Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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This exam paper must not be removed from the venue
School of Economics
EXAMINATION
Semester One Final Examinations, 2015
ECON2410 The Economics of Business Strategy
This paper is for St Lucia Campus students.
Examination Duration: 120 minutes
Reading Time: 10 minutes
Exam Conditions:
This is a School Examination
This is a Closed Book Examination - specified materials permitted
During reading time - write only on the rough paper provided
This examination paper will be released to the Library
Materials Permitted In The Exam Venue:
(No electronic aids are permitted e.g. laptops, phones)
An unmarked Bilingual dictionary is permitted
Calculators - Casio FX82 series or UQ approved (labelled)
Materials To Be Supplied To Students:
1 x 14 Page Answer Booklet
1 x Multiple Choice Answer Sheet
2 x Rough Paper
Instructions To Students:
Part A: Answer all questions on the Multiple Choice Answer sheet.
Part B: Each question in Part B contains two options – (a) and (b).
Answer option (a) or option (b) in the Answer Booklet.
Total Questions: 17
Total Marks: 65
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Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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PART A – Multiple Choice Questions
Answer ALL Questions on the Multiple Choice Answer Sheet.
Select the ONE answer that is most correct.
Each Question is worth 2 marks. (20 Marks Total)
A1. The Herfindhal index will be largest for an industry that is __________.
(a) a monopoly
(b) perfectly competitive
(c) a duopoly
(d) monopolistically competitive
A2. If a firm sells its output on a market that is characterised by many sellers and
buyers, a differentiated product, free entry and exit, and some control over
price, then the firm is _________.
(a) a monopolist
(b) an oligopolist
(c) a perfect competitor
(d) a monopolistic competitor
A3. If the reaction curve for firm 2 turns out to be Q2 = 30 – 0.5Q1, then the Cournot
equilibrium output will have each firm producing ________.
(a) 10
(b) 30
(c) 20
(d) 40
A4. In the Bertrand model _________.
(a) one firm plays a leadership role and its competitors willingly follow
(b) each firm takes the prices charged by its competitors as given
(c) prices are higher and quantities are slightly less than we would see if the
firms colluded to achieve the monopoly outcome
(d) each firm takes the quantities produced by its competitors as given
QUESTIONS CONTINUE OVER PAGE
Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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A5. Which of the following is not an exit barrier for firms in an industry?
(a) Sunk costs.
(b) Labour agreements or commitments to purchase raw materials.
(c) Excess capacity.
(d) Government restrictions.
A6. What situation occurs when a large incumbent sets a low price to drive smaller
rivals from the market?
(a) Limit pricing.
(b) Price leading.
(c) Capacity expansion.
(d) Predatory pricing.
A7. 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 pricing.
(c) Uniform customer pricing.
(d) Uniform competitive pricing.
A8. 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) Demand volatility is an especially serious problem when the production
involves substantial fixed costs.
(c) Pricing coordination becomes easier in a volatile demand condition
because firms are chasing a moving target.
(d) Price cutting is harder to detect when demand conditions are stable.
A9. Which of the following conditions does not tend to heat up price competition?
(a) Many sellers in the market.
(b) Some firms have excess capacity.
(c) Products are differentiated/buyers have high switching costs.
(d) Some firms have cost advantage over others.
A10. What term describes the process of using market prices of unfinished and
semifinished goods to estimate the incremental value-created by distinctive
parts of the value chain?
(a) Consonance analysis.
(b) Value creation analysis.
(c) Value-added analysis.
(d) Benefit leadership analysis.
Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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PART B – Short Answer Questions
Each question in Part B contains two options – (a) and (b)
Answer either option (a) or option (b) in the Answer Booklet
Marks are as indicated (45 Marks Total)
Answer either option (a) or option (b):
B1. [5 marks]
(a) Explain why the demand curve faced by an individual firm in a perfectly
competitive market structure is a horizontal line?
Or
(b) Mention three properties of the Herfindhal index.
B2. [5 marks]
(a) Describe the difference between vertical differentiation and horizontal
differentiation.
Or
(b) List the drawbacks of the Cournot model?
B3. [7 marks]
(a) Explain the three entry conditions (i.e. the typology of entry conditions)
described by Joseph Bain.
Or
(b) What are the conditions under which an incumbent firm can successfully
deter entry by holding excess capacity?
QUESTIONS CONTINUE OVER PAGE
Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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B4. [5 marks]
(a) Explain the difference between direct effect of commitment and strategic
effect of commitment.
Or
(b) Drew Fudenberg and Jean Tirole developed a taxonomy of commitment
strategies based on two important dimensions. What are the two
important dimensions?
B5. [7 marks]
(a) Even if firms coordinate using tit-for-tat pricing, harmony may not ensue.
There are many impediments to implementing a successful tit-for-tat
strategy. What are the main impediments?
Or
(b) Despite there being other potential effective strategies, why would we
necessarily expect firms to adopt a tit-for-tat strategy? (Why is tit-for-tat
strategy so compelling?)
B6. [10 marks]
(a) Suppose two firms (Firm 1 and Firm 2) are producing a product. The total
demand is: Q = 53 – P, where Q = Q1 + Q2. Each of the two firms has the
cost function TC = 5Q. Based on the information given, complete the table
below. Show all your workings to gain full marks.
Equilibrium P Q Q1 Q2 Profit1 Profit2
Monopoly (collusion)
Cournot
QUESTIONS CONTINUE OVER PAGE
Semester One Final Examinations, 2015 ECON2410 The Economics of Business Strategy
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Or
(b) Suppose two firms (Firm 1 and Firm 2) are producing a product. The total
demand is: Q = 300 – P, where Q = Q1 + Q2. Each of the two firms has
the cost function TC = 60Q. Based on the information given, complete the
table below. Assume that Firm 1 is the leader and Firm 2 is the follower.
Show all your workings to gain full marks.
Equilibrium P Q Q1 Q2 Profit1 Profit2
Cournot
Stackelberg
B7. [6 marks]
(a) How can a cost leader create more value than its competitors? (Explain
the three different ways by which a cost leader creates more value than its
competitors.)
Or
(b) How can a benefit leader create more value than its competitors? (Explain
the three different ways by which a benefit leader creates more value than
its rivals.)
END OF EXAMINATION