Question 1

_____, uncertainty, and risk of opportunism are the three major reasons due to which U.S.Steel prefers to own its mines, enrichment facilities, and ore carriers.
A)Involuntary transactions
B)Transaction costs
C)Nonspecificity of assets
D)Trademark and credibility

Accepted Answer

Transaction costs refer to the expenses incurred in the process of buying or selling goods or services. In this context, U.S. Steel prefers to own its mines, enrichment facilities, and ore carriers because buying or leasing these assets from other companies would involve transaction costs such as search costs, bargaining costs, and monitoring costs. By owning these assets, U.S. Steel can avoid these transaction costs and have greater control over its supply chain. Additionally, by owning its assets, U.S. Steel can reduce uncertainty about the quality and availability of the inputs it needs to produce steel, and avoid the risk of opportunism by suppliers who may try to take advantage of their market power.

Question 2

It is more efficient for a mini-mill to use the worldwide market for scrap steel than to integrate upstream.

Accepted Answer

Mini-mills typically rely on scrap steel as their primary raw material, which they source from the global market rather than integrating upstream and producing their own raw steel. This approach is generally considered to be more efficient, as it allows mini-mills to more easily adjust to fluctuations in market demand and raw material prices, as well as avoid the high capital costs and environmental concerns associated with upstream steel production.

Question 3

Foreign outsourcing of service is commonly seen in economies that possess the skills and equipment required to produce those services for themselves.

Accepted Answer

Foreign outsourcing of services often occurs because companies are looking to reduce costs by utilizing cheaper labor or resources available in other countries, rather than because the outsourcing economy lacks the skills or equipment to produce those services.

Question 4

Identify the reason why U.S.Steel prefers to own iron ore mines.
A)It helps them to coordinate iron ore transport and furnace operations.
B)It reduces the company's raw material costs.
C)It helps them to inspect the quality of the ore.
D)It reduces the competition the company faces in the world steel market.

Accepted Answer

It helps them to coordinate iron ore transport and furnace operations.

Question 5

If the assets used during the various stages of production are relatively nonspecific but the markets are highly uncertain, a short-term contract is likely to be the most efficient.

Accepted Answer

The answer of If the assets used during the various...

Question 6

Successive monopolies can earn larger profits by operating independently rather than working together or cooperating.

Accepted Answer

When monopolies in successive stages of a production process work together or cooperate, they can coordinate their pricing and output strategies to maximize overall profits, which is typically higher than what they could achieve operating independently due to double marginalization.

Question 7

The different stages of production of any commodity can be said to possess high volumetric interdependence if the output produced in any one of the stages affects the output produced during the subsequent stages.

Accepted Answer

High volumetric interdependence means that the output produced in one stage affects the output produced in subsequent stages. Therefore, the statement is true.

Question 8

U.S.Steel considers the iron ore market thin because of:
A)the availability of wide range of ore producers.
B)the scarcity of alternative ore suppliers.
C)the volatility of ore prices.
D)the low deliverability risks.

Accepted Answer

The iron ore market is considered thin by U.S. Steel primarily due to the scarcity of alternative ore suppliers, which limits options and increases dependency on a few sources.

Question 9

The ISO 9000 family of quality management and assurance procedures improve exchangeability by lowering the cost of obtaining information about the goods to be traded and the counterparties with whom individuals might trade.

Accepted Answer

The ISO 9000 family of quality management and assurance procedures help to standardize product quality and increase transparency in supply chains, lowering the cost and risk of obtaining information about goods and counterparties, thus improving exchangeability.

Question 10

The obligations and prohibitions present in a contract between a franchiser and the franchisee are called vertical restraints.

Accepted Answer

Vertical restraints are restrictions imposed by a franchiser on a franchisee which define the terms of their business relationship. These may include obligations and prohibitions related to pricing, advertising, territories, and product sourcing.

Question 11

Iron mining, coal mining, and coke production constitute the _____ steps in steel making.
A)intermediate
B)upstream
C)final
D)introductory

Accepted Answer

Iron mining, coal mining, and coke production are all upstream steps in steel making, as they provide the raw materials necessary for producing steel. The intermediate steps include refining the iron and steel manufacturing, while the final step is the production of finished steel products. Therefore, option B (upstream) is the correct choice.

Question 12

Since the government controls the maximum price pipelines can charge for transportation of natural gas, the pipelines going to the same destination usually compete by discounting rates below the legal maximum.

Accepted Answer

As the government controls the maximum price pipelines can charge for the transportation of natural gas, in order to compete, pipelines often discount their rates below the legal maximum.

Question 13

Among the different stages of red wine production (selection of grapes, crushing, fermentation, blending and fining, adding preservatives, filtration and bottling), the first stage-selection of grapes is called the downstream and the final stage-packaging/bottling is called the upstream.

Accepted Answer

The statement is reversed. The selection of grapes is called upstream and packaging/bottling is called downstream.

Question 14

Although coal and iron ore are both important raw materials used in steel production, coal is a more specific resource compared to iron ore.

Accepted Answer

Coal and iron ore serve different roles in steel production: coal (specifically coking coal) is primarily used as a fuel and reducing agent, while iron ore is the source of iron itself. Neither is more specific than the other; they are both essential for different reasons.

Question 15

A thin market usually does not allow the use of futures contracts or other hedging tools.

Accepted Answer

A thin market refers to a market with low trading volume and limited liquidity. In such markets, it may be difficult to find counterparties willing to take on the opposite side of a futures contract or other hedging tool, making it unreliable as a hedging strategy.

Question 16

If different people own the different stages of production of a commodity, a contract or market relationship helps to minimize transaction risks and creates economic value.

Accepted Answer

The answer of If different people own the different stages...

Question 17

An asset's specificity can be measured in terms of the percentage of its cost that can be recovered if it is redeployed into its next most valuable use.

Accepted Answer

An asset's specificity is related to the extent to which it is tailored to a particular use, and the higher the specificity, the lower the percentage of cost that can be recovered if it is redeployed. Therefore, the statement is correct and the answer is A.

Question 18

Vertical integration of the different stages of spun yarn production increases transaction costs and the risk of opportunism since each stage employs highly specific assets.

Accepted Answer

Vertical integration of the different stages of spun yarn production typically reduces transaction costs and the risk of opportunism because it brings all stages under a single management, improving coordination and reducing the need for market transactions between stages.

Question 19

A firm that controls both the upstream as well as the downstream stages of production is said to be:
A)functionally integrated.
B)perpendicularly integrated.
C)vertically integrated.
D)horizontally integrated.

Accepted Answer

Vertical integration refers to a firm's ownership and control over multiple stages of the production or distribution process, from raw materials to finished goods. This includes both upstream (supplier) and downstream (distributor) activities. Therefore, the correct choice is vertically integrated.

Question 20

When the ownership of the different stages of production of a commodity lies with different individuals, it becomes difficult to take decisions on capacity expansion because of all the following reasons, EXCEPT:
A)differences in attitudes toward risk.
B)differences in motivation.
C)different degrees of risk exposure.
D)different abilities to hedge themselves.

Accepted Answer

Differences in motivation do not inherently affect decision-making on capacity expansion in the context of ownership across different stages of production. The other options (A, C, D) directly impact decision-making due to varying risk perceptions and management capabilities among owners.

Quiz 14: Vertical Relationships

_____, uncertainty, and risk of opportunism are the three major reasons due to which U.S.Steel prefers to own its mines, enrichment facilities, and ore carriers.