Managerial Economics - Chapter 7
Terms in this set (29)
What term refers to situations in which firms can sustain prices in excess of those that would arise in a non-cooperative single-shot price or quantity-setting game?
a. Dedicated pricing
b. Strategic pricing
c. Marginal pricing
d. Cost-plus pricing
e. Cooperative pricing*
What term describes a policy in which a firm is prepared to match whatever change in strategy a competitor makes?
a. Response strategy
b. Always cooperate strategy
c. Always aggress strategy
d. Tit-for-tat strategy*
e. Trigger strategy
What term describes a decision that has a long-term impact and is difficult to reverse?
a. Dedicated investment
b. Strategic commitment*
c. Critical choice
d. Market investment
e. Firm commitment
How much can firm 1 improve its outcome by committing to a strategy thus transforming the simultaneous move game to a sequential move game?
What type of cooperation-inducing strategy is defined as one so compelling that that a firm would expect all other firms to adopt it?
a. Backward induction
b. Focal point*
c. Always aggress
What is a grim trigger strategy in a two firm repeated game?
a. A strategy where a firm will always aggress regardless of how the other firm acts
b. A strategy where a firm will always cooperate regardless of how the other firm acts
c. A strategy in which a firm is prepared to match whatever changes in strategy the competitor makes
d. A strategy in which a firm initially cooperates and then aggresses for the rest of the game as soon as the opponent aggresses*
e. A strategy in which a firm is prepared to aggress when its opponent cooperates and cooperate when its opponent aggresses
What tactical term best describes the capacity relationship between Toyota and Honda such that Toyota's response is to reduce production output of the Rav 4 if Honda were to first announce a large increase in the production of the CR-V that drove down prices?
a. Tough commitment
b. Strategic complement
c. Soft commitment
d. Strategic substitute*
What type of effect describes how a commitment impacts the present value of the firm's profits, assuming the firm adjusts its own tactical decisions in light of this commitment and that its competitor's behavior does not change?
a. Tactical effect
b. Financial effect
c. Direct effect*
d. Strategic effect
e. Indirect effect
Which of the following statements is true about how the volatility of demand conditions affects the sustainability of cooperative pricing?
a. Price cutting is easier to detect when demand conditions are volatile
b. Pricing coordination becomes easier in a volatile demand condition because firms are chasing a moving target
c. Price cutting is harder to detect when demand conditions are stable
d. Demand volatility is an especially serious problem when the production involves substantial variable costs
e. Demand volatility is an especially serious problem when the production involves substantial fixed costs*
Which of the following terms describes the situation created by a large dominant firm where smaller firms can find buyers as long as they sustain a lower price?
a. Price umbrella*
b. Price leading
c. Predatory pricing
d. Premium pricing
e. Price lining
Why do price-sensitive buyers tend to harm cooperative pricing in a market?
a. They cause an increase in detection lags because competitor prices become more difficult to monitor
b. There is a resultant decrease in the frequency of interaction between competitors
c. There is an increase in the probability of misreads
d. The is an increase in temptation to cut price, even if competitors are expected to match*
e. There is an increase in detection lags because prices of competitors are more difficult to monitor
Which of the following practices does NOT help firms facilitate cooperative pricing?
a. Price leadership
b. Advance announcement of price changes
c. Price following*
d. Most favored customer clauses
e. Uniform delivered prices
Which of the following is an example of a market where barometric price leadership occurs?
a. Breakfast cereal
b. Prime-rate loan*
d. Steel until the 1960s
e. Fast food hamburger
What type of clause is a provision in a sales contract that promises a buyer that it will pay the lowest price the seller charges?
a. Low price clause
b. Price matching clause
c. Best price clause
d. Most favored customer clause*
e. Competitive price clause
Which of the following statements is true about a tough commitment?
a. It is good for competitors
b. It is bad for competitors*
c. In Cournot competition, elimination of production facilities is an example of a tough commitment
d. In Betrand competition, a commitment to increase prices is an example of a tough commitment
e. Tough commitments are always in the best interest of a firm
Which of the following statements is true about a soft commitment?
a. It is bad for competitors
b. It is good for competitors*
c. In Cournot competition, capacity expansion is an example of a soft commitment
d. In Betrand competition, a commitment to reduce prices is an example of a soft commitment
e. Soft commitments are always in the best interest of a firm
Which of the following commitment strategies involves soft commitment postures, strategic complements for the stage 2 tactical variables, a refrain commitment action and an acceptance of the status quo out of fear thus waiting to follow the leader?
a. Top Dog
b. Lean and Hungry Look
c. Mad Dog
d. Puppy-Dog Ploy
e. Weak-Kitten Effect*
What type of pricing involves a firm quoting a single delivered price for all buyers with the firm absorbing any freight charges itself?
a. Uniform delivered pricing*
b. Uniform FOB (free on board) pricing
c. Uniform customer pricing
d. Uniform favored pricing
e. Uniform competitive pricing
Which set of advice below should a manager disregard when seeking pricing stability that is least likely to suffer from antitrust legislation?
a. All pricing decisions should be made unilaterally. Avoid direct contacts with competitors about price.*
b. Carefully handle public pricing communications.
c. Always share analyses of probably competitive reactions.
d. Monitor the content. Announce price changes; do not lecture competitors about the need to raise prices or consequences of reducing them.
e. Clear your pricing tactics with an attorney well-versed in antitrust law.
What process involves using computer simulations to track the likely competitive implications of pricing and investment decisions over many years?
a. Regression testing
b. Virtual reality
c. War gaming*
d. Commitment testing
e. Scenario testing
What type of option exists when a decision maker has the opportunity to tailor a decision to information that will be received in the future?
a. Real option*
b. Commitment option
c. Project option
d. Decision option
e. Future option
What term refers to the situation in the used car market where owners are more anxious to sell low-quality cars than high-quality cars?
a. Clunker market
b. Quality conundrum
c. Car scrapping market
d. Low-quality market
e. Lemons market*
How much revenue a firm brings in by improving the quality of a product such that more consumers want to buy it depends on which two factors?
a. The decrease in demand caused by the increase in quality and the incremental profit earned on each additional unit sold
b. The increase in demand caused by the increase in quality and the incremental profit earned on each additional unit sold*
c. The increase in demand caused by the increase in quality and the incremental loss on each additional unit sold
d. The decrease in demand caused by the increase in quality and the incremental loss on each additional unit sold
e. The quality of changes to the original product and the decrease in demand cause by the changes in quality
There are 2 firms in a Stackelberg Oligopoly market for cell phone service in a Texas county, where firm 1 is the leader, and firm 2 is the follower. The market inverse demand function and the total cost functions each of the two firms are as follows:
P = 50 - 0.25(Q1 + Q2) (market inverse demand)
TC1 = 5 + 10Q1 (total cost function for firm 1)
TC2 = 2 + 12Q2 (total cost function for firm 2)
P = a - b (Q1 + Q2) Market Inverse Demand Curve
TC1 = FC1 + MC1 * Q1 Total Cost function for firm 1
TC2 = FC2 + MC2 * Q2 Total Cost function for firm 2
Q2 = a RF1 - b RF1 * Q1 Reaction function for firm 1
Q2 = (a - MC1) / b - 2 * Q1 Reaction function for firm 1
Q2 = a RF2 - b RF2 * Q1 Reaction function for firm 2
Q2 = (a - MC2) / (2 b) - .5 * Q1 Reaction function for firm 2
Q1 = (1/b)
(a - b
aRF2 - MC1)
Q2 = aRF2 - bRF2 * Q1
Which of the following represents the Stackelberg equilibrium market price, and level of output for firm 1 and firm 2?
In equilibrium, what will the firm 2 profit equal?
a. P = $35 Q1 = 42 Q2 = 42
b. P = $24 Q1 = 56 Q2 = 48
c. P = $20.50 Q1 = 84 Q2 = 34 *
d. P = $24 Q1 = 52 Q2 = 52
e. P = $20.50 Q1 = 34 Q2 = 84
a. π2 = $287 *
b. π2 = $350
c. π2 = $574
d. π2 = $877
e. π2 = $1,152
Suppose a firm has $50 million to invest in a new market. Given market uncertainties, the firm forecasts a high-scenario where the present value of the investment is $200 million and a low-scenario where the present value of the investment is $20 million. If the firm believes each scenario is equally likely and invests today, what is the net present value of the investment?
a. $30 million
b. $50 million
c. $60 million*
d. $80 million
e. $90 million
Suppose a firm has $50 million to invest in a new market. Given market uncertainties, the firm forecasts a high-scenario where the present value of the investment is $200 million and a low-scenario where the present value of the investment is $20 million. Suppose that by waiting a year, the firm can learn with certainty which scenario will arise. Assume a 10% annual discount rate. If the firm waits one year and learns that the high-scenario will happen, then it can still invest and make a net present value of $150 million. If the firm maximizes its expected net present value, then what is the firm's expected net present value of the investment?
a. $56.55 million
b. $68.18 million*
c. $75 million
d. $76.42 million
e. $85.61 million
Suppose that a firm offers secret discounts to 200 customers in a particular industry to attract those customers from a competitor firm. If there is a 2% probability that any one of those customers will disclose the pricing, what is the probability that the firm's competitors will hear from at least one of those 200 customers?
Suppose that a firm offers secret discounts to 20 customers in a particular industry to attract those customers from a competitor firm. If there is a 2% probability that any one of those customers will disclose the pricing, what is the probability that the firms competitors will hear from at least one of those 20 customers?
Which of the following commitment strategies involves soft commitment postures, strategic substitutes for the stage 2 tactical variables, a refrain commitment action, and a behavior of being actively submissive such that the firm is posturing to avoid conflict?
a. Top Dog
b. Lean and Hungry Look*
c. Mad Dog
d. Puppy-Dog Ploy
e. Weak-Kitten Effect