Economics Of Strategy 7th Edition By David Dranove – Test Bank
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Sample
Test
File: ch03, Chapter 3: The Vertical Boundaries of the Firm
Multiple Choice
1. What
do the vertical boundaries of a firm refer to?
2. a)
The activities the firm itself performs versus purchases from independent firms
3. b)
The level of expertise of the firm’s workforce
4. c)
The breadth of products a firm produces
5. d)
The production output level for a firm
6. e)
The chain of production processes from raw materials to finished good
Ans: a
Heading: The Vertical Boundaries of the Firm
Level: Medium
2. Which
of the following processes is most representative of a vertically integrated
firm on the “make” end of the make-or-buy continuum?
3. a)
Arm’s length market transactions
4. b)
Long-term contracts
5. c)
Strategic alliances and joint ventures
6. d)
Parent/subsidiary relationships
7. e)
Perform activity internally
Ans: e
Heading: Make Versus Buy
Level: Easy
3. Which
of the following processes is most representative of a less integrated firm on
the “buy” end of the make-or-buy continuum?
4. a)
Arm’s length market transactions
5. b)
Long-term contracts
6. c)
Strategic alliances and joint ventures
7. d)
Parent/subsidiary relationships
8. e)
Parent/subsidiary relationships
Ans: a
Heading: Make Versus Buy
Level: Easy
4. Which
of the following has a downstream relationship with a Toyota Motor Corporation?
5. a)
Steel manufacturers
6. b)
Tire companies
7. c)
Dealerships
8. d)
Paint producer
9. e)
Car parts manufacturer
Ans: c
Heading: Make Versus Buy – Upstream, Downstream
Level: Easy
5. 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?
6. a)
Infrastructure
7. b)
Product innovation
8. c)
Obtaining regulatory approval
9. d)
Customer relationship
10. e)
Manufacturing and communications
Ans: b
Heading: Example 5.1 Licensing Biotechnology Products
Level: Medium
6. Which
of the following is a true argument regarding the make-or-buy decision process?
7. a)
Firms should make an asset, rather than buy it, if that asset is a source of
competitive advantage for the firm
8. b)
Firms should buy, rather than make, to avoid the costs of making the product
9. c)
Firms should make, rather than buy, to avoid paying a profit margin to
independent firms
10. 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
11. 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
Ans: d
Heading: Some Make-or-Buy Fallacies
Level: Medium
7. 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?
8. a)
External training methods are better than internal ones
9. b)
Companies are always willing to pay more for external employees
10. c)
External training is more advanced (up-to-date) than internal
11. d)
Scale economies can result in fixed education costs while in house education
methods may be more expensive
12. e)
Externally trained employees are more likely to become better business leaders
Ans: d
Heading: Example 5.2 Employee Skills: Make or Buy?
Level: Hard
8. What
is a market firm?
9. a)
Firm representing a particular industry
10. b)
Financial firm
11. c)
Subsidiary of the larger parent firm
12. d)
Large scale firm
13. e) An
independent outsourcing partner
Ans: e
Heading: Reasons to “Buy” – Exploiting Scale and Learning
Economies
Level: Medium
9. What
are agency costs?
10. a)
Costs of the sales force
11. b)
Costs associated with slack effort and with the administrative controls to
deter it
12. c)
Costs related to general and administrative expenses
13. d)
Costs associated with outsourcing of firm functions
14. e)
Costs attributed to the use of professional service firms
Ans: b
Heading: Bureaucracy Effects: Avoiding Agency and Influence
Costs – Agency Costs
Level: Hard
10. Which
of the following is a method firms can use to counteract price fluctuations and
eliminate income risk?
11. a)
Manufacture all needed inputs internally
12. b)
Acquire upsteam firms in the vertical chain
13. c)
Enter into futures contracts to hedge the price of raw materials
14. d)
Eliminate competitors by under-cutting their price
15. e)
None of the above
Ans: c
Heading: Some Make or Buy Fallacies – Avoiding Peak Prices
Level: Medium
11. Which
of the following is not a method a firm could use to force vertical
foreclosure?
12. a)
Downstream monopolist acquires upsteam supplier and refuses to buy from other
suppliers
13. b)
Upsteam monopolist acquires downstream firm and refuses to sell to other
downstream firms
14. c)
Competitive downstream firm acquires upstream monopolist and refuses to sell to
downstream firms
15. d)
Upstream competitor acquires downstream competitor and refuses to buy from
other suppliers
16. e)
Competitive upstream firm acquires downstream monopolist and refuses to buy
from other suppliers
Ans: d
Heading: Some Make or Buy Fallacies – Vertical Foreclosure
Level: Hard
12. Which
of the following issues makes it difficult for to managers to reign in
dedicated “cost centers” in a firm?
13. a)
Cost centers have no dedicated “customer”
14. b)
Cost centers are easy to judge against market counterparts performing similar
functions
15. c)
Firms are unwilling to endure the ill will generated by firing unproductive
elements in an organization
16. d)
Firms are always looking to cut costs when they retain an advantage insulting it
from the market
17. e)
Managers of costs centers have significant latitude to complete their jobs
Ans: c
Heading: Bureaucracy Effects: Avoiding Agency and Influence
Costs – Agency Costs
Level: Medium
13. What
primary agency cost problem plagued the partnership between Sony’s hardware and
software from 1998-2008 with regards to digital music?
14. a)
High infrastructure costs
15. b)
Contract disputes
16. c)
High transaction costs
17. d)
Overlapping distribution channels
18. e)
Manager/worker slacking
Ans: e
Heading: Example 5.3 Disconnection at Sony
Level: Medium
14. What
are influence costs?
15. a)
Costs associated with slack effort and with the administrative controls to
deter it
16. b)
The cost of activities aimed at affecting the distribution of benefits in an
organization
17. c)
Costs related to the negotiation of external contracts
18. d)
Costs of recruiting (“buying”) outside employees with a particular skill set
19. e)
The costs of advertising to customers
Ans: b
Heading: Bureaucracy Effects: Avoiding Agency and Influence
Costs – Influence Costs
Level: Hard
15. Which
of the following is not a characteristic of a complete contract?
16. a)
The contract allows for a party to exploit weaknesses in another party’s
position as the transaction unfolds
17. b)
Elimination of opportunistic behaviors
18. c)
Stipulation of each party’s responsibilities and rights
19. d)
Binding instruction for each party on courses of action as the transaction
unfolds
20. e)
Must be enforceable
Ans: a
Heading: Reasons to “Make” – Complete versus Incomplete Contracting
Level: Medium
16. Which
of the following is a reason for a firm to Buy rather than make?
17. a) To
eliminate competition among upstream suppliers
18. b)
Upstream firms aggregate the demands of many buyers and provide economies of
scale.
19. c) To
prevent downstream competitors from reducing their prices
20. d)
Tax advantages for purchasing upstream rather than making internally
21. e)
None of the above
Ans: b
Heading: Reasons to Buy – Exploiting scale and Learning
Economies
Level: Medium
17. What
problem preventing complete contracts refers to the limits on the capacity of
individuals to process information, deal with complexity and pursue rational
aims?
18. a)
Agency costs
19. b)
Bounded rationality
20. c)
Performance measurement difficulties
21. d)
Asymmetric information
22. e)
Contract body of law
Ans: b
Heading: Reasons to “Make” – Complete versus Incomplete
Contracting
Level: Easy
18. What
problem preventing complete contracts refers to a lack of transparency/equal
access to the details surrounding a contract?
19. a)
Agency costs
20. b)
Bounded rationality
21. c)
Performance measurement difficulties
22. d)
Asymmetric information
23. e)
Contract body of law
Ans: d
Heading: Reasons to “Make” – Complete versus Incomplete
Contracting
Level: Easy
19. When
contracts are incomplete, what must be well defined and enforceable to allow
for smooth transactions to occur?
20. a)
Contract performance measures
21. b)
Contract roles
22. c)
Contract costs
23. d)
Contract triggers
24. e)
Contract law
Ans: e
Heading: Reasons to “Make” – The Role of Contract Law
Level: Easy
20. Under
what circumstance would it be logical to leave contracts vague and open-ended?
21. a)
When performance may be ambiguous or difficult to measure.
22. b)
When one of the firms in the contract is much larger than the other firm
23. c) If
there are many other firms that can provide the same service or product
24. d)
When the cost of writing the contract is too high
25. e) If
the smaller of the two contracting firms is the upstream firm
Ans: a
Heading: Complete Versus Incomplete Contracting – Difficulties
Specifying or Measuring Performance
Level: Easy
21. 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?
22. a)
Timing fit
23. b)
Size fit
24. c)
Color fit
25. d)
Sequence fit
26. e)
Price fit
Ans: d
Heading: Reasons to “Make” – Coordination of Production Flows
through the Vertical Chain
Level: Easy
22. 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?
23. a)
Design attributes
24. b)
Critical components
25. c)
Contract factors
26. d)
Coordination factors
27. e)
Relationship attributes
Ans: a
Heading: Reasons to “Make” – Coordination of Production Flows
through the Vertical Chain
Level: Hard
23. Which
of the following asset specificity forms describes why glass container
production requires molds custom tailored to particular container shapes and
glass making machines?
24. a)
Site specificity
25. b)
Physical asset specificity
26. c)
Dedicated assets
27. d)
Human asset specificity
28. e)
The fundamental transformation
Ans: b
Heading: Reasons to “Make” – Relationship Specific Assets
Level: Hard
24. Which
of the following is not a result of the holdup problem?
25. a)
More difficult contract negotiations and more frequent renegotiations
26. b)
Investments to improve ex post bargaining positions
27. c)
Reduction in the transaction costs of arm’s length market exchanges
28. d)
Distrust
29. e)
Reduced investment in relationship-specific investments
Ans: c
Heading: Reasons to “Make” – The Holdup Problem and Transaction
Costs
Level: Easy
25. Which
of the following is not a method to protect intellectual property?
26. a)
Patents that are specific and complete
27. b)
Complete contracts regarding IP with all suppliers
28. c)
Non-disclosure agreements for employees
29. d)
Limiting access to IP to a few key employees
30. e)
Charging higher prices to limit access to IP
Ans: e
Heading: Leakage of Private Information
Level: Easy
Short Answer
26. Suppose
you manufacture 10 million hard drives per year specifically for Dell laptop
computers. If your average variable cost C=$20/unit, annualized cost of
investment to build a hard drive factory I=$30 million, and market price
(bailout market price in the event Dell does not buy) Pm=$22/unit,
what is your company’s RSI (relationship specific investment)?
Ans: $10 million
Heading: Reasons to “Make” – Rents and Quasi-Rents
Level: Hard
27. Suppose
you manufacture 10 million hard drives per year specifically for Dell laptop
computers. Suppose your average variable cost C=$20/unit and annualized cost of
investment to build a hard drive factory 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?
Ans: $20 million
Heading: Reasons to “Make” – Rents and Quasi-Rents
Level: Hard
28. 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”?
Ans: $30 million
Heading: Reasons to “Make” – Rents and Quasi-Rents
Level: Hard
29. 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 subsequently renegotiates to only purchase for $22.50/unit, what has Dell
increased its own profits by?
Ans: $25 million
Heading: Reasons to “Make” – The Holdup Problem
Level: Hard
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