FOUNDATIONS OF INTERNATIONAL STRATEGY
Practice Exam Questions & Answers
,1. Suppose two companies making medical equipment are developing a new highly
sophisticated instrument for brain surgeons. Dutch Healthcare has been working on a
high-frequency technology and American Healthcare on a low-frequency technology.
If they adopt the same technology, all kinds of components can be standardized and
profit margins for both will benefit. However, Dutch Healthcare has a preference for
high frequency, whereas American Healthcare has a preference for low frequency.
If both companies adopt high-frequency Dutch Healthcare gains 2 billion Euros and
American Healthcare gains 1 billion Euros.
If both companies adopt low-frequency Dutch Healthcare gains 1 billion Euros and
American Healthcare gains 2 billion Euros.
If Dutch Healthcare adopts low-frequency and American Healthcare high-frequency,
Dutch losses 1 billion Euros and American losses 1 billion Euros.
If Dutch Healthcare adopts high-frequency and American Healthcare low-frequency,
Dutch losses 1 billion Euros and American losses 1 billion Euros.
Which of the following statements is NOT true?
a. Both companies adopting high-frequency is a Nash Equilibrium.
b. Both companies adopting low-frequency is a Nash Equilibrium.
c. Dutch Healthcare adopting high-frequency and American Healthcare adoption
low-Frequency is not a Nash Equilibrium.
d. Both companies adopting high-frequency is not a Nash Equilibrium.
(d) is the only statement that is NOT true. If both companies adopt high-
frequency Dutch Healthcare gains 2 billion Euros and American
Healthcare gains 1 billion Euros, neither of them has an incentive to
deviate from this decision: for Dutch it would mean −1 billion instead of 2
billions, for American it would mean −1 billion instead of 1 billion. So the
strategy combination (high, high) is a Nash Equilibrium.
2. Evaluate the following statements:
Statement I. New firms quickly enter markets in which firms are earning abnormal
profits. Since more firms are now competing for the same number of buyers, market
prices tend to decrease, thereby decreasing firm profits.
Statement II. New firms quickly enter markets in which firms are earning abnormal
profits. As a consequence of increased level of competition for skilled personnel,
labor costs tend to increase, thereby decreasing firm profits.
a. Statement I is false and Statement II is true.
b. Statement I is true and Statement II is false.
c. Both statements I and II are true.
d. Both statements I and II are false.
(c) is correct. Statement I is true because when more firms compete for the
same number of buyers prices decrease and therefore profits decrease.
Statement II is true because when more firms compete for skilled personnel
this results in higher salaries (higher costs) and therefore profits decrease.
, 3. Which one of the following statements about Agency theory is true?
a. The existence of the market for corporate control may prevent managers from
engaging in excessive on-the-job consumption.
b. Empirical work on corporate governance suggests that manager-controlled
companies are significantly more profitable than owner-controlled companies
are.
c. A relationship between the production manager and the sales managers
working together on a new investment project can be characterized as agency
relationship.
d. Individuals are assumed to be boundedly rational in Agency Theory.
(a) is the only statement that is true. "Competition between management
teams in the market for corporate control increases the pressure on managers
to perform well." diminishing excessive on-the-job consumption.
4. On 18 September 2015, the US Environmental Protection Agency (EPA) issued a
notice of violation of the Clean Air Act to the German automaker Volkswagen (VW),
after it was found that the US subsidiary had intentionally programmed its diesel
engines to activate certain emissions controls only during laboratory emissions
testing. The programming caused the vehicles’ nitrogen oxide (Nox) output to meet
US standards during regulatory testing, but emit up to 40 times more Nox in real-
world driving. This recent scandal can be analyzed using Agency Theory. According
to Agency Theory, several organizational mechanisms could have prevented the
recent VW emission scandal. Which of the following is NOT a solution put forth by
Agency Theory to solve agency problems?
a. Additional layer of hierarchy and complex reporting systems.
b. Increased monitoring by having a ‘dual CEO’, that is to say: by having the
same person as the CEO and as the chairman of the board of directors.
c. Rewarding the agents with stock options.
d. Monitoring in the form of having expatriates in key positions in the foreign
subsidiary.
(a) is correct. This solution is not in line with Agency Theory. Having the same
person as the CEO and as the chairman does not enhances monitoring.
5. Which of the following is NOT an assumption of the Behavioral Theory of the Firm:
a. Changes in the firm occur only when the aspiration levels of stakeholders are
not met.
b. An employee of a firm can have more than one objective.
c. An individual is self-interested and may behave opportunistically.
d. Stakeholders in the firm have different information sets.
(a) is correct. Self-interest and opportunistic behavior are assumptions of
Transaction Cost Economics not of the BTOF. Remember the discussion we
had about Oliver Williamson and Herbert Simon.
Practice Exam Questions & Answers
,1. Suppose two companies making medical equipment are developing a new highly
sophisticated instrument for brain surgeons. Dutch Healthcare has been working on a
high-frequency technology and American Healthcare on a low-frequency technology.
If they adopt the same technology, all kinds of components can be standardized and
profit margins for both will benefit. However, Dutch Healthcare has a preference for
high frequency, whereas American Healthcare has a preference for low frequency.
If both companies adopt high-frequency Dutch Healthcare gains 2 billion Euros and
American Healthcare gains 1 billion Euros.
If both companies adopt low-frequency Dutch Healthcare gains 1 billion Euros and
American Healthcare gains 2 billion Euros.
If Dutch Healthcare adopts low-frequency and American Healthcare high-frequency,
Dutch losses 1 billion Euros and American losses 1 billion Euros.
If Dutch Healthcare adopts high-frequency and American Healthcare low-frequency,
Dutch losses 1 billion Euros and American losses 1 billion Euros.
Which of the following statements is NOT true?
a. Both companies adopting high-frequency is a Nash Equilibrium.
b. Both companies adopting low-frequency is a Nash Equilibrium.
c. Dutch Healthcare adopting high-frequency and American Healthcare adoption
low-Frequency is not a Nash Equilibrium.
d. Both companies adopting high-frequency is not a Nash Equilibrium.
(d) is the only statement that is NOT true. If both companies adopt high-
frequency Dutch Healthcare gains 2 billion Euros and American
Healthcare gains 1 billion Euros, neither of them has an incentive to
deviate from this decision: for Dutch it would mean −1 billion instead of 2
billions, for American it would mean −1 billion instead of 1 billion. So the
strategy combination (high, high) is a Nash Equilibrium.
2. Evaluate the following statements:
Statement I. New firms quickly enter markets in which firms are earning abnormal
profits. Since more firms are now competing for the same number of buyers, market
prices tend to decrease, thereby decreasing firm profits.
Statement II. New firms quickly enter markets in which firms are earning abnormal
profits. As a consequence of increased level of competition for skilled personnel,
labor costs tend to increase, thereby decreasing firm profits.
a. Statement I is false and Statement II is true.
b. Statement I is true and Statement II is false.
c. Both statements I and II are true.
d. Both statements I and II are false.
(c) is correct. Statement I is true because when more firms compete for the
same number of buyers prices decrease and therefore profits decrease.
Statement II is true because when more firms compete for skilled personnel
this results in higher salaries (higher costs) and therefore profits decrease.
, 3. Which one of the following statements about Agency theory is true?
a. The existence of the market for corporate control may prevent managers from
engaging in excessive on-the-job consumption.
b. Empirical work on corporate governance suggests that manager-controlled
companies are significantly more profitable than owner-controlled companies
are.
c. A relationship between the production manager and the sales managers
working together on a new investment project can be characterized as agency
relationship.
d. Individuals are assumed to be boundedly rational in Agency Theory.
(a) is the only statement that is true. "Competition between management
teams in the market for corporate control increases the pressure on managers
to perform well." diminishing excessive on-the-job consumption.
4. On 18 September 2015, the US Environmental Protection Agency (EPA) issued a
notice of violation of the Clean Air Act to the German automaker Volkswagen (VW),
after it was found that the US subsidiary had intentionally programmed its diesel
engines to activate certain emissions controls only during laboratory emissions
testing. The programming caused the vehicles’ nitrogen oxide (Nox) output to meet
US standards during regulatory testing, but emit up to 40 times more Nox in real-
world driving. This recent scandal can be analyzed using Agency Theory. According
to Agency Theory, several organizational mechanisms could have prevented the
recent VW emission scandal. Which of the following is NOT a solution put forth by
Agency Theory to solve agency problems?
a. Additional layer of hierarchy and complex reporting systems.
b. Increased monitoring by having a ‘dual CEO’, that is to say: by having the
same person as the CEO and as the chairman of the board of directors.
c. Rewarding the agents with stock options.
d. Monitoring in the form of having expatriates in key positions in the foreign
subsidiary.
(a) is correct. This solution is not in line with Agency Theory. Having the same
person as the CEO and as the chairman does not enhances monitoring.
5. Which of the following is NOT an assumption of the Behavioral Theory of the Firm:
a. Changes in the firm occur only when the aspiration levels of stakeholders are
not met.
b. An employee of a firm can have more than one objective.
c. An individual is self-interested and may behave opportunistically.
d. Stakeholders in the firm have different information sets.
(a) is correct. Self-interest and opportunistic behavior are assumptions of
Transaction Cost Economics not of the BTOF. Remember the discussion we
had about Oliver Williamson and Herbert Simon.
