Question 1

When a firm establishes a long-term contract with another firm whereby it acquires an asset such as a machine or a building through a rental agreement,it is called a:

Accepted Answer

A lease contract is an agreement between two firms where one firm (the lessee) acquires an asset owned by the other firm (the lessor) through a rental agreement. It allows the lessee to use the asset without actually owning it. This arrangement is commonly used for assets such as machinery, equipment, and buildings, and it typically involves a long-term commitment. Thus, option C is the correct answer. Option A, standard supply contract, refers to an agreement to purchase a standard quantity of goods or services regularly, and option B, joint venture, refers to a cooperation arrangement between two or more firms to pursue a specific business opportunity. Option D, franchise agreement, is a contract between a franchisor and franchisee, where the franchisor grants the franchisee the right to use its brand, products, and services in exchange for a fee.

Question 2

While firms buy many of their inputs through the open market,there is often a desire to produce critical inputs.A common concern in producing an input internally is that:

Accepted Answer

Producing critical inputs internally can lead to higher costs over the long run as the firm may not have the expertise, technology or economies of scale to keep costs low. Such inputs often require significant investment in R&D, machinery and specialized skills, which might be more efficiently obtained through outsourcing to a specialized supplier.

Question 3

DrugCo has two demand equations for its retail products (pain reliever and cancer):
Pain relief: P = 100 - 10 Q
Cancer drug: P = 200 - 15 Q
The marginal cost of production is $30.Which product should go to the retail market and which should go to the wholesale market? What are the corresponding retail and wholesale prices? What would happen if the sales are switched from the retail to the wholesale and vice versa?

Accepted Answer

Starting with the pain relief drug,P = 100 - 10 Q
So,MR = 100 - 20 Q
Setting MC = MR,we get 30 = 100 - 20 Q or
20 Q = 70
Or Q = 3.5 units and so,P = 100 - 10 (3.5)= $65
Now going to the cancer drug,P = 200 - 15 Q
So,MR = 200 - 30 Q
Setting MC = MR,we get 30 = 200 - 30 Q
Or 30 Q = 170 or Q = 5.67 units and so P = 200 - 15(5.67)= $115
So in the retail markets the drugs will be priced at $65 and $115respectively.
The wholesale drug will cost $115 to the wholesalers and the company will retail the cheaper drug to the consumers.Switching this order will allow other manufacturers to buy the cheaper drug which can be resold in the wholesale market for a much higher price but less than $65,and drive DrugCo out of business.

Question 4

When a firm decides to move away from ownership of a vertically integrated production process and begins to purchase supplies or other services from other businesses,it is said to be:

Accepted Answer

When a firm decides to purchase supplies or services from other businesses instead of owning the production process, it is known as outsourcing. This allows the firm to focus on its core competencies while reducing costs associated with owning and maintaining the production process.

Question 5

A firm that produces its own output is engaging in ______ integration,while a firm that markets its own good is engaging in ______ integration.

Accepted Answer

A firm that produces its own output is engaging in backward integration because it is moving upstream in the supply chain to control the production process. When a firm markets its own goods, it is engaging in forward integration, as it is moving downstream in the supply chain to control the distribution or sales process.

Question 6

Why are firm-specific assets so important in the decision to build internally,negotiate a long-term contract,or buy on the open market?

Accepted Answer

The answer of Why are firm-specific assets so important in...

Question 7

Tasty Chicken Inc.is a large producer of chicken for grocery stores.It usually engages in a long-term contract with these stores to maintain demand for its product.However,Tasty Chicken is regularly plagued with rising and falling prices for its supplies: particularly chicken feed and new chicks.Should Tasty Chicken vertically integrate upstream,building or buying a hatching company and an animal feed company? What are the pluses and minuses of such a decision?

Accepted Answer

The answer of Tasty Chicken Inc.is a large producer of...

Question 8

When a corporation participates in more than one successive stage in a multi-stage production process,it is said to be:

Accepted Answer

When a corporation participates in more than one successive stage in a multi-stage production process, it is said to be vertically integrated. This means that the company controls different parts of the supply chain, from the production of raw materials to the distribution of finished products. This allows the company to optimize its operations and reduce costs, as well as have more control over quality and delivery times.

Question 9

When a firm establishes a long-term contract with another firm,whereby the first firm grants the second independent business the rights to use the former's name,reputation and business format,it is referred to as a:

Accepted Answer

The scenario described is that of a franchise agreement. In a franchise arrangement, the franchisor (the first firm) grants the franchisee (the second independent business) the right to use its brand name, business model, and reputation in exchange for fees, royalties, and other considerations.

Question 10

What is outsourcing and what forms does it take?

Accepted Answer

The answer of What is outsourcing and what forms does...

Question 11

Autocorp faces the following demand function for its automobiles:
P = 55,000 - 200 Q
Its MC is $9,000.What will be its price if: (a)it decides to sell the automobiles by itself and (b)it sells though SUVmart,an independent distributor.What is the consequence of this exclusive dealing on prices?

Accepted Answer

The answer of Autocorp faces the following demand function for...

Question 12

What limits the entire economy from being served by one gigantic firm that produces everything?

Accepted Answer

The answer of What limits the entire economy from being...

Question 13

Why aren't all economic transactions conducted through markets?

Accepted Answer

The answer of Why aren't all economic transactions conducted through...

Question 14

Agri-Tech supplies is a patented sweetener to various food processors.It has noticed that the value of the sweetener varies dramatically from one buyer to another,depending on the end-use demand.But its experiments with charging higher prices to some buyers have failed.The demand for the juices is highly price elastic while the demand for sweetened medicine is relatively less elastic.Can Agri-Tech find a way to successfully price discriminate?

Accepted Answer

The answer of Agri-Tech supplies is a patented sweetener to...

Question 15

The nonmarket transactions refer to:

Accepted Answer

Nonmarket transactions are transactions that are not conducted in the market through price mechanism. Vertical integration, where a firm owns or controls multiple stages of the production process, involves nonmarket transactions such as transferring goods or services within the same firm. Purchases made in the spot market and short term contracts are market transactions. Market power refers to a firm's ability to influence prices in the market, and is not related to nonmarket transactions.

Question 16

When a firm purchases a part of its supplies from any one of a large number of potential suppliers at the current market price without long-term commitments,it is:

Accepted Answer

Making a spot market purchase refers to purchasing supplies at the current market price from any available supplier without any long-term commitments. This strategy allows the firm to take advantage of favorable market conditions and avoid the risks of long-term commitments. Arbitrage refers to buying and selling the same asset in different markets to take advantage of price differences. Integrating upstream or downstream involves acquiring or merging with suppliers or customers to gain control over the supply chain. Therefore, the best choice for the given scenario is A) making a spot market purchase.

Question 17

AutoCorp faces a demand of P = $30,000 - 5 Q for its primary line of sporty mini-cars in Little Rock.The marginal cost of producing the car is $8,000.Discuss the implications of selling the new mini-car through its own dealership or through the local dealer: MiniMart.

Accepted Answer

The answer of AutoCorp faces a demand of P =...

Question 18

Nonmarket transactions refer to:

Accepted Answer

Nonmarket transactions often involve long-term contracts rather than immediate, spot market exchanges. These contracts can include agreements for future delivery of goods or services, often at predetermined prices, which are not conducted in the open market.

Question 19

An iron and steel manufacturing plant was facing a power crisis on a daily basis.The unit had to stall production for about two hours on an average per day.In order to minimize the loss,the owner decided to invest in a cogeneration unit that would produce enough power to facilitate production during the peak load hours.This action of the manufacturer exemplifies:

Accepted Answer

Investing in a cogeneration unit to produce power for the plant's own use is an example of forward or downstream integration, where a company expands its operations closer to the end user or customer, in this case by generating its own power to ensure continuous production.

Question 20

Tasty Chicken Inc.has worked hard to develop its brand name.Its motto "Absolutely Tasty" has become a common term used for good food.But the company finds that grocery stores do not feature their products in high visibility areas.Further,restaurants never tell their patrons they are eating food manufactured by Tasty Chicken.What needs to be done?

Accepted Answer

The answer of Tasty Chicken Inc.has worked hard to develop...

Quiz 19: Vertical Integration and Outsourcing