question
Which of the following cost line items would be a fixed cost?
answer
Rent
question
Suppose an entrepreneur starts a business earning $2M in revenue in 2009 while at the same time incurring $1.8M in costs. If the entrepreneur's best outside alternative employment opportunity is to earn $300K, what are the firms accounting and economic profits?
answer
$200K, -$100K
question
Which of the following statements is true regarding the relationship between average and marginal cost functions?
answer
When average cost neither increases or decreases (because it is constant or at a minimum point), marginal cost is equal to average cost
question
If a firm can sell its product for more than its fixed costs, but not for more than its totals costs:
answer
It will continue to operate in the short run at a loss
question
What is the minimum efficient scale (MES) of production?
answer
The minimum point on a U-shaped average cost curve
question
Which of the following best describes economies of scope?
answer
Savings are achieved when a firm produces a wider variety of goods
question
Increased economies of scale and scope are helped by which of the following?
answer
Umbrella branding
question
Which of the following benefits of diversification explains the idea that a firm with many business lines can reduce swings in value because it receives only a small percentage of its revenue from any one of those business lines?
answer
Diversifying shareholder portfolios
question
Suppose a firm's plant produces Q units in any given year. The plant itself operates with annualized costs of $10M and other annual fixed expenses totaling $3M. In addition, the firm's variable costs depend on Q and are given by the formula 5Q^2+3Q. What is the formula for the firm's Short-Run (i.e. one year) Average Costs?
answer
AC(Q)= TC(Q)/Q
TC(Q)=FC+VC
So, AC(Q) = (5Q^2+3Q+13M) / Q
TC(Q)=FC+VC
So, AC(Q) = (5Q^2+3Q+13M) / Q
question
How does the digitization of books, movies, and music affect inventory economies of scale?
answer
- Firms at any level can distribute and create at a low cost, reducing the advantage big firms get through economies of scale
- Allows for lower costs at higher quantities
- Allows for lower costs at higher quantities
question
Which of the following is a true argument regarding the make-or-buy decision process?
answer
Firms should buy, rather than make, in general, because market firms are subject to the discipline of the market and must be efficient and innovative to survive
question
What are agency costs?
answer
Costs associated with slack effort and with the administrative controls to deter it
question
What is a market firm?
answer
An independent outsourcing partner
question
Which of the following is a method firms can use to counteract price fluctuations and eliminate income risk?
answer
Enter into futures contracts to hedge the price of raw materials
question
Which of the following is not a method a firm could use to force vertical foreclosure?
answer
Upstream competitor acquires downstream competitor and refuses to buy from other suppliers
question
Which of the following issues makes it difficult for to managers to reign in dedicated "cost centers" in a firm?
answer
Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization
question
Which of the following is not a characteristic of a complete contract?
answer
The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds
question
Which of the following is a reason for a firm to Buy rather than make?
answer
Upstream firms aggregate the demands of many buyers and provide economies of scale.
question
Explain why the make-or-buy decision is moot when contracts are complete.
answer
A complete contract eliminates opportunities for shirking by stipulating each party's responsibilities
and rights for each and every contingency that could conceivably arise during the transaction. By
using a complete contract, a firm can get its trading partner to mimic any and all of the steps that
would have been taken by a vertically integrated firm, as well as replicate the profits accruing to each
participant in the vertical chain.
and rights for each and every contingency that could conceivably arise during the transaction. By
using a complete contract, a firm can get its trading partner to mimic any and all of the steps that
would have been taken by a vertically integrated firm, as well as replicate the profits accruing to each
participant in the vertical chain.
question
Suppose you manufacture 10 million hard drives per year specifically for Dell laptop computers. Suppose your average variable cost C=$20/unit, annualized cost of investment to build a hard drive factory I=$30 million, and the market price (bailout market price in the event Dell does not buy) Pm=$22/unit. If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and the deal subsequently falls apart, what is your company's "quasi-rent"?
answer
IF DELL DOES NOT BUY
contribution pu = 22 - 20 = $2/unit
No. of unit = 10M
Total Contribution = 20M
IF DELL BUY
contribution pu = 25 - 20 = $5/unit
No. of unit = 10M
Total Contribution = 50M
Quasi Rent = 50 - 20 = 30M - Quasi Rent = (Difference in price between Dell and market)*No. of units
contribution pu = 22 - 20 = $2/unit
No. of unit = 10M
Total Contribution = 20M
IF DELL BUY
contribution pu = 25 - 20 = $5/unit
No. of unit = 10M
Total Contribution = 50M
Quasi Rent = 50 - 20 = 30M - Quasi Rent = (Difference in price between Dell and market)*No. of units
question
The concept of who gets to control resources, make decisions and allocate profits is known as:
answer
The Property Rights Theory (PRT)
question
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?
answer
The cost difference is positive for low and negative for high levels of specificity
question
What concept describes the situation where the owner of an asset grants another party the right to use that asset, but the owner retains all controlling rights that are not explicitly stipulated in the contract?
answer
Residual rights of control
question
The process by which governance develops is known as:
answer
Path Dependence
question
Suppose we have two firms (Firm 1 & Firm 2) enter into a transaction where Firm 1 is upstream of firm 2 in a vertical chain. What term best describes the organization of the transaction where Firm 1 owns the assets of Firm 2?
answer
Forward integration
question
Which of the following describes when a manufacturer produces some of an input quantity itself and purchases the remaining portion from independent firms?
answer
Tapered integration
question
Which of the following is not a benefit of tapered integration?
answer
Allows the firm to produce most efficiently in all circumstances
question
In what type of market structure do sellers set identical prices and are prices generally driven down to marginal costs?
answer
Perfect competition
question
What term describes the differentiation of a product when it is unambiguously better or worse than competing products?
answer
Vertical differentiation
question
A monopolist faces demand P=200-Q and has constant marginal cost of production of 20 per unit.
a) What are the price and quantity of output in a competitive market?
b) What are the price, quantity, and profit when the monopolist maximizes the profit?
a) What are the price and quantity of output in a competitive market?
b) What are the price, quantity, and profit when the monopolist maximizes the profit?
answer
**Figure out
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