Chapter 7 Excercise Questions
ISBN-13 : 978-0-618-9886-4
1) Does a firm make use of comparative advantage in
allocating its resources? What factors give a firm a comparative
2) Under what conditions are the two strategies of
low cost and high quality a trade-off? Under what conditions would
the efficient frontier not be an appropriate picture of the two
3) What is the best practices frontier? How does this
relate to competitive advantage?
4) Why is growth a primary strategy of almost every
firm? Would it ever make sense to “stand pat”. Use the economic
profit equation to provide an answer.
5) Jack Welch is heralded as a great leader of
General Electric (GE). His strategy to acquire companies in
different lines of business based on the requirement that each
business in GE was to become the #1 or #2 competitor in the
indistry is touted as being particulary brillant. While very
successful, could there have been a fundemental flaw in Welch’s
7) How is national strategy different firm firm
strategy? How are the two the same?
8) Use what you know about Starbucks and apply the
VRIO/VRIN approach to evaluate Starbucks, as you know it. Use the
five forces model to evaluate Starbucks. Is the five forces model
different from the VRIO model? Explain.
10)Texas Instruments are once announced a price for
random-access memories that wouldn’t be available until two years
after the announcement. A few days later, Bowmar announced that it
would produce this product and sell it a lower price than Texas
Instruments. A few weeks later, Motorols said it, too, would
produce this product and sell it below the Bowmar price. A few
weeks after this, Texas Instrments Announced a price that was
one-half of Motorola’s. The other two firms announced that, after
reconsidering their decision, they would not produce the product.
What do you think was Texas Instruments reason for announcing the
price of a product two years before it was actually for sale?
11) Explain how a strategy of increasing expenditures
on advertising could deter market entry.
12) Coke and Pepsi have sustained their market
dominance for nearly a century. General Motors and Ford have lost
their dominance. What is the difference between the two cases.
13) Currently, a fast-food firm has a monopoly in the
university student union. The monopoly pays the university $75,000
a year in order to maintain it. The firm earns an economic profit
of $290,000 per year. Another fast food firm wants to enter the
market and offer its fare to students. The manager of the first
firm calls the university president asking her to maintain the
first firms monopoly. How much would the first firm be willing to
pay to keep the monopoly?
14) A first mover is dominating a market, with
revenues of $40 million annually. The average total cost of the
firm is #02 million, of which $19 million is fixed. How can the
first move keep others from entering the market?
15) When would limit pricing make sense? What price
should serve as the limit?
17) Explain the differences between perfect
competition, monopoly, monopolistic competitoin, and oligopoly.
18) Why would a firm want to deter entry? How much
would a monopolist spend to keep other firms out of its market?
19) Explain why predatory pricing hardly works in the