MGMT 493 Chapter 8 2025
Amazon.com has decided to enter the college bookstore market. The goal of "Amazon Campus" is to
offer co-branded university-specific web sites that offer textbooks and paraphernalia, such as logo
sweaters and baseball hats. This development shows Amazon's relentless pursuit of
A. geographic diversification.
B. product diversification.
C. vertical integration.
D. horizontal integration. - answer-B. product diversification. (In Chapter Case 8, it has been discussed
how Amazon.com, lead by Jeff Bezos, has developed from an online bookseller into an online company
that sells a wide variety of goods and services. Recently, Amazon has announced plans to enter the
college bookstore market, which is an example of how the company has relentlessly pursued product
diversification)
Decisions relating to "what stages of the industry value chain to participate in" determine a firm's
A. level of diversification.
B. geographic scope.
C. vertical integration.
D. absorptive capacity. - answer-C. vertical integration. (The industry value chain describes the
transformation of raw materials into finished goods and services along distinct vertical stages. This
decision determines the firm's vertical integration)
Which of the following stakeholders of a company would most likely be responsible for formulating a
corporate strategy?
A. the first-line employees
B. the creditors
C. the chief executive officer
D. the middle manager - answer-C. the chief executive officer (Although many managers have input to
this important decision-making process, the responsibility for corporate strategy ultimately rests with
the CEO.)
Which of the following statements is true of transaction costs?
A. When the costs of pursuing an activity in-house are more than the costs of transacting for that activity
in the market, then the concerned firm should vertically integrate.
B. When companies transact in the open market, they incur internal transaction costs.
C. Transaction costs exclusively consist of external costs associated with economic exchanges.
,D. Transaction costs are necessary to explain and predict the boundaries of a firm. - answer-D.
Transaction costs are necessary to explain and predict the boundaries of a firm. (A theoretical
framework in strategic management called transaction cost economics explains and predicts the
boundaries of the firm. Transaction costs are all internal and external costs associated with an economic
exchange, whether it takes place within the boundaries of a firm or in markets.)
Which of the following is an example of an external transaction cost?
A. the cost of setting up a production unit
B. the cost of searching for a contract manufacturer
C. the cost of recruiting and retaining employees
D. the cost of maintaining plant and machinery - answer-B. the cost of searching for a contract
manufacturer (When companies transact in the open market, they incur external transaction costs: the
costs of searching for a firm or an individual with whom to contract, and then negotiating, monitoring,
and enforcing the contract.)
Which of the following is an example of an internal transaction cost?
A. the cost of searching for a contract manufacturer
B. the cost of signing a contract with a supplier
C. the cost of buying raw materials
D. the cost of maintaining a production unit - answer-D. the cost of maintaining a production unit
(Transaction costs can occur within a firm. Considered internal transaction costs, these include costs
pertaining to organizing an economic exchange within a firm—for example, the costs of recruiting and
retaining employees, paying salaries and benefits, maintaining a production unit, setting up a shop floor,
providing office space and computers, and organizing, monitoring, and supervising work.)
Which of the following statements is true of internal transaction costs?
A. Internal transaction costs arise when companies transact in the open market.
B. When the internal costs involved in pursuing an activity in-house are more than the costs of
transacting, then the concerned firm should vertically integrate.
C. Internal transaction costs tend to increase with organizational size and complexity.
D. It is beneficial to "buy" goods or services rather than "make" when internal transaction costs are low.
- answer-C. Internal transaction costs tend to increase with organizational size and complexity. (Internal
transaction costs include administrative costs associated with coordinating economic activity between
different business units of the same corporation such as transfer pricing for input factors, and between
business units and corporate headquarters including important decisions pertaining to resource
allocation, among others. Internal transaction costs tend to increase with organizational size and
complexity.)
,A primary advantage of organizing economic activity within firms is the
A. ability to coordinate highly complex tasks to allow for specialized division of labor.
B. low administrative costs because of reduced bureaucracy.
C. eradication of the principal-agent problem.
D. high-powered incentive to work as salaried employees for an existing firm. - answer-A. ability to
coordinate highly complex tasks to allow for specialized division of labor. (The advantages of organizing
economic activity within firms include coordination of highly complex tasks to allow for specialized
division of labor. Internal transaction costs include administrative costs associated with coordinating
economic activity between different business units of the same corporation such as transfer pricing for
input factors, and between business units and corporate headquarters including important decisions
pertaining to resource allocation, among others.)
Grace Apparel Inc. has decided to procure fabrics required for its garments from external suppliers
instead of maintaining its own dyeing and weaving facilities. How will this decision affect the firm?
A. The firm will be protected against the principal-agent problem.
B. The firm's administrative costs will be low because of necessary bureaucracy.
C. The firm will have more flexibility in purchasing and comparing prices of goods and services.
D. The firm will have high-powered incentives, such as hourly wages and salaries. - answer-C. The firm
will have more flexibility in purchasing and comparing prices of goods and services. (Grace Apparel will
have more flexibility in purchasing and comparing prices of goods and services. The advantages of
obtaining goods and services externally include increased flexibility. Transacting in markets enables
those who wish to purchase goods to compare prices and services among many different providers.)
Managers in a firm hired to improve the firm's profitability and ultimately the shareholders' value will
add to the overall costs if they pursue their own self-interests. What does this best illustrate?
A. diseconomies of scale
B. principal-agent problem
C. experience-curve effects
D. information asymmetries - answer-B. principal-agent problem (The principal-agent problem is a major
disadvantage of organizing economic activity within firms, as opposed to within markets. It can arise
when an agent such as a manager, performing activities on behalf of the principal (the owner of the
firm), pursues his or her own interests.)
The most efficient way to overcome the principal-agent problem in a firm is to
A. increase the level of vertical integration within the firm.
B. provide stock options to managers.
C. downsize the existing workforce.
, D. organize economic activities within the firm. - answer-B. provide stock options to managers. (The
principal-agent problem is a major disadvantage of organizing economic activity within firms, as
opposed to within markets. One potential way to overcome the principal-agent problem is to give stock
options to managers, thus making them owners)
In the market for used cars, which of the following is a reason behind the crowding out of desirable cars
by lemons or inferior ones?
A. experience-curve effects
B. time compression diseconomies
C. principal-agent problem
D. information asymmetry - answer-D. information asymmetry (In the market for used cars, unequal
information between sellers and buyers has led to a lemons problem. Information asymmetries can
result in the crowding out of desirable goods and services by inferior ones.)
_____ is best described as a situation in which one party is more informed than another, because of the
possession of private information.
A. Information governance
B. Information asymmetry
C. Information deregulation
D. Information piracy - answer-B. Information asymmetry (Frequently, sellers have better information
about products and services than buyers, which in turn creates information asymmetries, situations in
which one party is more informed than another, because of the possession of private information.)
Chao is in an interview for a sales job that requires no experience. He is trying to portray himself as a
highly enthusiastic, energetic person with high-level communication and interpersonal skills. The
interviewer is convinced that Chao should be hired as a salesperson in the company. However, in his
resume, Chao had not mentioned his previous work experience as he was fired from that job because he
used illegal drugs. Which of the following does this scenario best illustrate?
A. information asymmetry
B. principal-agent problem
C. experience-curve effect
D. learning-curve effect - answer-A. information asymmetry (The scenario best illustrates information
asymmetry. Information asymmetries are situations in which one party is more informed than another,
because of the possession of private information.)
When approaching a bank for a loan, the borrower has better knowledge than the lender about his or
her own ability to repay the loan without defaulting. What is this situation referred to as?
A. principal-agent problem
