DISCLAIMER: This sample is to give you an idea about the types of questions you may encounter.
It is not representative of the test length, composition of topics, or the number/proportion of
questions in each format.
Short Essay Questions
a. Water is more critical to sustaining human life than are diamonds. Why then do firms that
provide water to customers generally earn lower economic profits than firms that provide
Rivalry is higher among firms that provide water, because:
there are more firms that provide water than there are firms that provide diamonds,
water is not a differentiated product;
The main rival, tap water, is available for free (or almost free).
b. What would you recommend to a firm that sells water if they want to achieve competitive
They should acquire or develop a resource that other firms do not have access to; such as a patent
on fortified water, a new secret flavor, or a new process to enhance the flavor or health benefits of
water. Then they can use this resource to build a differentiation strategy, and charge a premium.
Apply a five forces analysis to the industry as described below:
The pharmaceutical industry consists of firms that develop, patents, and distribute drugs.
Although there are not significant production economies in this industry, there are important
economies in research and development. Product differentiation exists as well because firms often
sell branded products. Firms compete in research and development. However, once a product is
developed and patented, competition is significantly reduced. Recently, the increased availability
of generic, non-branded drugs has threatened the profitability of some drug lines. Once an
effective drug is developed, there are usually few, if any, alternatives to that drug. Drugs are
manufactured from commodity chemicals usually available to numerous suppliers. Major
customers include doctors and patients. Recently, the increased availability of generic, non-
branded drugs has threatened the profitability of some drug lines. Once an effective drug is
developed, there are usually few, if any, alternatives to that drug. Drugs are manufactured from
commodity chemicals available from numerous suppliers. Major customers include doctors and
patients. Recently, increased costs have led the federal government and insurance companies to
pressure drug companies to reduce their prices.
The buyer power in this industry is: Low/High/
Moderate (circle one). Why?
There are few alternatives to an effective drug, reducing buyer power. But the pressure
from large buyers, federal government and insurance companies, can influence pricing.