Study Questions for midterm

Study Questions for midterm - Study Questions for Exam 1 1...

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Study Questions for Exam 1 1. Generally, which firms captured more value: aluminum producers or Coke and Pepsi? Explain your answer by analyzing the competitive forces in the concentrate industry. In each industry, which of the competitive forces seem to be the most important in determining average profitability? 2. Briefly explain how economies of scale and network effects can create barriers to imitation of a firm’s competitive advantage? Give an example where you would expect that network effects would create a barrier to imitation, and explain how it would create a barrier to imitation. 3. In defending his company against allegations of anticompetitive practices, Bill Gates claimed that if someone developed an operating system for personal computers that was superior to MS Windows, it would quickly become the market leader. Do you agree? To answer this question, consider the following: If you developed Oranges, a new operating system that was easier to use than Windows, what challenges would you face in stealing market share from Windows? 4. In 1993, the market price for aluminum is about $1100/ton. The following data describe your costs for producing aluminum. These costs are based on you producing at your capacity of 20,000 tons/year. Electricity: $250/ton of aluminum Alumina: $400/ton of aluminum Other raw materials: $150/ton Maintenance: $40/ton Freight: $40/ton Labor: $70/ton SG&A: $30/ton How much would you produce this year? How would your production decision change if the market price fell to $800? Explain. How would it influence your decision if your $2 billion aluminum smelting plant could not be used for other kinds of production, and could not be sold to competitors due to over capacity in the market? Now, assume that you have not yet built this plant. Explain how you might make a decision about whether to build this plant, highlighting any assumptions that you are making. 5. Terrell’s TVs manufacturer TVs, which it then sells to the Best Buy here in Ithaca. Terrell’s pays $300 for the components, and $700 for labor to manufacture each TV. The components are commodities, widely available from a large number
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of suppliers. Labor is easily replaceable. Best Buy incurs costs of $100 per TV for advertising, rent and labor. It can sell the TV for $1200. a. What is the lowest price the TV manufacturer will accept?
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