Multiple choice questions

Question 1:
What is the correct completion of this sentence? The production of a good or
service is characterized by economies of scope if

A: the marginal cost of producing the next unit is above the average cost of
production.
B: the average cost of production are increasing over a particular interval of
production quantities.
C: firms can produce cheaper per unit if they produce more.
D: None of the above is correct.

Question 2:
Substitutes and complements constitute one of the forces in Porters five forces
model. Which of the following statements is INCORRECT in this context?

A: The cross-price elasticity of complementary goods is always negative.

B: The presence of close substitutes renders the demand for a good or service
less price elastic.
C: Supply shocks in industries producing complementary goods can
significantly alter the competitive advantage of firms in their own industry.
D: Substitutes erode profits more if they have comparable price-value
characteristics.

Question 3:
Which of these justifications for diversification of a firms activities into a
conglomerate is problematic?

A: Diversification allows firm shareholders to reduce the risk of holding

company shares.
B: Diversification allows firms to use internal capital markets for investments
in high-yield activities for which it is difficult to obtain capital from outsiders.
C: Diversification allows firms to deploy unique and hard-to-replicate
resources across multiple industries.
D: None of the reasons listed above is problematic.

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Question 4:
Which of these investments is characterized by the lowest level of asset
specificity?

A: Foxconn invests in a production plant that can build over 1 million

smartphone components each day. Although many producers need the
component, only Apple demands this amount of it.
B: Dr. Peeters and Dr. Bhaskarabhatla spend two days making an exam for
the course Organization and Strategy, a course given only at Erasmus
School of Economics.
C: Christiano Ronaldo spends five hours each day in the gym to train his body
for professional football, which he only plays for Real Madrid Football Club.
D: The Dutch kebab restaurant chain Has opens an outlet near the campus of
the Erasmus School of Economics.

Question 5:
What is the correct completion of this sentence? According to the Property Rights
Theory of Grossman, Hart and Moore

A: contracts are a perfect tool to arrange economic transactions in the

absence of specific assets.
B: ownership of assets is important because it assigns residual rights, which
impact on investment incentives.
C: real-world contracts are always incomplete, because of uncertainty and
strategic behaviour of contracting parties.
D: the legal framework adequately defines rights and obligations in
economic transactions.

Question 6:
Which statement is correct? Organizations are typically more powerful

A: when more other organizations depend on them, and they do not

depend heavily on other organizations.
B: when less other organizations depend on them, and they do not depend
heavily on other organizations.
C: when more other organizations depend on them, and they depend
heavily on other organizations.
D: when less other organizations depend on them, and they depend
heavily on other organizations.

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Question 7:
Consider the following figure:

The graph depicts 3 average cost curves for 3 different technologies available to
produce a product X. Which of the following statements is INCORRECT?

A: In the long run the firm should select the technology with the lowest
average cost curve at its desired output level.
B: The minimum efficient scale of technology 1 is at point A, i.e. the
intersection of the curves for technology 1 and technology 2.
C: Any output level between point B and C is most efficiently produced using
technology 3.
D: Point C is the long-run minimum efficient scale for the production of X, as
it is the output level with the lowest average cost over the entire range of
potential output.

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Question 8:
Which argument listed below is a disadvantage of the functional organizational
structure (U-form)?

A: Managers struggle to meet conflicting demands, as their organizational unit

is subject to hierarchies in several dimensions.
B: The manifold of informal relationships with outside organizations in the
firms network renders it hard for the top management to keep an overview
of the firms activities.
C: The organization fails to realize economies of scale in support activities,
such as R&D and marketing, because each department performs these
functions at a smaller scale.
D: It may be harder to use pay-for-performance for functional departments,
as it is difficult to quantify the contribution of each department to firm
profits.

Question 9:
Which statement about corporate culture is INCORRECT?

A: Organisational culture can be an effective supplement to formal control and

pay-for-performance in reducing agency problems.
B: A strong organisational culture is always beneficial to firm performance in
a changing environment, because it leads to uniformity in the way problems
are dealt with in the organization.
C: It is often very hard for management to make deliberate changes to
corporate culture.
D: Overcoming initial disconnects between different organizational cultures is
often a major managerial challenge when firms merge.

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Question 10:
Consider the following graph:

The Airbus A-380 is the largest jet airliner, which is currently produced. The graph
depicts the history of cumulative orders and deliveries realised by Airbus. The
company experienced a significant drop in the average production cost of the A-
380 between 2011 and 2015. Which explanation for this drop in costs do you
consider most likely to be true?

A: Airbus has been able to significantly increase its output per year, which has
led to economies of scale.
B: Airbus has pre-empted the entry of Boeing in this segment, which has
reduced the internal rivalry in the industry.
C: Airbus has gained more experience in building this type of plane, allowing
it to exploit learning economies.
D: The larger number of orders has improved Airbus bargaining power vis--
vis its customers, which has decreased buyer power.

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Question 11:
Consider the following figure:

The figure graphically depicts the choice of effort (e) problem for an agent in a
principal-agent problem. The dashed line is the agents cost of effort, the full line
is the payment scheme proposed by the principal. The scheme proposed here is
given as a 900$ fixed payment plus 20% of sales. Sales depend on effort linearly,
i.e. 1 unit of effort always increases sales by 50 units. Which statement about this
figure is INCORRECT?

A: The size of the fixed payment is irrelevant for the agents optimal effort
choice in this case.
B: The optimal effort for the agent is found at 50, because here the payment
scheme line is exactly parallel to the effort cost curve.
C: Without performance-based pay the agent exerts no more than 40 units of
effort.
D: The relationship between the effort exerted by the agent and the realized
sales is irrelevant to the optimal effort choice of the agent.

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Question 12:
Which statement about franchising is INCORRECT?

A: Franchising allows local franchisees to exploit economies of scale in

advertising, which are not available to the franchiser.
B: Franchisees with strong local knowledge will be more able to respond to
varying local demand conditions.
C: Franchising allows chains with limited capital to grow by attracting capital
from franchisees.
D: A major risk in franchising is that franchisees underinvest in quality and
harm the reputation of the franchiser.

Question 13:
Consider the following figure:

The figure presents a social network within an organization. Which statement in

relation to this figure is consistent with the structural view of power?

A: James is expected to be more powerful than Robert because he is connected

to more people within their own group B, which increases his influence.
B: Robert is expected to be less powerful than James, because he occupies a
structural hole in the network, i.e. between group C and B.
C: James is expected to be less powerful than Robert, because when he leaves
the organization, fewer social links have to be built to reconnect all
employees than when Robert leaves.
D: None of the answers above is correct.

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Question 14:
Which statement about organizational structures is CORRECT?

A: In self-managed teams one person is specifically employed to coordinate

and control the other team members.
B: Financial traders often work on an individual basis, because informal
information exchange among them is of crucial importance.
C: Most organizations eventually take on the form of a hierarchy of authority,
as firm growth renders coordination problems more complex.
D: Strategy consultants often work in self-managed teams, because this
facilitates pay-for-performance for their individual contributions to a
projects success.

Question 15:
In terms of coordination within firms, two broad approaches can be distinguished,
autonomy and lateral relations. Which features below are NOT associated with
strong autonomy and weak lateral relations?

A: Departments within the organization operate as profit centers with clear

goals in terms of performance.
B: A matrix organization structure.
C: Organizations can easily add or shed individual departments, which
facilitates mergers and acquisitions.
D: Each of the above is associated with strong autonomy and weak lateral
relations.

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Question 16:
The market shares of kite-surf brands are as follows:

Firm Market share

North 0.42
Naish 0.31
Cabrinha 0.18
Slingshot 0.05
F-One 0.03
Ozone 0.01

Suppose that in the market two mergers occur at the same point in time; Naish
and Cabrinha, as well as F-One and Ozone, merge. How large is the difference
between the pre-mergers and post-mergers Herfindahl-index for the kite-surf
market?

A: 0
B: 0.05
C: 0.08
D: 0.11

Question 17:
The collusion hypothesis argues that a positive relation between concentration and
profitability:

A: Reflects a natural tendency for efficient firms to be successful and become

dominant in their industries.
B: Reflects a process of reverse causation.
C: Is evidence of the abuse of market power designed to enhance profits.
D: Is evidence that an increase in market power is good for consumers.

Question 18:
What type of market conditions exists if existing structural barriers are effective
and the incumbents costs to deter entry are non-existent?

A: Blockaded entry.
B: Judo entry.
C: Deterred entry.
D: Accommodated entry.

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Question 19:
Consider the following figure.

Firms will exit the industry when the market price falls below __(i)__ and the
wedge between Px and Py becomes larger when the capital intensity of an industry
__(ii)__.

Which words need to be filled out at (i) and (ii)?

A: (i) Py, (ii) increases.

B: (i) Py, (ii) decreases.
C: (i) Px, (ii) increases.
D: (i) Px, (ii) decreases.

Question 20:
__(i)__ pricing, or setting the price sufficiently low to discourage entrants, is most
effective when entrants are __(ii)__ about the incumbents costs.

Which words need to be filled out at (i) and (ii)?

A: (i) Limit, (ii) sure.

B: (i) Limit, (ii) unsure.
C: (i) Predatory, (ii) sure.
D: (i) Predatory, (ii) unsure.

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Question 21:
Which of the following is a way that enhances the credibility of AXA Insurance
Groups commitment to enter the Brazilian market for life insurances?

A: By sending a press-release to the news media to announce their entry into

the life insurance market of Brazil.
B: By examining the characteristics of the Brazilian life insurance market and
their potential customers.
C: By issuing new shares on the stock market to finance the investment.
D: By signing a contract with a Brazilian intermediary to sell life insurance
products.

Question 22:
Consider the following figure:

If Firm 1 makes a soft commitment, the reaction curve __(i)__ shifts to the
__(ii)__.

Which words need to be filled out at (i) and (ii)?

A: (i) R1 , (ii) left.

B: (i) R1, (ii) right.
C: (i) R2, (ii) left.
D: (i) R2, (ii) right.

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Question 23:
Construction company Heijmans intends to enter the Cape Verdean market and
decides to enter the market through a joint venture with a local partner, Aalviar
Lima. The contract stipulates that both firms own a 50% stake in the joint venture.

The contract includes an option for Heijmans to buy the Cape Verdean partner
after 3 years at a cost of 400. Taking into account the uncertainty in the Cape
Verdean market, Heijmans estimates that there is a 65% probability of joint
venture success after 3 years. In that case, the market value of the joint venture
will equal 1400. However, there is a 35% probability of joint venture failure. In
that case, the market value of the joint venture is zero. The discount rate is 10%.

What is the value for the real option for Heijmans to buy the Cape Verdean
partner?

A: 140.4
B: 146.5
C: 152.6
D: 158.7

Question 24:
The following table summarizes information about smoked sausages in the
Netherlands (in euros per kilo):

Average consumer Average

Brand willingness-to-pay Price costs
Unox 7.50 6.20 5.40
Hema 7.30 6.10 5.70
Albert Heijn 5.90 4.80 3.70
Jumbo 5.50 4.90 3.80

Assume that each brand can change the prices of their smoked sausages, while
all other factors that can affect the demand for smoked sausage remain constant
over time. Which smoked sausage brand is MOST LIKELY to sell most sausages in
the long run?

A: Unox.
B: Hema.
C: Albert Heijn.
D: Jumbo.

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Question 25:
Consider the following figure:

If cost leader Firm F attains __(i)__ with the rest of the firms in the industry E,
then Firm F obtains a __(ii)__ price-cost margin than the rest of the firms in the
industry.

Which words need to be filled out at (i) and (ii)?

A: (i) consumer surplus parity, (ii) higher.

B: (i) consumer surplus parity, (ii) lower.
C: (i) producer surplus parity, (ii) higher.
D: (i) producer surplus parity, (ii) lower.

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Question 26:
If a product concerns a __(i)__ good, the quality of the good is known before
purchase and, consequently, opportunities for additional value creation by the firm
are much more likely to arise from __(ii)__.

Which words need to be filled out at (i) and (ii)?

A: (i) search, (ii) cost reductions.

B: (i) search, (ii) benefit enhancements.
C: (i) experience, (ii) cost reductions.
D: (i) experience, (ii) benefit enhancements.

Question 27:
Which of the following characteristics pertain to the capabilities of the firm?
Capabilities

A: are the firms capacity to deploy resources that have been purposely
integrated to achieve a desired end-state.
B: emerge over time through complex interactions among tangible and
intangible resources.
C: are often based on developing and exchanging information and
knowledge through the firms human capital.
D: All answers stated above are correct.

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Question 28:
Consider the figure below. Suppose that firm G has realised a product innovation
that leads to a fundamental shift in the competitive positions in the market. Firm
G is now able to realise a higher quality qG against lower cost CG relative to its
competitors. However, as time passes Gs competitors are also able to reduce
costs and increase quality.

Unit cost C

All other firms

C0
X
CG G
Y
qo qG Quality

When firm Gs competitive advantage is derived from __(i)__, then __(ii)__ which
causes a decline in Gs superior cost-quality position.

Which words need to be filled out at (i) and (ii)?

A: (i) social complexity, (ii) his competitors reach point X.

B: (i) social complexity, (ii) his competitors reach point Y.
C: (i) early mover advantages, (ii) firm G reaches point X.
D: (i) early mover advantages, (ii) firm G reaches point Y.

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Question 29:
Disruptive technologies refer to the class of technologies that

A: maintain and exploit the capabilities of a firm that are the basis of its
competitive advantage.
B: has a higher created value than their predecessors, through a
combination of a somewhat lower product value for consumers and a much
lower cost.
C: affect the capacity to absorb information and turn this information into
new knowledge.
D: All answers stated above are correct.

Question 30:
The innovators dilemma states that incumbents cannibalise their successful
business models by innovative investments, while failure to innovate may invite
entry. Which effect is most likely to dominate if the probability of innovation by
entrants is high?

A: Sunk cost effect.

B: Replacement effect.
C: Efficiency effect.
D: Productivity effect.

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Open question 1:

Food processors
Firms that potentially cooperate in a cartel have been subject to close scrutiny by
antitrust authorities all over the world. In case a cartel is identified, these
authorities enforce the law and generally impose fines to the firms that constitute
the cartel.

a: Explain why antitrust laws generally prohibit cartels.

Suppose that 2 firms operate in the market for food processors, Kenwood and
KitchenAid, and that both firms consider cooperation in a cartel to reduce the
continuous pressure to innovate. Consider the demand function for food
processors P=720-2Q where Q=q1+q2 and assume that the marginal cost are 60.

b: What is the profit for each firm under competition? Provide calculations.

c: What is the profit of each firm when they cooperate in a cartel? Provide
calculations.

d: Cartels are often instable. If Kenwood believes that KitchenAid will stick to
the cartel agreement, how much is the rise in profits for Kenwood by
defecting from the cartel agreement? Provide calculations.

Suppose that the probability of innovation by new entrants is low.

e: Provide and clearly explain an argument why Kenwood and KitchenAid

under the cartel agreement are likely to refrain from innovation.

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Open Question 2 (Only if you passed the in-class assignments!):

Fruit farming in England

Economists Oriana Bandiera, Iwan Barankay, and Imran Rasul visited a fruit farm
in England and worked with management to try to improve the firms fruit-packing
operation. The firm is contemplating alternative ways to pay the field workers at
the farm who pick fruits. Suppose field workers are paid a minimum wage of 2
per hour and they have quadratic costs of exerting effort, where c(e) represents
the cost of effort and e represents the number of hours in a day:

0 4
() = 1
( 4) > 4
2

a: Given the information provided, write down the objective function that the
field worker maximizes.

b: How many hours does each worker choose to work under this minimum
wage payment regime?

c: Suppose each additional hour of effort by the field worker generates 50 in

extra revenue to the firm. How many hours does the worker work per day
if the firm provides a 10-percent commission in addition to the minimum
hourly wage? Explain your answer by showing the calculation.

d: How much does the field worker make under this regime?

e: Suppose the firm wants to eliminate hourly wage and increase the
commission so that its employees work 11 hours a day. What should be the
new commission?

f: The farm employs supervisors to monitor field workers. The economists

found that the worker productivity was surprisingly highest when the worker
and supervisor had a social connection, as measured by shared country
of origin, living quarters, and similar duration of employment at the farm.
What can explain this odd pattern?

g: Suppose the firm links supervisor pay with worker productivity. Will the
economists find the same result under the new regime as in Part f? Explain
why or why not?

End of the exam

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