Question 1

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

Accepted Answer

False

Question 2

Vertical integration can be used to extend a monopoly position from one stage of an industry's value chain to adjacent stages,thereby allowing the monopolist to increase the amount of monopoly profit it can extract.

Accepted Answer

False

Question 3

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

Accepted Answer

Corporate strategy involves decisions regarding the range of products a company should produce, the geographical areas it should operate in and the degree of vertical integration it would pursue.

Question 4

J.K.Galbraith opposed the trend towards "corporate capitalism" arguing that large,integrated corporations were not essential to develop and commercialize new technologies.

Accepted Answer

The answer of J.K.Galbraith opposed the trend towards "corporate capitalism"...

Question 5

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 typically purchase gold and silver from mining companies, wholesalers, or other sources rather than owning the mines themselves. This is because owning a mine requires a high level of investment and expertise, and the markets for gold and silver are highly competitive and easily accessible to jewelry makers without incurring significant transaction costs.

Question 6

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 7

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

Accepted Answer

Corporate strategy is concerned with the choice of which businesses a firm competes in, while business strategy focuses on how a firm competes within a specific industry.

Question 8

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

Accepted Answer

Large companies have increasingly focused on core competencies and outsourced non-core activities to become more flexible and efficient, reducing their vertical scope.

Question 9

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 10

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 believed in vertical integration during the 20th century as it allowed them to have greater control over the entire production process and reduce the risks associated with relying on external suppliers and markets.

Question 11

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

Accepted Answer

High-powered incentives typically refer to performance-based incentives that are more common in outsourced or competitive environments, not in wholly owned and directly managed units.

Question 12

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 creates a relationship between the supplier and buyer, which reduces the likelihood of opportunistic behavior and results in lower transaction costs. Thus, the statement is true.

Question 13

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

Accepted Answer

In a capitalist economy, markets use the price mechanism to allocate resources, while firms use internal administration to organize production and distribution.

Question 14

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.

Question 15

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 16

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

Accepted Answer

Managing vertically-related businesses that are strategically different can still pose challenges even with an appropriate organizational structure, as differences in strategy may require distinct management approaches, resources, and expertise.

Question 17

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 led to a narrowing in the scope of the activities of large corporations during the last two decades of the 20th century. This is because companies had to focus on their core competencies and streamline operations to remain competitive in the rapidly changing business landscape.

Question 18

In fashion clothing,one reason why mass-market distributors such as H&M,Forever 21,and Gap outsource their production is to reduce new product cycle time (the time between the initial design of a product and its delivery to a retail store).

Accepted Answer

The answer of In fashion clothing,one reason why mass-market distributors...

Question 19

Franchising offers a means of reconciling the coordination and control benefits of vertical integration with the entrepreneurial flexibility and high-powered incentives of market contracts.

Accepted Answer

This statement is true. Franchising allows for a level of control and coordination similar to vertical integration, but also allows for individual entrepreneurs to run their own businesses and be incentivized through market contracts.

Question 20

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 is the basic economic rationale for why firms exist. By bringing economic activity within the bounds of a single organization, the firm can reduce transactions costs and better coordinate production and exchange activities, leading to higher efficiency and profits.

Quiz 11: Vertical Integration and the Scope of the Firm

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