Question 1

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, ______potentially faces a hold- up problem as the firm invested in a ______.
A)Red Tomatoes; negotiation asset
B)Red Tomatoes; transaction- specific asset
C)Mario's Pizza; negotiation asset
D)Mario's Pizza; transaction- specific asset

Accepted Answer

The hold-up problem refers to the risk that a specific investment by one party will lead to opportunistic behavior by another party, leading to lower-than-expected returns for the initial investor. In this case, Mario's Pizza is investing in a tomato sauce plant to reduce transportation costs, which is a specific investment tied to the Red Tomatoes farm. This makes it a transaction-specific asset, as opposed to a negotiation asset that would be more general and transferable. Therefore, if Red Tomatoes decides to capitalize on their position and raise prices, Mario's Pizza could potentially face a hold-up problem.

Question 2

If an upstream firm and a downstream firm have a long- term contract regarding the price of an input, a change in the market price of the input can result in either the upstream or downstream firm to incur opportunity cost.

Accepted Answer

If the market price of the input increases, the downstream firm may have to pay more than the market price, resulting in an opportunity cost for them. Similarly, if the market price of the input decreases, the upstream firm may have to sell their input for less than the market price, resulting in an opportunity cost for them.

Question 3

Vertical integration can reduce transaction costs through all of the following ways except which one?
A)decreasing search cost
B)increasing the complexity of coordination
C)increasing information and control
D)decreasing the incentive for litigation

Accepted Answer

Increasing the complexity of coordination, which can occur due to vertical integration, can actually increase transaction costs instead of reducing them. The other options of decreasing search cost, increasing information and control, and decreasing the incentive for litigation are all ways in which vertical integration can reduce transaction costs.

Question 4

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, the cabinet plant is a(n)______.
A)negotiation asset
B)transaction- specific asset
C)information asset
D)monitoring cost

Accepted Answer

The cabinet plant is a transaction-specific asset because it is built specifically to reduce the costs of transporting lumber from the nearby Big Woods timber harvesting farm to the Luxury Cabinets manufacturing plant.

Question 5

If an upstream firm and a downstream firm want to establish a contract, all of the following costs can be incurred except which one?
A)enforcement costs
B)negotiation costs
C)monitoring costs
D)search costs

Accepted Answer

Search costs are not typically associated with establishing contracts between upstream and downstream firms, as both parties are likely aware of each other's existence and potential for collaboration. Enforcement, negotiation, and monitoring costs, on the other hand, may be incurred during the process of establishing and maintaining a contractual relationship.

Question 6

If production technological interdependency exists, the______ integration of the successive production stages______ production costs.
A)vertical; can reduce
B)horizontal; can reduce
C)horizontal; doubles
D)vertical; increases

Accepted Answer

Vertical integration refers to a situation where a company owns or controls multiple stages of the production process. In this case, if production technological interdependency exists (meaning each stage relies on the technology of the previous stage), vertical integration can reduce production costs by streamlining the process and eliminating inefficiencies. Therefore, option A is the correct choice.

Question 7

If all stages of production occur within a vertically integrated firm, the firm has no taxable transactions during production.

Accepted Answer

When all stages of production occur within a vertically integrated firm, there are no taxable transactions between different businesses or entities, since they are all part of the same firm. However, the firm will still have to pay taxes on profits earned from selling the final product.

Question 8

Costs incurred in imposing compliance with a contract between an upstream firm and a downstream firm are considered to be monitoring costs.

Accepted Answer

The answer of Costs incurred in imposing compliance with a...

Question 9

Vertical integration can reduce transaction costs through all of the following ways except which one?
A)establishing a partnership between the two firms
B)decreasing the incentive for litigation
C)increasing information and control
D)creating managerial diseconomies

Accepted Answer

Vertical integration involves merging or acquiring different stages of the production process under one entity, which can lead to managerial diseconomies such as increased bureaucracy and reduced flexibility. However, vertical integration can reduce transaction costs by establishing a partnership, decreasing the incentive for litigation, and increasing information and control.

Question 10

Vertical integration can reduce transaction costs through all of the following ways except which one?
A)decreasing the incentive for litigation
B)increasing the required areas of managerial expertise
C)decreasing search costs
D)establishing a partnership between the two firms

Accepted Answer

Vertical integration involves owning and controlling different stages of the production and distribution process, which can reduce transaction costs by eliminating the need for market transactions and coordination. A decrease in search costs and the incentive for litigation can also be achieved through vertical integration. However, increasing the required areas of managerial expertise would not reduce transaction costs but rather increase them as more specialized managers and resources will be needed to oversee the various stages of production and distribution. Establishing a partnership between the two firms, on the other hand, is not a form of vertical integration.

Question 11

If the mangers of Special Cakes, a large bakery, acquire an egg farm to produce the eggs for their cakes, the managers of Special Cakes are likely to experience all of the following except which one?
A)a decrease in managerial diseconomies
B)an increase in their required areas of expertise
C)an increase in the complexity of coordination of Special Cakes
D)an increase in managerial diseconomies

Accepted Answer

Acquiring an egg farm will provide Special Cakes with a stable and predictable source of eggs, which will reduce managerial diseconomies. This is because the managers of Special Cakes will no longer have to spend time searching for a reliable supplier and negotiating prices. However, there may be an increase in the complexity of coordination of Special Cakes, as they will now be managing two separate businesses (the bakery and the egg farm). Additionally, the managers of Special Cakes may need to develop new areas of expertise related to egg production and management, which could increase the required areas of expertise. However, since the question is asking for an exception, the correct answer is A.

Question 12

If the mangers of Big Scoops, a local ice cream parlor, acquire a dairy farm to produce the milk for their ice cream, the managers of Big Scoops are likely to experience all of the following except which one?
A)an increase in managerial diseconomies
B)the hold- up problem
C)an increase in the complexity of coordination of Big Scoops
D)an increase in their required areas of expertise

Accepted Answer

Acquiring a dairy farm to produce milk for their ice cream is a form of vertical integration, which typically aims to reduce the hold-up problem by securing a stable supply of inputs. The hold-up problem occurs when two parties may exploit the other in a transaction, especially after making transaction-specific investments. By owning the dairy farm, Big Scoops would have more control and less risk of being exploited by an external supplier, thus not likely experiencing an increase in the hold-up problem.

Question 13

If the mangers of Golden Bread, a large bakery, acquire a wheat farm to produce the flour for their bread, the managers of Golden Bread are likely to experience all of the following except which one?
A)the hold- up problem
B)an increase in managerial diseconomies
C)an increase in their required areas of expertise
D)an increase in the complexity of coordination of Golden Bread

Accepted Answer

The hold-up problem typically occurs in situations where there are specific investments made in a buyer-supplier relationship, leading to a potential for opportunistic behavior by one party due to the dependency created by the other. In the case of Golden Bread acquiring a wheat farm, they are integrating vertically, which actually reduces the risk of the hold-up problem because they are taking control of a key supply chain component (the wheat farm) rather than being dependent on an external supplier for flour.

Question 14

Crunchy Chips is a potato chip manufacturer. To produce the chips, Crunchy Chips needs to first peel and slice the potatoes and then fry them within two minutes of slicing to prevent browning. If Crunchy Chips is unable to fry the potatoes within two minutes, it must freeze the chips and later defrost them to fry them. Which of the following is true for Crunchy Chips?
A)Vertically integrating the slicing and frying process will increase production costs.
B)Crunchy Chips has no production technological interdependency.
C)Crunchy Chips has production technological interdependency.
D)Crunchy Chips faces a hold- up problem.

Accepted Answer

Crunchy Chips has production technological interdependency. The need to fry the potatoes within two minutes of slicing to prevent browning creates a technological interdependency between the peeling/slicing and frying processes. This means that the timely completion of one process is crucial for the completion of the other process. If the potato slicing process is delayed, the frying process is also delayed, which can lead to decreased production efficiency and increased costs. As a result, Crunchy Chips needs to manage the timing of both processes carefully to ensure optimal production efficiency.

Question 15

If the vertical integration between two firms creates greater managerial diseconomies than cost savings, the merger will increase the combined firm's overall costs.

Accepted Answer

While vertical integration can lead to cost savings through the elimination of transaction costs and increased efficiencies, it can also create managerial diseconomies such as increased bureaucracy and coordination difficulties. If the costs associated with these diseconomies are greater than the cost savings from integration, the merger will increase overall costs for the combined firm.

Question 16

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, the tomato sauce plant is a(n)______ .
A)negotiation cost
B)information asset
C)transaction- specific asset
D)monitoring cost

Accepted Answer

The tomato sauce plant is a transaction-specific asset because it is specifically built to reduce the costs of transporting fresh tomatoes from Red Tomatoes, the large tomato farm. It is an asset that is specific to the transaction between Mario's Pizza and Red Tomatoes, rather than a general asset like an information asset or a monitoring cost.

Question 17

All of the following are true regarding a long- term contract between an upstream firm and a downstream firm except which one?
A)The downstream firm can incur opportunity costs.
B)Both firms have increased flexibility.
C)The upstream firm can incur opportunity costs.
D)Changes in market conditions can impose new costs to either firm.

Accepted Answer

A long-term contract between an upstream firm and a downstream firm generally increases commitment and reduces flexibility for both firms, rather than increasing it. The downstream firm may incur opportunity costs, the upstream firm may incur production costs based on the contracted output, and changes in market conditions can impose new costs on either firm. However, increased flexibility is not typically a characteristic of long-term contracts.

Question 18

Vertical integration can increase and decrease a firm's costs.

Accepted Answer

Vertical integration can increase a firm's costs as it involves acquiring or developing new capabilities in-house. On the other hand, it can decrease a firm's costs by eliminating the need to rely on outside suppliers or intermediaries, reducing transaction costs and increasing operational efficiency.

Question 19

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

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.

Question 20

If Happy Cows, a dairy firm, merges with Best Cartons, a manufacturer of dairy cartons, the merger can alter the relationship between Happy Cows and Best Cartons from a(n)______to a(n) ______.
A)partnership; managerial relationship
B)adversarial relationship; partnership
C)managerial relationship; partnership
D)partnership; adversarial relationship

Accepted Answer

The merger changes their relationship from potentially adversarial (as separate entities possibly negotiating hard on prices and terms) to a partnership (since they become part of the same corporate entity, working together internally).

Quiz 11: Decisions About Vertical Integration and Distribution

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, potentially faces a hold- up problem as the firm invested in a .

If an upstream firm and a downstream firm have a long- term contract regarding the price of an input, a change in the market price of the input can result in either the upstream or downstream firm to incur opportunity cost.

Vertical integration can reduce transaction costs through all of the following ways except which one?

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, the cabinet plant is a(n) ______.

If an upstream firm and a downstream firm want to establish a contract, all of the following costs can be incurred except which one?

If production technological interdependency exists, the integration of the successive production stages production costs.

If all stages of production occur within a vertically integrated firm, the firm has no taxable transactions during production.

Costs incurred in imposing compliance with a contract between an upstream firm and a downstream firm are considered to be monitoring costs.

Vertical integration can reduce transaction costs through all of the following ways except which one?

Vertical integration can reduce transaction costs through all of the following ways except which one?

If the mangers of Special Cakes, a large bakery, acquire an egg farm to produce the eggs for their cakes, the managers of Special Cakes are likely to experience all of the following except which one?

If the mangers of Big Scoops, a local ice cream parlor, acquire a dairy farm to produce the milk for their ice cream, the managers of Big Scoops are likely to experience all of the following except which one?

If the mangers of Golden Bread, a large bakery, acquire a wheat farm to produce the flour for their bread, the managers of Golden Bread are likely to experience all of the following except which one?

If the vertical integration between two firms creates greater managerial diseconomies than cost savings, the merger will increase the combined firm's overall costs.

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, the tomato sauce plant is a(n) ______ .

All of the following are true regarding a long- term contract between an upstream firm and a downstream firm except which one?

Vertical integration can increase and decrease a firm's costs.

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 .

If Happy Cows, a dairy firm, merges with Best Cartons, a manufacturer of dairy cartons, the merger can alter the relationship between Happy Cows and Best Cartons from a(n) to a(n) .

Quiz 11: Decisions About Vertical Integration and Distribution

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, ______potentially faces a hold- up problem as the firm invested in a ______.

If an upstream firm and a downstream firm have a long- term contract regarding the price of an input, a change in the market price of the input can result in either the upstream or downstream firm to incur opportunity cost.

Vertical integration can reduce transaction costs through all of the following ways except which one?

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, the cabinet plant is a(n) ______.

If an upstream firm and a downstream firm want to establish a contract, all of the following costs can be incurred except which one?

If production technological interdependency exists, the______ integration of the successive production stages______ production costs.

If all stages of production occur within a vertically integrated firm, the firm has no taxable transactions during production.

Costs incurred in imposing compliance with a contract between an upstream firm and a downstream firm are considered to be monitoring costs.

Vertical integration can reduce transaction costs through all of the following ways except which one?

Vertical integration can reduce transaction costs through all of the following ways except which one?

If the mangers of Special Cakes, a large bakery, acquire an egg farm to produce the eggs for their cakes, the managers of Special Cakes are likely to experience all of the following except which one?

If the mangers of Big Scoops, a local ice cream parlor, acquire a dairy farm to produce the milk for their ice cream, the managers of Big Scoops are likely to experience all of the following except which one?

If the mangers of Golden Bread, a large bakery, acquire a wheat farm to produce the flour for their bread, the managers of Golden Bread are likely to experience all of the following except which one?

If the vertical integration between two firms creates greater managerial diseconomies than cost savings, the merger will increase the combined firm's overall costs.

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, the tomato sauce plant is a(n) ______ .

All of the following are true regarding a long- term contract between an upstream firm and a downstream firm except which one?

Vertical integration can increase and decrease a firm's costs.

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 ______.

If Happy Cows, a dairy firm, merges with Best Cartons, a manufacturer of dairy cartons, the merger can alter the relationship between Happy Cows and Best Cartons from a(n) ______to a(n) ______.

If Mario's Pizza, a large frozen pizza distributor, builds a tomato sauce plant near Red Tomatoes, a large tomato farm, to reduce the costs of transporting fresh tomatoes, potentially faces a hold- up problem as the firm invested in a .

If production technological interdependency exists, the integration of the successive production stages production costs.

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 .

If Happy Cows, a dairy firm, merges with Best Cartons, a manufacturer of dairy cartons, the merger can alter the relationship between Happy Cows and Best Cartons from a(n) to a(n) .