Which of the following is true with regard to the difference in exchange costs between an item produced internally firm and an item purchased from an outside supplier through an arm's length market transaction as the level of asset specificity increases?
A)The cost difference is positive for both low and high levels of specificity
B)The cost difference is negative for both low and high levels of specificity
C)The cost difference is negative for low and positive for high levels of specificity
D)The cost difference is positive for low and negative for high levels of specificity
E)As asset specificity increases,the transaction costs of the market exchange decrease

Question

Quizplus · Accepted Answer

As the level of asset specificity increases, the difference in exchange costs between an item produced internally and an item purchased from an outside supplier through an arm's length market transaction becomes more pronounced. At low levels of asset specificity, the difference may be positive or negative. However, at high levels of asset specificity, the firm incurs higher costs for using external suppliers due to the specialized nature of the asset. Therefore, the cost difference is positive for low levels of specificity and negative for high levels of specificity.

Which of the Following Is True with Regard to the Difference