Chapter 3

Suppose that firm XYZ manufactures 10 million hard drives per year specifically for Dell laptop computers. If firm XYZ has an average variable cost (C in the book) of AVC = $20/unit, annualized cost of investment to build a hard drive factory of I = $30 million, and market price (bailout market price in the event Dell does not buy) of Pm=$22/unit, what is firm XYZ's RSI (relationship specific investment)? a. $4 million b. $5.5 million c. $7 million d. $10 million e. $12 million

$10 million *

Suppose that firm XYZ manufactures 10 million hard drives per year specifically for Dell laptop computers. If firm XYZ has an average variable cost of AVC = $20/unit, annualized cost of investment to build a hard drive factory of I = $30 million. If Dell agrees to purchase the 10 million hard drives at a price P* = $25/unit, what is your company's "rent"? a. $14.5 million b. $16 million c. $20 million d. $25 million e. $28 million

$20 million *

Suppose that firm XYZ manufactures 10 million hard drives per year specifically for Dell laptop computers. If firm XYZ has an average variable cost of AVC = $20/unit, annualized cost of investment to build a hard drive factory of I = $30 million, and market price (bailout market price in the event Dell does not buy) of Pm=$22/unit. If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and subsequently renegotiates to only purchase for Pnew = $22.50/unit, what is the loss in firm XYZ's quasi-rent (which the amount that Dell increased its own profits by)? a. $12 million b. $15 million c. $17.5 million d. $25 million e. $30 million

$25 million *

Suppose that firm XYZ manufactures 10 million hard drives per year specifically for Dell laptop computers. If firm XYZ has an average variable cost of AVC = $20/unit, annualized cost of investment to build a hard drive factory of I = $30 million, and market price (bailout market price in the event Dell does not buy) of 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 firm XYZ's "quasi-rent"? a. $12 million b. $15 million c. $17.5 million d. $25 million e. $30 million

$30 million *

Suppose that firm XYZ manufactures 10 million hard drives per year specifically for Dell laptop computers. If firm XYZ has an average variable cost of AVC = $20/unit, annualized cost of investment to build a hard drive factory of I = $30 million, and market price (bailout market price in the event Dell does not buy) of Pm=$22/unit. If Dell agrees to purchase the 10 million hard drives at a price P*=$25/unit and subsequently renegotiates to only purchase for Pnew = $22.50/unit, what is firm XYZ's new "rent"? a. - $5 million b. - $10 million c. $5 million d. $10 million e. $11 million

- $5 million *

Which of the following processes is most representative of a less integrated firm on the "buy" end of the make-or-buy continuum? a. Arm's length market transactions b. Long-term contracts c. Strategic alliances and joint ventures d. Parent/subsidiary relationships e. Perform activity internally

Arm's length market transactions *

What problem preventing complete contracts refers to a lack of transparency/equal access to the details surrounding a contract? a. Agency costs b. Bounded rationality c. Performance measurement difficulties d. Asymmetric information e. Contract body of law

Asymmetric information *

Which of the following has a downstream relationship with a Toyota Motor Corporation? a. Steel manufacturers b. Tire companies c. Automotive Dealerships d. Paint producer e. Car parts manufacturer

Automotive Dealerships *

What problem preventing complete contracts refers to the limits on the capacity of individuals to process information, deal with complexity and pursue rational aims? a. Agency costs b. Bounded rationality c. Performance measurement difficulties d. Asymmetric information e. Habeas corpus

Bounded rationality *

What are agency costs? a. Costs of the sales force b. Costs associated with slack effort and with the administrative controls to deter it c. Costs related to general and administrative expenses d. Costs associated with outsourcing of firm functions e. Costs attributed to the use of professional service firms

Costs associated with slack effort and with the administrative controls to deter it *

What term describes features that need to relate to each other in a precise fashion otherwise they lose a significant portion of their economic value? a. Design attributes b. Critical components c. Contract factors d. Coordination factors e. Relationship attributes

Design attributes *

Which of the following is a method firms can use to counteract price fluctuations and eliminate income risk? a. Manufacture all needed inputs internally b. Acquire upstream firms in the vertical chain c. Enter into futures contracts to hedge the price of raw materials d. Eliminate competitors by under-cutting their price e. Avoid the use of contracts, and buy all inputs at their current market value

Enter into futures contracts to hedge the price of raw materials *

Which of the following issues makes it difficult for to managers to reign in dedicated "cost centers" in a firm? a. Cost centers have no dedicated "customer" b. Cost centers are easy to judge against market counterparts performing similar functions c. Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization d. Firms are always looking to cut costs when they retain an advantage by insulating it from the market e. Managers of costs centers have significant latitude to complete their jobs

Firms are unwilling to endure the ill will generated by firing unproductive elements in an organization

Which of the following is a true argument regarding the make-or-buy decision process? a. Firms should make an asset, rather than buy it, if that asset is a source of competitive advantage for the firm b. Firms should buy, rather than make, to avoid the costs of making the product c. Firms should make, rather than buy, to avoid paying a profit margin to independent firms d. 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 e. Firms should make, rather than buy, because a vertically integrated producer will be able to avoid paying high market prices for the input during periods of peak demand or scarce supply

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 *

What primary agency cost problem plagued the partnership between Sony's hardware and software from 1998-2008 with regards to digital music? a. High infrastructure costs b. Contract disputes c. High transaction costs d. Overlapping distribution channels e. Manager/worker slacking and lack of interest

Manager/worker slacking and lack of interest *

Which of the following is NOT a method to protect intellectual property? a. Patents that are specific and complete b. Complete contracts regarding IP (intellectual property) with all suppliers c. Non-disclosure agreements for employees d. Limiting access to IP (intellectual property) to a few key employees e. Outsourcing the production of a patented product to a different firm

Outsourcing the production of a patented product to a different firm *

Which of the following processes is most representative of a vertically integrated firm on the "make" end of the make-or-buy continuum? a. Arm's length market transactions b. Long-term contracts c. Strategic alliances and joint ventures d. Parent/subsidiary relationships e.Perform activity internally

Perform activity internally *

Which of the following asset specificity forms describes why glass container production requires molds custom tailored to particular container shapes and glass making machines? a. Site specificity b. Physical asset specificity c. Dedicated assets d. Human asset specificity e. The fundamental transformation

Physical asset specificity *

The biotechnology industry is seeing a broad pattern of disintegration due to the fact that big pharma companies are less and less doing which of the following core functions? a. Infrastructure b. Product innovation c. Obtaining regulatory approval d. Customer relationship e. Manufacturing and communications

Product innovation *

Which of the following is NOT a result of the holdup problem? a. More difficult contract negotiations and more frequent renegotiations b. Investments to improve ex post bargaining positions c. Reduction in the transaction costs of arm's length market exchanges d. Distrust e. Reduced investment in relationship-specific investments

Reduction in the transaction costs of arm's length market exchanges *

What is a reason that companies might want to "buy" instead of "make" talent from the market when looking to acquire employees with a particular skill set? a. External training methods are better than internal ones b. Companies are always willing to pay more for external employees c. External training is more advanced (up-to-date) than internal d. Scale economies can result in fixed education costs while in house education methods may be more expensive e. Externally trained employees are more likely to become better business leaders

Scale economies can result in fixed education costs while in house education methods may be more expensive *

Which of the following types of fit (used to aide in coordination along all dimensions of production) explains a situation where the steps of a particular process must occur in a particular order? a. Timing fit b. Size fit c. Color fit d. Sequence fit e. Price fit

Sequence fit *

What do the vertical boundaries of a firm refer to? a. The activities the firm itself performs versus purchases from independent firms b. The level of expertise of the firm's workforce c. The breadth of products a firm produces d. The production output level for a firm e. The government's environmental regulations

The activities the firm itself performs versus purchases from independent firms *

Which of the following is NOT a characteristic of a complete contract? a. The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds b. Elimination of opportunistic behaviors c. Stipulation of each party's responsibilities and rights d. Binding instruction for each party on courses of action as the transaction unfolds e. Must be enforceable

The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds *

What are influence costs? a. Costs associated with slack effort and with the administrative controls to deter it b. The cost of activities aimed at affecting the distribution of benefits in an organization c. Costs related to the negotiation of external contracts d. Costs of recruiting ("buying") outside employees with a particular skill set e. The costs of advertising to customers

The cost of activities aimed at affecting the distribution of benefits in an organization *

Which of the following is NOT a method a firm could use to force vertical foreclosure? a. Downstream monopolist acquires upstream supplier and then the downstream monopolist refuses to buy from other suppliers b. Upstream monopolist acquires downstream firm and then the upstream monopolist refuses to sell to other downstream firms c. Competitive downstream firm acquires upstream monopolist and then the upstream monopolist refuses to sell to downstream firms d. Upstream competitor acquires downstream competitor and then the downstream competitor refuses to buy from other suppliers e. Competitive upstream firm acquires downstream monopolist and then the downstream monopolist refuses to buy from other suppliers

Upstream competitor acquires downstream competitor and then the downstream competitor refuses to buy from other suppliers *

Which of the following is a reason for a firm to Buy rather than make? a. To eliminate competition among upstream suppliers b. Upstream firms aggregate the demands of many buyers and provide economies of scale c. To prevent downstream competitors from reducing their prices d. Tax advantages for purchasing upstream rather than making internally e.Asymmetric information

Upstream firms aggregate the demands of many buyers and provide economies of scale *

Under what circumstance would it be logical to leave contracts vague and open-ended? a. When performance may be ambiguous or difficult to measure. b. When one of the firms in the contract is much larger than the other firm c. If there are many other firms that can provide the same service or product d. When the cost of writing a detailed contract is very large e. If the smaller of the two contracting firms is the upstream firm

When performance may be ambiguous or difficult to measure. *