Question 1

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 is true. Firms require coordination and organization of economic activity to function effectively, and often have lower administrative costs compared to transactions costs that would be required to organize activity across markets.

Question 2

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

Accepted Answer

Economic organization in the capitalist economy is achieved through the coordination of markets and firms. Markets determine prices through the price mechanism, while firms use administrative direction to allocate resources and make decisions. Therefore, both markets and firms play a role in the economic organization of a capitalist economy.

Question 3

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 not only search costs and costs of negotiating contracts but also the costs incurred in enforcing contracts.

Question 4

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 5

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 6

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 often do not own mines because they can purchase gold and silver from the market at competitive prices, avoiding the high costs and risks associated with mining operations.

Question 7

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

The statement is reversed. Corporate strategy is concerned with the overall direction and scope of an entire organization, while business strategy is concerned with how a specific business unit competes within a particular industry.

Question 8

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

Accepted Answer

Corporate strategy is indeed concerned with decisions over product scope (what products to offer), geographical scope (where to offer those products), and vertical scope (what stages of the production process to own). Therefore, the statement is true.

Question 9

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 10

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

Accepted Answer

The answer of Managing vertically-related businesses that are strategically very...

Question 11

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

The growth in company size and scope was primarily due to technological advancements, economies of scale, and strategic management, not just transaction costs.

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 was indeed a major factor that led to the narrowing in the scope of activities of large corporations during the last two decades of the 20th century. This was due to factors such as globalization, technological advancements, deregulation, and increasing competition, which forced companies to focus on their core competencies and divest non-core businesses.

Question 13

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 both crucial factors to consider when analyzing the scope of a firm, including the vertical, geographical, and product scope. Economies of scope refer to the cost savings a firm can achieve by producing multiple products or services together, while transaction costs refer to the costs of conducting business and transactions with suppliers, customers, and other partners. Understanding these concepts is essential for firms to make informed decisions about their strategic scope and optimize their operations.

Question 14

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 long-term relationship of trust and mutually beneficial outcomes between buyers and suppliers. This reduces the likelihood of opportunism, and hence lowers transaction costs associated with monitoring, negotiation, and enforcement. Therefore, offering the possibility of repeat business can help to mitigate the problems of market failure due to information asymmetry, bounded rationality, and moral hazard.

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

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 17

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. Many large companies have shifted towards a more horizontal structure, outsourcing certain activities to focus on core competencies and improve flexibility.

Question 18

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 19

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 in the 20th century believed that vertical integration, or expanding their operations to include multiple stages of the supply chain, would allow them to reduce risk and improve coordination. This approach was seen as an alternative to relying solely on competitive markets for resources and inputs.

Question 20

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.

Quiz 10: Vertical Integration and the Scope of the Firm