Question 1

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 or merging with suppliers or distributors in the supply chain, which often results in changes to the internal organization of the firm. For example, a company that vertically integrates by acquiring a supplier may need to restructure its manufacturing operations to incorporate the new supplier.

Question 2

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 buying potatoes rather than growing them, Wendy's is allowing market prices to guide their resource allocation. This means they are choosing to allocate their resources (in this case, money) based on the prices they can obtain potatoes for in the market, rather than investing in potato growing operations which may or may not be cost-effective.

Question 3

Vertical integration is

Accepted Answer

Vertical integration is when a firm expands into earlier or later stages of production. This can involve acquiring suppliers or distributors in order to control the supply chain and reduce transaction costs.

Question 4

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 5

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

Becoming more vertically integrated means taking control of more stages of the production process. Don's Pasture Apple Cider Company already buys glass bottles, apple presses, and computers, so it is likely that the next logical step would be to start growing their own apples. This would allow them to have more control over the quality and quantity of their raw materials. It would be less practical and less efficient to start making glass bottles or apple presses, and there is no need for them to start making computers as they can simply purchase those from a supplier.

Question 6

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 7

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

Question 8

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 its own microchips, a computer manufacturer can have more control over the production process and ensure the quality of the chips meets their own standards. If they were buying chips from a third-party supplier, they would have less control over the production process and may not be able to guarantee the quality of the chips.

Question 9

By integrating vertically,

Accepted Answer

By integrating vertically, a firm brings together various procedures involved in producing a good under one roof. This allows the firm to have greater control over the production process and potentially reduce costs by eliminating external contracting.

Question 10

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

The minimum efficient scale of production is the point at which a firm is producing at the lowest average cost that it can achieve in the long run. At this point, the firm has reached its optimal size and cannot reduce its long-run average cost by expanding any further.

Question 11

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

Accepted Answer

When several resources are combined in the production of a good, the marginal contribution of each input often cannot be observed. This is because the output produced is the result of the joint contribution of all the resources used, making it difficult to determine the individual impact of each input on the final product. Therefore, it is difficult to allocate revenue among the various resources involved in the production process.

Question 12

'Simply cut' is a firm specialized in the cutting and polishing of rough diamonds.They are buying the rough diamonds from a South-African diamond mining company,and they are selling the cut diamonds to the jewelry makers.If 'Simply cut' wants to vertically integrate forward,they should:

Accepted Answer

If Simply Cut wants to vertically integrate forward, they should consider using the polished diamonds to make jewelry. This would allow them to expand their business and offer a complete product to their customers. Mining diamonds themselves (B) would be a significant undertaking requiring investment in resources and expertise. Buying rough diamonds from another company (C) and selling rough diamonds (D) would not be a good fit for their existing business. Buying polished diamonds from another company (E) would not make sense as they already specialize in cutting and polishing rough diamonds. Therefore, the best choice is (A).

Question 13

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 producing flanges in-house ($980 per million) is lower than the cost of contracting out for flanges plus the cost of finding manufacturers and negotiating contracts ($1,020 per million). Therefore, it would be more cost-effective for Spacely Sprockets to start manufacturing its own flanges.

Question 14

The more complicated the process used to produce a good,

Accepted Answer

The more complicated the production process, the more difficult it becomes for buyers and sellers to negotiate and coordinate with each other. This increases the transaction costs of organizing production through markets, making it less efficient compared to organizing production through a hierarchy or using administrative controls within a firm. Therefore, the answer is A.

Question 15

'Simply cut' is a firm specialized in the cutting and polishing of rough diamonds.They are buying the rough diamonds from a South-African diamond mining company,and they are selling the cut diamonds to the jewelry makers.If 'Simply cut' wants to vertically integrate backward,they should:

Accepted Answer

If 'Simply cut' wants to vertically integrate backward, they should start mining the diamonds themselves instead of buying them from another company. This would give them more control over the supply chain and increase their profits by cutting out the middleman. Using the polished diamonds to make jewelry or buying polished diamonds from another company would be a form of horizontal integration rather than vertical integration backward. Buying rough diamonds from another company or selling rough diamonds would not be backward integration, but rather a continuation of their current business model.

Question 16

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 17

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 concept of minimum efficient scale (MES) implies that production at or above that level is considered efficient and effective in terms of cost. Thus, producing only 300,000 toasters would not meet the MES and would likely result in higher average costs due to underutilization of resources. Therefore, option A is correct.

Question 18

Which of the following is true of vertical integration?

Accepted Answer

Vertical integration is the process of a firm expanding its operations by taking over activities that are typically performed by its suppliers or distributors. This can lead to the formation of larger firms from smaller ones as the firm integrates backwards to acquire its suppliers or forwards to acquire its distributors.

Question 19

The simpler a production process is,

Accepted Answer

When a production process is simpler, it is more likely that a firm will use the market to organize production rather than using centralized control. This is because the transaction costs of using markets are lower in simpler production processes. Therefore, the statement that the more likely a firm will use the market to organize production is the best choice.

Question 20

The more complicated a production process is,

Accepted Answer

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

Quiz 14: Transaction Costs, imperfect Information, and Market Behavior