Question 1

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 in the same supply chain or distribution channel. This can lead to the formation of larger firms as smaller ones are absorbed.

Question 2

The more complicated a production process is,

Accepted Answer

The answer of The more complicated a production process is,
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Question 3

By integrating vertically,

Accepted Answer

Vertical integration means bringing different stages of production under one firm. This allows the firm to have greater control over the production process, reduce transaction costs, and potentially gain a competitive advantage. By collecting various procedures involved in producing a good within one firm, it avoids the need to constantly trade with other firms through markets (Option A) or government intermediation (Option B). This also ensures that firm and market processes are connected to produce a good or service most efficiently (Option C). The alternative to vertical integration is to parcel out the various procedures involved in producing a good among various contractors (Option E). So, the best choice is D.

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

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 refers to the production level at which the average cost of producing each unit is minimized. If the minimum efficient scale in toaster production is 500,000 units per year, it means that the average cost of producing each unit will be the lowest at this level of production. Therefore, producing 300,000 toasters will result in higher average costs than producing 500,000 toasters.

Question 6

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, the computer manufacturer can ensure that they meet its quality standards and specifications. This allows for greater control over the production process and the final product, which can ultimately lead to improved performance and reliability for customers.

Question 7

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 8

Vertical integration is

Accepted Answer

Vertical integration refers to a firm's expansion into earlier or later stages of production. This allows the firm to have more control over its supply chain, reduce transaction costs, and potentially increase efficiency. It can involve integrating forward towards the market (such as a manufacturer opening its own retail stores) or backward towards its inputs (such as a car manufacturer acquiring a steel mill).

Question 9

The more complicated the process used to produce a good,

Accepted Answer

The more complicated the process used to produce a good, the greater are the transaction costs of organizing production through markets. This is because coordination and communication costs increase as complexity increases, making it more difficult to ensure quality and timely production through market negotiations alone. Therefore, firms may choose to organize production internally through administrative controls instead.

Question 10

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 11

The McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly. Growing potatoes is very different from running a fast-food restaurant. One could say of McDonald's decision to grow its own potatoes for the Russian franchise that

Accepted Answer

McDonald's decision to grow its own potatoes in Russia can be viewed as an example of bounded rationality - the idea that organizations often make decisions that are not fully rational due to limited information or cognitive constraints. However, in this case, the need for quality control likely outweighs the limitations in rational decision-making. By growing their own potatoes, McDonald's can ensure that they meet the desired standards for the quality of their products. Therefore, the bounded rationality criterion is outweighed by the need for quality control.

Question 12

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 as they all work together to produce the final output. This is due to the fact that the inputs are complementary to each other and the contribution of each input cannot be observed individually.

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

Spacely can produce the flanges for $980 per million, which is less than the $1,020 ($1,000 for flanges plus $20 for finding and negotiating contracts) it currently pays. Therefore, it would be beneficial for Spacely to start manufacturing its own flanges.

Question 14

The simpler a production process is,

Accepted Answer

When the production process is simpler, it is more likely that a firm will choose to use the market to organize production, as there are fewer transaction costs involved in outsourcing rather than trying to handle everything in-house through centralized control. Additionally, simpler production processes generally lead to lower cost of production, which incentivizes firms to use the market to take advantage of cost savings. Therefore, options A, D, and E can be eliminated as incorrect. Option B is also incorrect, as a lower transaction cost in markets is one of the advantages of using the market to organize production.

Question 15

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

Accepted Answer

Vertical integration involves the merging or acquisition of companies involved in different stages of production or distribution. This can lead to changes in the internal organization of the firm, such as the consolidation of departments or changes in reporting structure.

Question 16

The limit on the amount of information a manager can comprehend about a firm's operation is known as

Accepted Answer

Bounded rationality refers to the limit on the amount of information a manager can comprehend about a firm's operation due to cognitive limitations, time constraints, and other factors. The other options listed are not appropriate explanations for this concept.

Question 17

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 that the company would want to own or control more of the supply chain. Since apples are the primary input for their product, it would make the most sense for the company to start growing their own apples to become more vertically integrated.

Question 18

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 point at which a firm has achieved the lowest possible long-run average cost of production. At this point, the firm cannot further reduce its costs by expanding its production. Thus, the statement is true.

Question 19

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 20

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

Buying rather than growing potatoes allows Wendy's to allocate resources based on market prices, which is guided by supply and demand. This decision is based on a market-oriented approach rather than a hierarchical or vertically integrated approach.

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