the consumers' maximum willingness to pay (reservation price) and the firm's cost (V - C). However, the difference between the price charged and the firm's cost is simply producer surplus)