Question 1

If the minimum efficient scale in toaster production is 500,000 units per year, the average cost of producing 300,000 toasters is greater than the average cost of producing 500,000.

Accepted Answer

The minimum efficient scale in toaster production is 500,000 units per year, meaning that a company needs to produce at least 500,000 units to achieve the lowest average cost per unit. Producing only 300,000 units would result in higher average costs as the fixed costs would be spread over a smaller number of units, increasing the per-unit cost. Therefore, the average cost of producing 300,000 toasters is greater than the average cost of producing 500,000, making the statement true.

Question 2

Jack F. Altrades's decision whether to purchase a good from a firm or hire resources directly in the market will

Accepted Answer

Jack F. Altrades's decision whether to purchase a good from a firm or hire resources directly in the market will depend on both his skill and the opportunity cost of his time. His production skill will affect whether he can produce the good or service efficiently, while the opportunity cost of his time will affect whether it is more cost-effective to hire resources or produce the good or service himself.

Question 3

Vertical integration has no effect on the internal organization of a firm; it only affects the outside markets.

Accepted Answer

Vertical integration involves a firm acquiring control or ownership of other companies involved in different stages of the supply chain. This can result in significant changes to the internal organization of the firm, as it may need to integrate processes and operations across the different companies. Additionally, the decision to vertically integrate often involves evaluating the potential benefits and risks associated with the strategy, which can impact the firm's overall market positioning and future direction.

Question 4

One reason a computer manufacturer may produce its own microchips rather than buy them is that it can maintain control over production quality.

Accepted Answer

By producing their own microchips, the computer manufacturer can ensure that the chips meet their desired quality standards and specifications. They have control over the entire production process and can make adjustments as needed to ensure the quality of the final product. If they were to buy microchips from another manufacturer, they would have to rely on that manufacturer's quality control processes and may not have as much control over the final product.

Question 5

Vertical integration is

Accepted Answer

Vertical integration involves a firm expanding into earlier or later stages of production, such as a retailer buying a supplier or a manufacturer buying a distributor. This allows the firm to have more control over its supply chain and potentially reduce costs or improve efficiency.

Question 6

When several resources are combined in the production of a good,

Accepted Answer

When several resources are combined in the production of a good, it can be difficult to determine the marginal contribution of each input. This is because the contribution of each input is not always easily observable and may depend on the presence or absence of other inputs.

Question 7

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

Accepted Answer

Minimum efficient scale refers to the lowest level of output at which a firm can produce its products at the lowest possible long-run average cost. Once the firm reaches this level, it cannot reduce its average cost further by expanding its output. Therefore, the statement is true.

Question 8

Wendy's must decide whether to grow its own potatoes for French fries. Growing potatoes is a very different process from running a fast-food restaurant. Based on this information alone , should Wendy's grow its own potatoes?

Accepted Answer

The answer of Wendy's must decide whether to grow its...

Question 9

Don's Pasture Apple Cider Company buys four inputs: apples, glass bottles, apple presses, and computers for record keeping. If the company decides to become more vertically integrated, it will

Accepted Answer

Vertical integration involves owning or controlling the entire supply chain. In this case, it would make sense for the company to start growing its own apples to have more control over the quality and cost of this input. Making glass bottles, apple presses, and computers would likely be too far removed from the company's core competency and require too much investment in new equipment and expertise.

Question 10

When a firm is operating at its minimum efficient scale, its short-run average total cost of production is minimized.

Accepted Answer

The answer of When a firm is operating at its...

Question 11

Spacely Sprockets, Inc., usually pays $1,000 for a million flanges, which it uses as inputs in the manufacture of sprockets. It also spends an average of $20 per million flanges on finding manufacturers and negotiating contracts. Spacely is capable of making its own flanges at a cost of $980 per million. Given these costs,

Accepted Answer

The cost of making its own flanges ($980 per million) is cheaper than contracting out for flanges ($1,000 per million + $20 per million for finding and negotiating contracts). Therefore, it makes financial sense for Spacely to start manufacturing its own flanges.

Question 12

By integrating vertically,

Accepted Answer

Vertical integration involves the consolidation of various procedures involved in producing a good within one firm. This allows for greater control and coordination over the entire production process, which can result in greater efficiency and cost savings.

Question 13

Wendy's restaurants must decide whether to grow their own potatoes for French fries or buy them. If they buy rather than grow, then they have opted to

Accepted Answer

By choosing to buy potatoes instead of growing them, Wendy's is allowing market prices to guide their resource allocation. This means they are basing their decision on the prevailing market conditions and prices for potatoes, rather than trying to control the entire supply chain (vertical integration) or control resources through a hierarchical structure.

Question 14

The more complicated a production process is,

Accepted Answer

The answer of The more complicated a production process is,
...

Question 15

Managers experience bounded rationality when they focus narrowly on maximizing their firm's profits and ignore the broader perspective of society's preferences.

Accepted Answer

The answer of Managers experience bounded rationality when they focus...

Question 16

If the minimum efficient scale in the production of aluminum exceeds the quantity of aluminum any individual siding producer buys, siding producers should integrate backward into aluminum production.

Accepted Answer

The answer of If the minimum efficient scale in the...

Question 17

Which of the following is true of vertical integration?

Accepted Answer

Vertical integration occurs when a firm expands its operations by acquiring businesses that are part of its supply chain or distribution channels. This can lead to the formation of larger firms as smaller ones are absorbed.

Question 18

The more complicated the process used to produce a good,

Accepted Answer

The greater the complexity of the production process, the higher the risk of transaction costs from organizing production through markets. This is because there are more potential complications and uncertainties that can arise, such as variations in quality, timely delivery, and coordination of inputs. As a result, it may be more efficient for a firm to vertically integrate and use administrative controls to organize the production process.

Question 19

The simpler a production process is,

Accepted Answer

If a production process is simple, it is easier for a firm to use the market to organize production rather than organizing it through centralized control. This is because the transaction costs of using markets are lower when the production process is simple.

Question 20

Which of the following is the best example of vertical integration

Accepted Answer

Vertical integration refers to a company's acquisition of its upstream (suppliers) and/or downstream (distributors/retailers) businesses. In this case, an auto firm acquiring a tire manufacturer is an example of vertical integration as the tire manufacturer is a supplier of a key component used in the production of automobiles.

Quiz 14: Transaction Costs, Imperfect Information, and Behavioral Economics