quiz 3

Restrictions imposed by the government, such as export quotas on certain products, are a part of the _______ environment of the PESTEL framework.

political Explanation: The political environment describes the processes and actions of government bodies that can influence the decisions and behavior of firms. Governments, for example, can affect firm performance by exerting political pressure on companies.

Aura Software Inc. has been operating in the country of New Fernsland for almost a decade. The nation is currently experiencing an economic downturn. Which of the following is the most likely benefit of this economic condition for Aura Software Inc.?

Aura Software Inc. will have better access to highly skilled human capital at a lower cost. explanation: Aura Software Inc. will most likely have better access to highly skilled human capital at a lower cost. In economic downturns, unemployment rises. As more people search for employment, skilled human capital is abundant and wages usually fall. A period of high unemployment could be a good time for firms to expand or upgrade their human capital base.

Which of the following companies would most likely benefit from an economic recession?

Fast Chow Inc., which specializes in selling low-cost Asian food Explanation: For customers, expenditures on luxury products are often the first to be cut during recessionary periods. As a result, companies that specialize in low-cost goods often benefit during recessions.

_____ is best described as the amount that savers are paid for use of their money and the amount that borrowers pay for that use.

Interest Rate Explanation: A key macroeconomic variable for managers to track is interest rates—the amount that savers are paid for use of their money and the amount that borrowers pay for that use.

Spark Electronics Inc., One Digital Inc., and Esco Products Corp. are all companies that manufacture and sell consumer electronics. They procure their component parts from the same set of suppliers in China and sell the final product to customers with similar needs. Thus, the three companies together are a part of a(n)

industry explanation: The three companies together are a part of an industry. An industry is a group of (incumbent) companies that face more or less the same set of suppliers and buyers. Firms competing in the same industry tend to offer similar products or services to meet specific customer needs.

Which of the following statements about the five forces in the U.S. airline industry is true?

Taken together, the competitive forces are quite unfavorable for generating a profit potential in the airline industry. explanation: As discussed in Strategy Highlight 3.2, taken together, the competitive forces are quite unfavorable for generating a profit potential in the airline industry: low entry barriers, high supplier power, high buyer power combined with low customer switching costs, and the availability of low-cost substitutes. This type of hostile environment leads to intense rivalry among existing airlines and low overall industry profit potential.

Incumbent firms can benefit from several important sources of entry barriers. Economies of scale are one such source. Which of the following is an implication of economies of scale for incumbent firms?

They can demand better terms from their suppliers. explanation: Economies of scale are cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers.

_____ describe the positive externality that one user of a product or service has on the value of that product or service for other users.

network effects explanation: Network effects describe the positive effect (externality) that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users.

The relative bargaining power of suppliers is most likely low when

incumbent firms face low switching costs when changing suppliers. explanation: The relative bargaining power of suppliers is most likely low when incumbent firms face low switching costs when changing suppliers.

Red Think Inc. is a company that supplies microprocessors to Osion Inc., a computer hardware company.
When Osion Inc. demands lower prices for the microprocessors, Red Think Inc. makes it clear that it would profit more from launching its own brand of laptops and desktops in the market. Fearing the competition it would then face from Red Think Inc., Osion Inc. decides to buy the microprocessors at the quoted price itself. In this scenario, Red Think Inc., as a supplier, has exercised its bargaining power by threatening to

forward integrate explanation: In this scenario, Red Think Inc. as a supplier has exercised its bargaining power by threatening to forward integrate. The relative bargaining power of suppliers is high when they can credibly threaten to forward integrate into the industry.

Which of the following firms most likely has the lowest bargaining power as a buyer?

a cell phone company that requires highly customized software for its phones explanation: The firm that most likely has the lowest bargaining power as a buyer is a cell phone company that requires highly customized software for its phones. The power of buyers is high when the industry's products are standardized or undifferentiated commodities. When suppliers offer products that are differentiated, the bargaining power of buyers reduces.

Which of the following is a feature of a fragmented industry?

A fragmented industry consists of many small firms. explanation: A fragmented industry consists of many small firms and tends to generate low profitability.

Owners of coffee plantations in the country of Matterstein grow their own coffee beans and supply them to various stores and restaurants all over the country. There are many plantation owners supplying to a huge number of companies, and they are typically unable to differentiate their products from each other. They also do not have the power to fix their own prices in the industry. In addition, these suppliers can only achieve competitive parity and not a competitive advantage. Thus, the coffee bean industry in Matterstein best illustrates a(n)___ structure.

perfectly competitive explanation: The coffee bean industry in Matterstein best illustrates a perfectly competitive industry structure. A perfectly competitive industry is characterized as fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices.

In the restaurant industry, a large number of restaurants cater to the similar food-related needs of customers.
However, each restaurant makes its product unique by offering a different cuisine, a different ambience, or different services like home delivery and organic ingredients. This differentiation allows each restaurant to set its own prices. Thus, the restaurant industry best illustrates a(n)

monopolistically competitive structure. explanation: The restaurant industry best illustrates a monopolistically competitive structure. A monopolistically competitive industry is characterized by many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers.

Which of the following statements is true of an oligopoly?

An oligopoly is often analyzed using game theory. explanation: An oligopoly is often analyzed using game theory, which attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated.

Which of the following real-world examples best supports the statement that strategic commitments to a specific industry may be the result of more political than economic considerations?

Airbus was created by a number of European governments through direct subsidies in order to provide a countervailing power to Boeing. explanation: In some cases, strategic commitments to a specific industry may be the result of more political than economic considerations. Airbus, for example, was created by a number of European governments through direct subsidies in order to provide a countervailing power to Boeing.

How do complements affect a primary product or service?

They increase the demand for the primary product. explanation: Complements increase the demand for a primary product, thereby enhancing the profit potential for the industry and the firm.

A consolidated industry turns into a fragmented industry when

technological advances lead to industry convergence. explanation: Consolidated industry structures may break up and become more fragmented. This generally happens when there are external shocks to an industry such as deregulation, new legislation, technological innovation, or globalization. Industry convergence is often brought on by technological advances.

Strategic group mapping establishes that

competitive rivalry is strongest between firms that are within the same strategic group. explanation: Competitive rivalry is strongest between firms that are within the same strategic group. The closer firms are on the strategic-group map, the more directly and intensely they are in competition with one another.

Which of the following statements best supports the fact that even during a period of low demand in the U.S. automotive industry, excess capacity remained?

GM and Chrysler, despite their bankruptcy, restructured instead of exiting the industry. explanation: As discussed in Chapter Case 3, when demand is slowing, excess capacity tends to develop in the automotive industry, and the incumbent car companies begin to initiate a cut-throat price competition to move inventory. Although both GM and Chrysler went into bankruptcy, neither exited the industry but rather restructured, causing excess capacity to remain in the industry.

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Restrictions imposed by the government, such as export quotas on certain products, are a part of the _______ environment of the PESTEL framework.

political Explanation: The political environment describes the processes and actions of government bodies that can influence the decisions and behavior of firms. Governments, for example, can affect firm performance by exerting political pressure on companies.

Aura Software Inc. has been operating in the country of New Fernsland for almost a decade. The nation is currently experiencing an economic downturn. Which of the following is the most likely benefit of this economic condition for Aura Software Inc.?

Aura Software Inc. will have better access to highly skilled human capital at a lower cost. explanation: Aura Software Inc. will most likely have better access to highly skilled human capital at a lower cost. In economic downturns, unemployment rises. As more people search for employment, skilled human capital is abundant and wages usually fall. A period of high unemployment could be a good time for firms to expand or upgrade their human capital base.

Which of the following companies would most likely benefit from an economic recession?

Fast Chow Inc., which specializes in selling low-cost Asian food Explanation: For customers, expenditures on luxury products are often the first to be cut during recessionary periods. As a result, companies that specialize in low-cost goods often benefit during recessions.

_____ is best described as the amount that savers are paid for use of their money and the amount that borrowers pay for that use.

Interest Rate Explanation: A key macroeconomic variable for managers to track is interest rates—the amount that savers are paid for use of their money and the amount that borrowers pay for that use.

Spark Electronics Inc., One Digital Inc., and Esco Products Corp. are all companies that manufacture and sell consumer electronics. They procure their component parts from the same set of suppliers in China and sell the final product to customers with similar needs. Thus, the three companies together are a part of a(n)

industry explanation: The three companies together are a part of an industry. An industry is a group of (incumbent) companies that face more or less the same set of suppliers and buyers. Firms competing in the same industry tend to offer similar products or services to meet specific customer needs.

Which of the following statements about the five forces in the U.S. airline industry is true?

Taken together, the competitive forces are quite unfavorable for generating a profit potential in the airline industry. explanation: As discussed in Strategy Highlight 3.2, taken together, the competitive forces are quite unfavorable for generating a profit potential in the airline industry: low entry barriers, high supplier power, high buyer power combined with low customer switching costs, and the availability of low-cost substitutes. This type of hostile environment leads to intense rivalry among existing airlines and low overall industry profit potential.

Incumbent firms can benefit from several important sources of entry barriers. Economies of scale are one such source. Which of the following is an implication of economies of scale for incumbent firms?

They can demand better terms from their suppliers. explanation: Economies of scale are cost advantages that accrue for firms with larger output because they can spread fixed costs over more units, can employ technology more efficiently, can benefit from a more specialized division of labor, and can demand better terms from their suppliers.

_____ describe the positive externality that one user of a product or service has on the value of that product or service for other users.

network effects explanation: Network effects describe the positive effect (externality) that one user of a product or service has on the value of that product or service for other users. When network effects are present, the value of the product or service increases with the number of users.

The relative bargaining power of suppliers is most likely low when

incumbent firms face low switching costs when changing suppliers. explanation: The relative bargaining power of suppliers is most likely low when incumbent firms face low switching costs when changing suppliers.

Red Think Inc. is a company that supplies microprocessors to Osion Inc., a computer hardware company.
When Osion Inc. demands lower prices for the microprocessors, Red Think Inc. makes it clear that it would profit more from launching its own brand of laptops and desktops in the market. Fearing the competition it would then face from Red Think Inc., Osion Inc. decides to buy the microprocessors at the quoted price itself. In this scenario, Red Think Inc., as a supplier, has exercised its bargaining power by threatening to

forward integrate explanation: In this scenario, Red Think Inc. as a supplier has exercised its bargaining power by threatening to forward integrate. The relative bargaining power of suppliers is high when they can credibly threaten to forward integrate into the industry.

Which of the following firms most likely has the lowest bargaining power as a buyer?

a cell phone company that requires highly customized software for its phones explanation: The firm that most likely has the lowest bargaining power as a buyer is a cell phone company that requires highly customized software for its phones. The power of buyers is high when the industry’s products are standardized or undifferentiated commodities. When suppliers offer products that are differentiated, the bargaining power of buyers reduces.

Which of the following is a feature of a fragmented industry?

A fragmented industry consists of many small firms. explanation: A fragmented industry consists of many small firms and tends to generate low profitability.

Owners of coffee plantations in the country of Matterstein grow their own coffee beans and supply them to various stores and restaurants all over the country. There are many plantation owners supplying to a huge number of companies, and they are typically unable to differentiate their products from each other. They also do not have the power to fix their own prices in the industry. In addition, these suppliers can only achieve competitive parity and not a competitive advantage. Thus, the coffee bean industry in Matterstein best illustrates a(n)___ structure.

perfectly competitive explanation: The coffee bean industry in Matterstein best illustrates a perfectly competitive industry structure. A perfectly competitive industry is characterized as fragmented and has many small firms, a commodity product, ease of entry, and little or no ability for each individual firm to raise its prices.

In the restaurant industry, a large number of restaurants cater to the similar food-related needs of customers.
However, each restaurant makes its product unique by offering a different cuisine, a different ambience, or different services like home delivery and organic ingredients. This differentiation allows each restaurant to set its own prices. Thus, the restaurant industry best illustrates a(n)

monopolistically competitive structure. explanation: The restaurant industry best illustrates a monopolistically competitive structure. A monopolistically competitive industry is characterized by many firms, a differentiated product, some obstacles to entry, and the ability to raise prices for a relatively unique product while retaining customers.

Which of the following statements is true of an oligopoly?

An oligopoly is often analyzed using game theory. explanation: An oligopoly is often analyzed using game theory, which attempts to predict strategic behaviors by assuming that the moves and reactions of competitors can be anticipated.

Which of the following real-world examples best supports the statement that strategic commitments to a specific industry may be the result of more political than economic considerations?

Airbus was created by a number of European governments through direct subsidies in order to provide a countervailing power to Boeing. explanation: In some cases, strategic commitments to a specific industry may be the result of more political than economic considerations. Airbus, for example, was created by a number of European governments through direct subsidies in order to provide a countervailing power to Boeing.

How do complements affect a primary product or service?

They increase the demand for the primary product. explanation: Complements increase the demand for a primary product, thereby enhancing the profit potential for the industry and the firm.

A consolidated industry turns into a fragmented industry when

technological advances lead to industry convergence. explanation: Consolidated industry structures may break up and become more fragmented. This generally happens when there are external shocks to an industry such as deregulation, new legislation, technological innovation, or globalization. Industry convergence is often brought on by technological advances.

Strategic group mapping establishes that

competitive rivalry is strongest between firms that are within the same strategic group. explanation: Competitive rivalry is strongest between firms that are within the same strategic group. The closer firms are on the strategic-group map, the more directly and intensely they are in competition with one another.

Which of the following statements best supports the fact that even during a period of low demand in the U.S. automotive industry, excess capacity remained?

GM and Chrysler, despite their bankruptcy, restructured instead of exiting the industry. explanation: As discussed in Chapter Case 3, when demand is slowing, excess capacity tends to develop in the automotive industry, and the incumbent car companies begin to initiate a cut-throat price competition to move inventory. Although both GM and Chrysler went into bankruptcy, neither exited the industry but rather restructured, causing excess capacity to remain in the industry.

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