Question 1

The manager of Steel Works learns of a new technological interdependency between the final stage of production and the distribution of the final product. Steel Works currently contracts with another firm to distribute the product. If Steel Works vertically integrates with the distributor firm, which of the following is true?
A)Steel Works is likely to incur managerial diseconomies as a result of an increase in the complexity of the firm.
B)With certainty, the combined firm will earn greater economic profits.
C)Steel Works will automatically create an internal successive monopoly.
D)Steel Works will not incur managerial diseconomies.

Accepted Answer

Vertical integration can increase the complexity of the firm and may lead to managerial diseconomies, such as difficulty in managing multiple stages of production and distribution. Therefore, Steel Works is likely to incur managerial diseconomies as a result of integration. Choices B, C, and D are incorrect as they are not necessarily true and/or do not address the issue of managerial diseconomies.

Question 2

The manager of Steel Works learns of a new technological interdependency between the final stage of production and the distribution of the final product. If Steel Works currently contracts with another firm to distribute the product, which of the following is true?
A)The manager has less of an incentive to integrate forward.
B)The manager has less of an incentive to integrate backward.
C)The manager has more of an incentive to integrate backward.
D)The manager has more of an incentive to integrate forward.

Accepted Answer

The new technological interdependency between the final stage of production and distribution suggests that closer coordination between these stages could lead to efficiencies or improvements. Integrating forward means taking control of the distribution process (moving closer to the end customer), which would allow the manager to better manage this interdependency. Hence, the manager has more of an incentive to integrate forward.

Question 3

If a firm has a monopoly in both the production and distribution, to maximize the overall economic profit of the firm, managers of either the production or distribution center should be instructed to maximize profit and the managers of the other center should be instructed to operate as a competitive market.

Accepted Answer

If a firm has a monopoly in both production and distribution, it can maximize its overall economic profit by having the production center maximize profit and the distribution center operate as a competitive market. This is because the production center will produce the quantity of output that maximizes its profit, and the distribution center will sell this output at the price that maximizes its profit. The overall economic profit of the firm is the sum of the profits of the production and distribution centers.

Question 4

Which of the following is true regarding managerial diseconomies?
A)Managerial diseconomies incentivize vertical integration.
B)Managerial diseconomies are a cost associated with vertical integration.
C)Managerial diseconomies incentivize forward integration.
D)Managerial diseconomies incentivize backward integration.

Accepted Answer

Managerial diseconomies refer to the increased costs and inefficiencies that can occur when a firm becomes too large and complex to be managed effectively. This cost is associated with vertical integration because integration means that the firm is taking on more activities and becoming more complex, potentially leading to managerial diseconomies. Therefore, choice B is the correct answer. Choices A, C, and D are incorrect because none of them are related to managerial diseconomies.

Question 5

The manager of Steel Works learns of a new technological interdependency between the intermediate stage and the final stage of production. If Steel Works currently contracts with another firm for the final stage of production, which of the following is true?
A)The manager has more of an incentive to integrate backward.
B)The manager has more of an incentive to integrate forward.
C)The manager has less of an incentive to integrate forward.
D)The manager has less of an incentive to integrate backward.

Accepted Answer

Since the new technological interdependency is between the intermediate and final stage of production, integrating forward (i.e. bringing the final stage in-house) would be more beneficial for Steel Works as it would ensure better coordination between the two stages and reduce the risk of disruptions in the supply chain. Additionally, by integrating forward, Steel Works would have greater control over the quality of the final product and could potentially capture more of the value chain.

Question 6

In general, if two stages in a supply chain are making an economic profit by setting prices that exceed their marginal cost of production, managers can increase profit through vertical integration.

Accepted Answer

If two stages in a supply chain are both making economic profit, it may be beneficial for managers to vertically integrate and eliminate the intermediate stage, thereby capturing the profit margin previously earned by that stage. This is known as backward integration.

Question 7

Vertical integration can eliminate double marginalization.

Accepted Answer

Vertical integration allows for firms to control multiple stages of production and distribution, which can lead to the elimination of double marginalization. Double marginalization occurs when each stage of production, such as manufacturing and retail, adds a markup to the final price, leading to higher prices for consumers. By integrating these stages, the markup can be reduced or eliminated, resulting in lower prices for consumers and potentially higher profits for the firm.

Question 8

The manager of Steel Works learns of a new technological interdependency between the first stage and the intermediate stage of production. If Steel Works currently contracts with another firm for the intermediate stage of production, which of the following is true?
A)The manager has less of an incentive to integrate backward.
B)The manager has more of an incentive to integrate forward.
C)The manager has less of an incentive to integrate forward.
D)The manager has more of an incentive to integrate backward.

Accepted Answer

Since the manager has learned of a new technological interdependency between the first and intermediate stages of production, integrating forward would allow Steel Works to capitalize on this interdependency and ensure the necessary production linkages.

Question 9

Because vertical integration is a yes or no decision, managers cannot use marginal analysis.

Accepted Answer

Managers can use marginal analysis in deciding whether to vertically integrate or not, by considering the incremental costs and benefits of integrating at each stage of the production process.

Question 10

The manager of Steel Works learns of a new technological interdependency between the first stage and the intermediate stage of production. If Steel Works currently contracts with another firm for the first stage of production, which of the following is true?
A)The manager has less of an incentive to integrate backward.
B)The manager has less of an incentive to integrate forward.
C)The manager has more of an incentive to integrate forward.
D)The manager has more of an incentive to integrate backward.

Accepted Answer

The discovery of a technological interdependency between the first stage and the intermediate stage of production suggests that closer coordination between these stages could lead to efficiency gains or improved output. Backward integration, which involves acquiring or merging with firms that supply inputs to the company (in this case, the first stage of production), would allow Steel Works to directly control and optimize this newly identified interdependency. Therefore, the manager has more of an incentive to integrate backward to capitalize on these potential benefits.

Question 11

If a firm has a monopoly in both the production and distribution, managers of the two divisions should be encouraged to maximize profits in their separate divisions.

Accepted Answer

If the firm has a monopoly in both production and distribution, it is a vertically integrated firm. In this case, managers of both divisions should work together to maximize overall profits for the firm, rather than just focusing on maximizing profits within their separate divisions. This is because their decisions will have an impact on the overall performance of the firm, and not just their individual division.

Question 12

All of the following are true regarding managerial diseconomies except which one?
A)An increase in the required expertise of managers is a type of managerial diseconomy.
B)Managerial diseconomies are a cost associated with vertical integration.
C)Managerial diseconomies incentivize vertical integration.
D)Increased complexity of the firm is a type of managerial diseconomy.

Accepted Answer

Managerial diseconomies refer to the increased costs that come with larger firms due to the difficulties in coordinating and managing more employees and resources. It is not an incentive for vertical integration, but rather a cost that needs to be minimized or avoided. A, B, and D are all true statements regarding managerial diseconomies.

Question 13

The manager of Steel Works learns of a new technological interdependency between the intermediate stage and the final stage of production. If Steel Works currently contracts with another firm for the intermediate stage of production, which of the following is true?
A)The manager has less of an incentive to integrate backward.
B)The manager has more of an incentive to integrate forward.
C)The manager has more of an incentive to integrate backward.
D)The manager has less of an incentive to integrate forward.

Accepted Answer

The new technological interdependency between the intermediate and final stages of production suggests that closer coordination could lead to efficiencies or improvements. Integrating backward, which means taking control of the intermediate stage of production, would allow the manager to better manage this interdependency, thus providing more incentive to do so.

Quiz 11: Decisions About Vertical Integration and Distribution

The manager of Steel Works learns of a new technological interdependency between the final stage of production and the distribution of the final product. If Steel Works currently contracts with another firm to distribute the product, which of the following is true?

Which of the following is true regarding managerial diseconomies?

The manager of Steel Works learns of a new technological interdependency between the intermediate stage and the final stage of production. If Steel Works currently contracts with another firm for the final stage of production, which of the following is true?

In general, if two stages in a supply chain are making an economic profit by setting prices that exceed their marginal cost of production, managers can increase profit through vertical integration.

Vertical integration can eliminate double marginalization.

The manager of Steel Works learns of a new technological interdependency between the first stage and the intermediate stage of production. If Steel Works currently contracts with another firm for the intermediate stage of production, which of the following is true?

Because vertical integration is a yes or no decision, managers cannot use marginal analysis.

The manager of Steel Works learns of a new technological interdependency between the first stage and the intermediate stage of production. If Steel Works currently contracts with another firm for the first stage of production, which of the following is true?

If a firm has a monopoly in both the production and distribution, managers of the two divisions should be encouraged to maximize profits in their separate divisions.

All of the following are true regarding managerial diseconomies except which one?

The manager of Steel Works learns of a new technological interdependency between the intermediate stage and the final stage of production. If Steel Works currently contracts with another firm for the intermediate stage of production, which of the following is true?