IIA IIA Certifications IIA-CIA-PART3 Questions & Answers

• Question 851:

  Patents are granted to encourage firms to invest in the research and development of new products. Patents are an example of

  A. Vertical integration.

  B. Market concentration.

  C. Entry barriers.

  D. Collusion.

  Correct Answer: C

  Entry barriers exist in all market structures other than perfect competition. The fewer the firms in an industry, the greater the barriers tend to be. Entry barriers include the existence of substantial economies of scale (low unit costs can be achieved only by large producers). They also include barriers created by existing firms. For example, large advertising expenditures may be necessary to compete. Control of raw materials or technology is another barrier. Consequently, patents held by existing firms may serve as an entry barrier because they prevent potential competitors from using certain technology. Patents are rights granted by the federal government to inventors to allow them the exclusive use of their inventions for a specific.

• Question 852:

  Monopolistic competition is characterized by

  A. A relatively large group of sellers who produce differentiated products.

  B. A relatively small group of sellers who produce differentiated products.

  C. A monopolistic market where the consumer is persuaded that there is perfect competition.

  D. A relatively large group of sellers who produce a homogeneous product.

  Correct Answer: A

  Monopolistic competition is characterized by a large number of firms offering differentiated products. Entry into the market is relatively easy, firms have some price control, and substantial non price competition exists, such as advertising.

• Question 853:

  According to a model developed by Arthur D Little, a firm with a better-than-average chance to improve its competitive position is in a

  A. Favorable position.

  B. Dominant position.

  C. Tenable position.

  D. Weak position.

  Correct Answer: A

  A firm in a favorable position has strengths that it can exploit. Thus, it has better-than average chance to improve its position but is not as well placed as a dominant or strong firm.

• Question 854:

  Firm X is considering entry into an industry. To analyze competition within the industry, Firm X evaluated its strategic groups. According to Michael E. Porter,

  A. The members of a strategic group pursue different competitive strategies.

  B. Intergroup competition is increased by market interdependence.

  C. Low barriers to mobility among strategic groups promote profitability.

  D. High substitutability of products reduces competition among groups.

  Correct Answer: B

  Intergroup competition is increased by market interdependence, which is the extent to which groups pursue the same customers. The greater the interdependence, the stronger the competition among groups.

• Question 855:

  According to a model suggested by Arthur D Little, a consulting organization, market share will tend to

  A. Increase after gains in mind share but not heart share.

  B. Decrease after losses in heart share but not mind share.

  C. Increase after gains in mind share and heart share.

  D. Not be affected by changes in mind share and heart share.

  Correct Answer: C

  Arthur D Little suggests a three-factor model for assessing a competitor's current and future market share. Market share is the share of the target market. Mind share is the percentage of customers who name the firm as the first that comes to mind" in the industry. Heart share is the percentage of customers who name the firm as the one from which they "would prefer to buy." A competitor that improves its mind share and heart share will ultimately increase its market share and profits.

• Question 856:

  According to Bruce Henderson, competitive equilibrium is most likely to be stable when: A. One competitor has twice the market share of a second competitor.

  B. Competitors are almost identical.

  C. One major factor is the critical factor.

  D. The product is undifferentiated.

  Correct Answer: A

  Bruce Henderson has analyzed firms' reaction patterns when confronted with competitive attacks. A key to the analysis is competitive equilibrium. When one competitor hasapproximately twice the market share of a second competitor, equilibrium exists. The costs of gaining market share outweigh the benefits to either party.

• Question 857:

  A corporation produces uniforms that it sells and rents to businesses. The corporation recently acquired a textile mill that produces synthetic cloth. This acquisition is an example of:

  A. Horizontal integration Forward integration

  B. Horizontal integration Backward integration

  C. Vertical integration Forward integration

  D. Vertical integration Backward integration

  Correct Answer: D

  The degree of backward and forward vertical integration along the value chain varies with the industry. The corporation acquired one of its suppliers, which is on a different level of the value chain. Thus, the combination involved vertical integration. Moreover, the acquisition of a supplier is characteristic of backward integration.

• Question 858:

  The retail petroleum industry consists of a few large firms that sell a standardized product.Which of the following best describes this industry?

  A. Monopoly.

  B. Oligopoly.

  C. Monopolistic competition.

  D. Pure competition.

  Correct Answer: B

  An oligopoly consists of a few large firms. If products are standardized, competition may be based solely on price. If products are partially differentiated, each firm may attempt to lead the industry regarding a given attribute, e.g., price, quality, service, or features. The retail petroleum industry is dominated by a small number of firms that control a vast majority of the market. Furthermore, it is an example of an industry that sells a standardized product, with competition based primarily on price.

• Question 859:

  According to Arthur D Little, a competitor firm that can act independently and sustain itslong-termstatus irrespective of the behavior of others holds which of the following competitive positions?

  A. A dominant position.

  B. A strong position.

  C. A favorable position.

  D. A tenable position.

  Correct Answer: B

  Evaluating a competitor's market position is necessary to judge how and whether to challenge it. A firm in a strong competitive position can act independently and sustain its long-term status irrespective of the behavior of others.

• Question 860:

  A strategic group analysis does all but which of the following?

  A. Determines what mobility barriers exist.

  B. Forecasts future group actions and trends.

  C. Considers how the firm compares with the competitors within the chosen strategic group.

  D. Predicts reaction patterns to events such as competitive attacks.

  Correct Answer: C

  An overall industry analysis, not a strategic group analysis, considers how the firm compares with the competitors within the chosen strategic group, e.g., on the basis of its scale of operations, the intensity of group rivalry, and the differences in the ability of the group members to implement their strategies.