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

Quizplus · Accepted Answer

Luxury Cabinets is the firm that potentially faces a hold-up problem because they invested in a transaction-specific asset (the cabinet plant) that is dependent on the availability and cost of timber from Big Woods. If Big Woods were to increase their prices or decrease their supply, Luxury Cabinets would be in a vulnerable position because their asset is specific to the transaction with Big Woods.

If Luxury Cabinets, a Kitchen Cabinet Manufacturer, Builds a Cabinet