Question 1

The growth in the size and scope of companies throughout most of the 19^th and 20^th centuries can be attributed primarily to the increasing transaction cost of markets.

Accepted Answer

False

Question 2

Managing vertically-related businesses that are strategically very different is not a problem if companies adopt an appropriate organizational structure.

Accepted Answer

False

Question 3

Manufacturers of final products such as motor vehicles, airplanes, and domestic appliances are more likely to backward integrate into the productions of commodity components than components that are specialized to the specific requirements of the manufacturer of the final product.

Accepted Answer

Manufacturers of final products are more likely to backward integrate into the production of specialized components that are specific to their requirements rather than commodity components, as specialized components are critical to their product's differentiation and performance.

Question 4

One of the advantages of a company providing its own facilities maintenance services is that the incentives that a wholly owned and directly managed maintenance unit is subject to "high powered" incentives.

Accepted Answer

A wholly owned and directly managed maintenance unit is typically subject to "low powered" incentives because its performance is directly tied to the parent company's objectives, leading to less external competitive pressure to reduce costs or improve efficiency compared to outsourcing to specialized firms.

Question 5

Corporate strategy is concerned with decisions over product scope, geographical scope, and vertical scope.

Accepted Answer

Corporate strategy is concerned with decisions related to the scope of the business, including the products or services offered, the geographical areas in which it operates, and the level of integration between different parts of the business (vertical scope).

Question 6

Firms exist in situations where the administrative costs of coordinating economic activity are less than the transactions costs of organizing such activity across markets.

Accepted Answer

This statement reflects the concept of transaction cost economics, which suggests that firms exist because it is more efficient to coordinate economic activity within a hierarchical structure rather than through markets where transaction costs (i.e. the costs of negotiating and enforcing contracts) may be prohibitively high.

Question 7

When there are technical efficiencies from co-locating vertically-related processes (e.g.the production of pulp and paper or the production of steel and steel strip), vertical integration (in the form of common ownership of the vertically-linked activities) is essential.

Accepted Answer

Technical efficiencies from co-locating vertically-related processes can be realized through arrangements other than common ownership, such as long-term contracts or strategic alliances, making vertical integration one option among several to achieve such efficiencies.

Question 8

During the past three decades, increased emphasis on flexibility and the need to develop superior organizational capabilities has caused large companies ot reduce their vertical scope.

Accepted Answer

This statement is true. Large companies have been reducing their vertical scope in order to focus on flexibility and developing better organizational capabilities.

Question 9

Corporate strategy is concerned with how a firm competes in a particular industry, whereas business strategy is concerned the choice of which businesses the firm competes in.

Accepted Answer

Corporate strategy is concerned with how a firm manages its portfolio of businesses, which includes decisions on which businesses to acquire, divest, or grow. Business strategy, on the other hand, focuses on how a specific business unit competes within its industry.

Question 10

By offering the possibility of repeat business, the suppliers and buyers can avoid the problems of opportunism that give rise to transaction costs.

Accepted Answer

Repeat business establishes a long-term relationship between suppliers and buyers, reducing the likelihood of opportunistic behavior and consequent transaction costs.

Question 11

Jewelry companies typically do not own gold and silver mines because the markets for gold and silver are highly competitive and impose few transaction costs on jewelry makers.

Accepted Answer

Jewelry companies rely on purchasing gold and silver from various sources, including mines, refiners, and traders, rather than owning their own mines. This is because the gold and silver markets are highly competitive, meaning that there are many sources available to purchase these metals from. Additionally, transactions in the gold and silver markets typically have few transaction costs, making it more cost-effective for jewelry companies to purchase the metals rather than own and operate their own mines.

Question 12

A major factor causing the narrowing in the scope of the activities of large corporations during the last two decades of the 20^th century was increasing turbulence of the economic environment.

Accepted Answer

The increasing turbulence of the economic environment caused large corporations to focus on core activities and divest non-core activities, resulting in a narrowing of scope.

Question 13

Transaction costs of markets include search costs and costs of negotiating contracts, but usually exclude the costs incurred in enforcing contracts.

Accepted Answer

Transaction costs of markets include search costs, costs of negotiating contracts, as well as costs incurred in enforcing contracts (such as legal fees in case of a dispute).

Question 14

For most of the 20^th century companies expanded their vertical scope in the belief that vertical integration reduced risk and permitted superior coordination compared to relying on markets.

Accepted Answer

This statement is true. Many companies during the 20th century believed that vertical integration allowed for better control and coordination over their operations, as well as reduced risk by owning more stages of the production process.

Question 15

Economies of scope and transaction costs are important concepts when analyzing the vertical, geograpjical, amd product scope of the firm.

Accepted Answer

Economies of scope and transaction costs are crucial in determining the optimal strategy for the firm's vertical, geographical, and product scope. Understanding these concepts can help a firm identify cost-saving opportunities and improve its efficiency in its operations.

Question 16

The main manifestation of the trend towards vertical de-integration is the growth of outsourcing.

Accepted Answer

The answer of The main manifestation of the trend towards...

Question 17

When a farmer operates a stall in a local farmers' market; this is a form of backward integration.

Accepted Answer

Backward integration refers to a company acquiring or merging with suppliers or companies that supply its raw materials. Operating a stall in a local farmers' market is a form of direct sales or retailing, not backward integration.

Question 18

Alfred Chandler described the administrative mechanism of ﬁrms as the "invisible hand" of economic coordination.

Accepted Answer

Alfred Chandler is known for his work on the visible hand of managerial coordination in firms, contrasting with Adam Smith's concept of the "invisible hand" of the market.

Question 19

Vertical integration allows a firm to extend its monopoly position from one stage of an industry's value chain to adjacent stages, this allows the firm to increase the amount of monopoly profit it can extract.

Accepted Answer

The answer of Vertical integration allows a firm to extend...

Question 20

Economic organization in the capitalist economy is achieved through markets by the price mechanism and through firms by administrative direction.

Accepted Answer

In a capitalist economy, markets play a crucial role in determining prices and allocating resources through the price mechanism. However, firms also play an important role in organizing economic activity through administrative direction. Both markets and firms are necessary elements of a functioning capitalist economy.

Quiz 10: Vertical Integration and the Scope of the Firm

The growth in the size and scope of companies throughout most of the 19th and 20th centuries can be attributed primarily to the increasing transaction cost of markets.