Question 1

When a firm is operating at its minimum efficient scale, its short-run average total cost of production is minimized.

Accepted Answer

The answer of When a firm is operating at its...

Question 2

The McDonald's restaurants in Russia grow their own potatoes to guarantee that they are grown correctly.Growing potatoes is very different from running a fast-food restaurant.One could say of McDonald's decision to grow its own potatoes for the Russian franchise that

Accepted Answer

McDonald's decision to grow its own potatoes in Russia is driven by the need for quality control. By growing their own potatoes, McDonald's can ensure that they meet the franchise's strict quality standards. The bounded rationality criterion, which emphasizes the need for firms to make rational decisions based on limited information and resources, does not play a significant role in this decision. Instead, the need for quality control takes precedence over other factors.

Question 3

If the minimum efficient scale in the production of aluminum exceeds the quantity of aluminum any individual siding producer buys, siding producers should integrate backward into aluminum production.

Accepted Answer

Backward integration is not necessarily the best strategy if the minimum efficient scale of aluminum production is too large for individual siding producers, as it may not be cost-effective or feasible for them to produce aluminum efficiently.

Question 4

When several resources are combined in the production of a good,

Accepted Answer

When several resources are combined in the production of a good, it often becomes difficult to observe the marginal contribution of each input, as they are used in combination with each other. This is because the combined effect of the resources is not always equal to the sum of their individual effects, making it hard to determine the productivity of each resource individually.

Question 5

The more complicated the process used to produce a good,

Accepted Answer

The greater the complexity of the production process, the more difficult it is for firms to coordinate and manage inputs and outputs efficiently. As a result, the transaction costs of organizing production through markets tend to be higher, as there are more opportunities for miscommunication, mistakes, and other forms of inefficiency. Thus, firms may be more likely to use administrative controls to manage the production process, rather than relying on the market to provide coordination.

Question 6

The simpler a production process is,

Accepted Answer

If a production process is simple, it is more likely that a firm will use the market to organize production. This is because a simple process is easier to outsource to other firms who specialize in that particular task, rather than investing in the resources to do it in-house. Using the market to organize production reduces the firm's transaction costs.

Question 7

By integrating vertically,

Accepted Answer

Vertical integration involves one firm owning and controlling various stages of the production process, from raw materials to finished product. This means that the various procedures involved in producing a good are collected within one firm, rather than being parceled out among various contractors or being connected through markets or government intermediation. Therefore, option D is the best choice.

Question 8

Spacely Sprockets, Inc., usually pays $1, 000 for a million flanges, which it uses as inputs in the manufacture of sprockets.It also spends an average of $20 per million flanges on finding manufacturers and negotiating contracts.Spacely is capable of making its own flanges at a cost of $980 per million.Given these costs,

Accepted Answer

Spacely Sprockets, Inc. should start to manufacture its own flanges because the cost of making its own flanges is $980 per million, which is lower than the cost of contracting out for flanges plus the cost of finding manufacturers and negotiating contracts. By manufacturing its own flanges, Spacely Sprockets, Inc. can save $20 per million flanges, which adds up to significant savings over time.

Question 9

Vertical integration is

Accepted Answer

Vertical integration refers to a company's expansion into earlier or later stages of its production process. For example, a car company that owns its own steel mills to produce the steel needed for car manufacturing is an example of vertical integration.

Question 10

Wendy's must decide whether to grow its own potatoes for French fries.Growing potatoes is a very different process from running a fast-food restaurant.Based on this information alone, should Wendy's grow its own potatoes?

Accepted Answer

Wendy's managers have bounded rationality, meaning they have limited information and expertise in growing potatoes, which is a different business from running a fast-food restaurant.

Question 11

Wendy's restaurants must decide whether to grow their own potatoes for French fries or buy them.If they buy rather than grow, then they have opted to

Accepted Answer

By choosing to buy potatoes instead of growing them, Wendy's is allowing market prices to guide their resource allocation decisions. This is because they would be purchasing the potatoes from suppliers who are competing with each other in a market, and the price they pay will be determined by supply and demand dynamics. This can be a more efficient way to allocate resources than trying to vertically integrate and produce the potatoes themselves.

Question 12

If the minimum efficient scale in toaster production is 500, 000 units per year, the average cost of producing 300, 000 toasters is greater than the average cost of producing 500, 000.

Accepted Answer

The minimum efficient scale in toaster production is 500,000 units per year, which means that the average cost of production will be lowest at this level of output. Producing 300,000 toasters is below the minimum efficient scale, which means that the average cost of production will be higher than producing 500,000 toasters. Therefore, the statement is true.

Question 13

One reason a computer manufacturer may produce its own microchips rather than buy them is that it can maintain control over production quality.

Accepted Answer

Producing their own microchips allows the manufacturer to have more control over the production process, which can help ensure higher quality standards.

Question 14

The more complicated a production process is,

Accepted Answer

In a complicated production process, centralized control can reduce transaction costs by streamlining operations and reducing the need for multiple market transactions.

Question 15

Which of the following is true of vertical integration?

Accepted Answer

Vertical integration involves a firm expanding its operations by acquiring or merging with other firms at different stages of production or distribution, leading to larger firms.

Question 16

Vertical integration has no effect on the internal organization of a firm; it only affects the outside markets.

Accepted Answer

Vertical integration affects both the internal and external organization of a firm. It involves acquiring or controlling production or supply chain stages that were previously handled by external parties. This can alter the firm's internal operations, processes, and structures in order to integrate the newly acquired stages.

Question 17

Don's Pasture Apple Cider Company buys four inputs: apples, glass bottles, apple presses, and computers for record keeping.If the company decides to become more vertically integrated, it will

Accepted Answer

Becoming more vertically integrated would entail bringing production processes in-house instead of outsourcing them, in this case, growing apples would be the most logical step.

Question 18

Which of the following is the best example of vertical integration

Accepted Answer

Vertical integration is when a company acquires or merges with a company that is a supplier or distributor of its products or services. In this case, the auto firm is acquiring a tire manufacturer, which is a supplier for their products.

Question 19

When a firm is no longer able to reduce its long-run average cost by expanding, it has achieved its minimum efficient scale of production.

Accepted Answer

The minimum efficient scale (MES) of production is the level of output at which a firm achieves the lowest possible long-run average cost. At the MES, the firm has fully exploited economies of scale and cannot reduce costs any further by expanding its operations. Therefore, the statement is true.

Question 20

Managers experience bounded rationality when they focus narrowly on maximizing their firm's profits and ignore the broader perspective of society's preferences.

Accepted Answer

The answer of Managers experience bounded rationality when they focus...

Quiz 14: Transaction Costs, Imperfect Information, and Behavioral Economics