Deck 11: Decisions About Vertical Integration and Distribution

Question 1

If Slick Shades, a sunglasses manufacturer, contracts with an outside supplier to manufacture the lenses for the sunglasses, this is an example of _ _.

A)outsourcing
B)divestiture
C)forward integration
D)backward integration

Answer 1

A

Question 2

If Happy Avocados, a ready- made guacamole manufacturer, purchases an avocado farm, this is an example of .

A)divestiture
B)forward integration
C)backward integration
D)outsourcing

Answer 2

C

Question 3

Fast Prints has a contract with local couriers to deliver their products to customers located throughout the city and it cost Fast Prints $5,000 in legal fees to establish the contracts. Fast Prints charges $25 for each set of 500 copies delivered in the city. What are Fast Prints' transaction costs?

A)$5,000
B)$25
C)$5,025
D)$4,975

Answer 3

A

Question 4

If Big Dogs, a hot dog producer, purchases delivery trucks to deliver their hot dogs to local grocery stores, this is an example of .

A)forward integration
B)backward integration
C)outsourcing
D)divestiture

Question 5

If Good Smells, a perfume manufacturer, purchases several local retail shops to sell their perfumes, this is an example of .

A)forward integration
B)outsourcing
C)divestiture
D)backward integration

Question 6

Big Oranges produces orange juice. To make its juice, Big Oranges harvests oranges from its own farms in addition to purchasing oranges from other locally owned farms. Big Oranges is _.

A)partially vertically integrated
B)partially forward integrated
C)completely vertically integrated
D)completely forward integrated

Question 7

If Happy Cows, a dairy manufacturer, sells its sour cream division, this is an example of .

A)divestiture
B)outsourcing
C)backward integration
D)forward integration

Question 8

If View Your World, a high- end window manufacturer, has contracted with a supplier to produce their glass, this is an example of _ .

A)forward integration
B)a market transaction
C)outsourcing
D)backward integration

Question 9

If a firm requires a standardized raw material to produce its output, is often the least expensive option to purchase the raw materials.

A)divestiture
B)the spot market
C)backward integration
D)forward integration

Question 10

The bottom of the supply chain contains and is referred to as the end of the chain.

A)finished goods; downstream
B)finished goods; upstream
C)raw materials; upstream
D)raw materials; downstream

Question 11

If View Your World, a high- end window manufacturer, has contracted with local carpenters to install their windows in residential homes, this is an example of .

A)outsourcing
B)a market transaction
C)forward integration
D)backward integration

Question 12

If Big Scoops, a local ice cream parlor, purchases milk from a grocery store to make their ice cream, this is an example of .

A)outsourcing
B)using a spot market
C)backward integration
D)forward integration

Question 13

If High Tech, a computer manufacturer, has a contract with Big Chips, a computer chip manufacturer, to produce the computer chips needed for High Tech's computers, this is an example of _.

A)forward integration
B)outsourcing
C)backward integration
D)divestiture

Question 14

If Good Smells, a perfume manufacturer, sells its home fragrance line, this is an example of .

A)divestiture
B)forward integration
C)backward integration
D)outsourcing

Question 15

If Slick Shades, a sunglasses manufacturer, purchases several local retail shops to sell their sunglasses, this is an example of .

A)backward integration
B)outsourcing
C)divestiture
D)forward integration

Question 16

If Happy Avocados, a ready- made guacamole manufacturer, contracts with an outside supplier to produce avocados, this is an example of _.

A)backward integration
B)outsourcing
C)forward integration
D)divestiture

Question 17

If Fast Prints has a contract with local couriers to deliver their products to customers located throughout the city, this is an example of .

A)forward integration
B)a market transaction
C)outsourcing
D)backward integration

Question 18

If Bella's Pizza, a local pizzeria, purchases canned tomatoes from a grocery store to make their pizza sauce, this is an example of .

A)forward integration
B)backward integration
C)outsourcing
D)using a spot market

Question 19

If Happy Cows, a milk producer, purchases a dairy farm, this is an example of .

A)outsourcing
B)forward integration
C)backward integration
D)divestiture

Question 20

The top of the supply chain contains and is referred to as the end of the chain.

A)finished goods; upstream
B)finished goods; downstream
C)raw materials; downstream
D)raw materials; upstream

Question 21

Vertical integration can lower firms' costs through each of the following except which one?

A)reducing information costs
B)increasing the required areas of managerial expertise
C)creating synergies
D)increasing flexibility by eliminating a contract with an input supplier

Question 22

A tax inversion merger _ legally reduce the combined firms' taxes and these mergers .

A)cannot; are only vertical mergers
B)can; can be horizontal or vertical mergers
C)can; are only horizontal mergers
D)cannot; can be horizontal or vertical mergers

Question 23

Firms that set their transfer prices equal to the price charged to an independent customer violate laws in many nations.

Question 24

If a merger allows managers to reduce duplicate operations, the merger .

A)eliminated the hold- up problem
B)created synergies
C)created managerial diseconomies
D)created technological interdependencies

Question 25

If the managers of Happy Avocados, a ready- made guacamole firm, spend considerable time researching different prices and quality measures offered by multiple avocado farmers, the time spent is considered to be a(n)cost.

A)monitoring
B)enforcement
C)information
D)negotiation

Question 26

All of the following are true regarding transfer prices except which one?

A)The transfer price is the internal firm price on an input that input- producing division charges the input- using division.
B)The transfer price is the internal firm price on an input that input- using division charges the input- producing division.
C)Law in many nations state that a transfer price must equal the price charged to an independent customer.
D)Transfer prices can affect the taxes a firm must pay.

Question 27

A transaction cost is the cost of using a market plus the price of the good or service.

Question 28

If the managers of View Your World, a high- end window manufacturer, spend considerable time researching different prices and quality measures offered by multiple glass firms, the time spent is considered to be a(n)cost.

A)enforcement
B)negotiation
C)monitoring
D)information

Question 29

If Slick Shades, a sunglasses manufacturer, merges with Best Lens, a lens manufacturer, and the combined firm is able to reduce the number of human resource departments from two to one, the merger created _ _.

A)technological interdependencies
B)synergies
C)a hold- up problem
D)managerial diseconomies

Question 30

If Slick Shades, a sunglasses manufacturer, has a contract with Best Lens, a lens manufacturer, to supply lenses needed to make the sunglasses, and the managers of the two firms both paid lawyers' fees to prepare the contract, the lawyer fees are considered to be a(n)cost.

A)information
B)negotiation
C)monitoring
D)enforcement

Question 31

If a German firm owns a U.S.- based firm, the combined firm is subject to the corporate tax laws in Germany.

Question 32

If a German firm owns a U.S.- based firm that is domiciled in the U.S., the combined firm is subject to the corporate tax laws in _ and income tax laws in _.

A)U.S.; U.S.
B)Germany; U.S.
C)U.S.; Germany
D)Germany; Germany

Question 33

Vertical integration can lower firms' costs through each of the following except which one?

A)lowering transaction costs
B)accommodating technological interdependencies
C)creating synergies
D)creating managerial diseconomies

Question 34

Vertical integration can only occur when a firm acquires a firm that is closer to the consumer.

Question 35

Vertical integration can lower firms' costs through each of the following except which one?

A)increasing the complexity of coordination
B)eliminating the hold- up problem
C)reducing information costs
D)creating synergies

Question 36

If Slick Shades, a sunglasses manufacturer, merges with Best Lens, a lens manufacturer, and the combined firm is able to reduce the number of accounting departments from two to one, the merger created _ _.

A)synergies
B)a hold- up problem
C)managerial diseconomies
D)technological interdependencies

Question 37

All of the following are true regarding transfer prices except which one?

A)Transfer prices occur when a firm engages in divestiture.
B)The transfer price is the internal firm price on an input that input- producing division charges the input- using division.
C)Transfer prices can affect the taxes a firm must pay.
D)Transfer prices are an accounting entry for the within- firm price of an input.

Question 38

If Happy Cows, a dairy firm, merges with Best Cartons, a manufacturer of dairy cartons, and the combined firm is able to reduce the number of executive managers, the merger created .

A)managerial diseconomies
B)technological interdependencies
C)a hold- up problem
D)synergies

Question 39

If a firm produces at more than one stage of the supply chain, the firm is vertically integrated.

Question 40

If View Your World, a high- end window manufacturer, sells its glass door division, this is an example of .

A)forward integration
B)outsourcing
C)divestiture
D)backward integration

Question 41

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, potentially faces a hold- up problem as the firm invested in a .

A)Red Tomatoes; negotiation asset
B)Red Tomatoes; transaction- specific asset
C)Mario's Pizza; negotiation asset
D)Mario's Pizza; transaction- specific asset

Question 42

If an upstream firm and a downstream firm have a long- term contract regarding the price of an input, a change in the market price of the input can result in either the upstream or downstream firm to incur opportunity cost.

Question 43

Vertical integration can reduce transaction costs through all of the following ways except which one?

A)decreasing search cost
B)increasing the complexity of coordination
C)increasing information and control
D)decreasing the incentive for litigation

Question 44

If Luxury Cabinets, a kitchen cabinet manufacturer, builds a cabinet plant near Big Woods, a timber harvesting farm, to reduce the costs of transporting lumber, the cabinet plant is a(n).

A)negotiation asset
B)transaction- specific asset
C)information asset
D)monitoring cost

Question 45

If an upstream firm and a downstream firm want to establish a contract, all of the following costs can be incurred except which one?

A)enforcement costs
B)negotiation costs
C)monitoring costs
D)search costs

Question 46

If production technological interdependency exists, the integration of the successive production stages production costs.

A)vertical; can reduce
B)horizontal; can reduce
C)horizontal; doubles
D)vertical; increases

Question 47

If all stages of production occur within a vertically integrated firm, the firm has no taxable transactions during production.

Question 48

Costs incurred in imposing compliance with a contract between an upstream firm and a downstream firm are considered to be monitoring costs.

Question 49

Vertical integration can reduce transaction costs through all of the following ways except which one?

A)establishing a partnership between the two firms
B)decreasing the incentive for litigation
C)increasing information and control
D)creating managerial diseconomies

Question 50

Vertical integration can reduce transaction costs through all of the following ways except which one?

A)decreasing the incentive for litigation
B)increasing the required areas of managerial expertise
C)decreasing search costs
D)establishing a partnership between the two firms

Question 51

If the mangers of Special Cakes, a large bakery, acquire an egg farm to produce the eggs for their cakes, the managers of Special Cakes are likely to experience all of the following except which one?

A)a decrease in managerial diseconomies
B)an increase in their required areas of expertise
C)an increase in the complexity of coordination of Special Cakes
D)an increase in managerial diseconomies

Question 52

If the mangers of Big Scoops, a local ice cream parlor, acquire a dairy farm to produce the milk for their ice cream, the managers of Big Scoops are likely to experience all of the following except which one?

A)an increase in managerial diseconomies
B)the hold- up problem
C)an increase in the complexity of coordination of Big Scoops
D)an increase in their required areas of expertise

Question 53

If the mangers of Golden Bread, a large bakery, acquire a wheat farm to produce the flour for their bread, the managers of Golden Bread are likely to experience all of the following except which one?

A)the hold- up problem
B)an increase in managerial diseconomies
C)an increase in their required areas of expertise
D)an increase in the complexity of coordination of Golden Bread

Question 54

Crunchy Chips is a potato chip manufacturer. To produce the chips, Crunchy Chips needs to first peel and slice the potatoes and then fry them within two minutes of slicing to prevent browning. If Crunchy Chips is unable to fry the potatoes within two minutes, it must freeze the chips and later defrost them to fry them. Which of the following is true for Crunchy Chips?

A)Vertically integrating the slicing and frying process will increase production costs.
B)Crunchy Chips has no production technological interdependency.
C)Crunchy Chips has production technological interdependency.
D)Crunchy Chips faces a hold- up problem.

Question 55

If the vertical integration between two firms creates greater managerial diseconomies than cost savings, the merger will increase the combined firm's overall costs.

Question 56

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, the tomato sauce plant is a(n) .

A)negotiation cost
B)information asset
C)transaction- specific asset
D)monitoring cost

Question 57

All of the following are true regarding a long- term contract between an upstream firm and a downstream firm except which one?

A)The downstream firm can incur opportunity costs.
B)Both firms have increased flexibility.
C)The upstream firm can incur opportunity costs.
D)Changes in market conditions can impose new costs to either firm.

Question 58

Vertical integration can increase and decrease a firm's costs.

Question 59

If Luxury Cabinets, a kitchen cabinet manufacturer, builds a cabinet plant near Big Woods, a timber harvesting farm, to reduce the costs of transporting lumber, _ potentially faces a hold- up problem as the firm invested in a .

A)Luxury Cabinets; transaction- specific asset
B)Big Woods; transaction- specific asset
C)Luxury Cabinets; negotiation asset
D)Big Woods; negotiation asset

Question 60

If Happy Cows, a dairy firm, merges with Best Cartons, a manufacturer of dairy cartons, the merger can alter the relationship between Happy Cows and Best Cartons from a(n)to a(n) .

A)partnership; managerial relationship
B)adversarial relationship; partnership
C)managerial relationship; partnership
D)partnership; adversarial relationship

Question 61

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $8 and they are paying the profit- maximizing wholesale price of $20, what is the retail price of the product?

A)$8
B)$28
C)$12
D)$20

Question 62

If a monopoly firm sells to competitive distributors, all of the following are true regarding the demand for the monopoly's product except which one?

A)It is a derived demand.
B)It is the consumers' market demand.
C)It depends on the consumers' market demand.
D)It is the distributors' demand.

Question 63

If Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20, what is the profit- maximizing number of sunglasses (in hundreds)for Slick Shades to produce?

A)50
B)80
C)70
D)90

Question 64

Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30. If Slick Shades vertically integrates with the perfectly competitive distributors, the relevant demand curve for the combined firm is the demand curve and the combined firm's marginal cost is equal to .

A)wholesale; $80
B)retail; $80
C)retail; $110
D)wholesale; $110

Question 65

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $3 and they are charging the profit- maximizing retail price of $9, what is wholesale price of the product?

A)$9
B)$6
C)$12
D)$3

Question 66

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost, the difference between the wholesale demand curve and the consumer retail demand curve is the .

A)marginal cost of distribution
B)average fixed cost of distribution
C)marginal cost of production
D)marginal revenue of production

Question 67

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $2 and they are paying the profit- maximizing wholesale price of $8, what is the retail price of the product?

A)$10
B)$2
C)$6
D)$8

Question 68

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $5 and they are paying the profit- maximizing wholesale price of $10, what is the retail price of the product?

A)$15
B)$5
C)$10
D)$7

Question 69

Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds)and charging the profit- maximizing wholesale price, what is the retail price?

A)$150
B)$120
C)$140
D)$160

Question 70

If Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30, what is the profit- maximizing number of sunglasses (in hundreds)for Slick Shades to produce?

A)55
B)80
C)40
D)60

Question 71

Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds)and charging the profit- maximizing wholesale price, what is Slick Shades' profit (in hundreds)?

A)$4,800
B)$3,600
C)$6,400
D)$2,400

Question 72

Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds)and charging the profit- maximizing wholesale price, what is Slick Shades' profit (in hundreds)?

A)$6,400
B)$7,200
C)$5,600
D)$8,000

Question 73

Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20. If Slick Shades vertically integrates with the perfectly competitive distributors, the profit- maximizing quantity will be _ _ the profit- maximizing quantity if they did not vertically integrate and the combined firm will earn
Profit if they did not vertically integrate.

A)greater than; greater
B)greater than; the same
C)the same as; the same
D)the same as; greater

Question 74

Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30. If Slick Shades vertically integrates with the perfectly competitive distributors, the profit- maximizing quantity will be _ _ the profit- maximizing quantity if they did not vertically integrate and the combined firm will earn
Profit if they did not vertically integrate.

A)greater than; the same
B)the same as; the same
C)greater than; greater
D)the same as; greater

Question 75

Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20. If Slick Shades vertically integrates with the perfectly competitive distributors, the relevant demand curve for the combined firm is the demand curve and the combined firm's marginal cost is equal to .

A)retail; $60
B)retail; $40
C)wholesale; $60
D)wholesale; $40

Question 76

If a monopoly firm sells to competitive distributors, all of the following are true regarding the demand for the monopoly's product except which one?

A)It is the wholesale demand.
B)It is the consumers' market demand.
C)It is the distributors' demand.
D)It is a derived demand.

Question 77

Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds), what is the profit- maximizing wholesale price?

A)$110
B)$120
C)$130
D)$140

Question 78

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $4 and they are charging the profit- maximizing retail price of $12, what is wholesale price of the product?

A)$8
B)$16
C)$12
D)$4

Question 79

Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds), what is the profit- maximizing wholesale price?

A)$120
B)$150
C)$140
D)$160

Question 80

Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds)and charging the profit- maximizing wholesale price, what is the retail price?

A)$160
B)$180
C)$170
D)$200