Chapter 2

Question 1

Which concepts in microeconomics are fundamental to business strategy

Answer 1

Horizontal bounderies
Economies of scale
Economies of scope

Question 2

What is the definition of Economies of scale

Answer 2

The production process for a specific good or service exhibits Economies of Scale over a range of output when Average Cost (Cost per unit per output) declines over that range.

Question 3

What is the definition of Diseconomics of scale

Answer 3

When the Average cost increases over a range of output.

Question 4

What does a Average cost curve capture

Answer 4

An average cost curve captures the relationship between average costs and output.

Question 5

What happens when a average cost curve is L-shaped

Answer 5

When capacity does not prove to be constraining, average costs may not rise as they do in an U-shaped cost curve. Output equal to or exceeding minimum efficient scale (MES) is efficient from a cost perspective.

Question 6

What happens when a average cost curve is U-Shaped

Answer 6

Average costs decline initially as fixed costs are spread over additional units of output. Average costs eventually rise as production runs up against capacity constraints.

Question 7

What is the definition of Economies of Scope

Answer 7

Economies of Scope exist if the achieves savings as it increases the variety of goods and services it produces.

Question 8

What is the most common source of Economies of Scale

Answer 8

The spreading of fixed costs over an ever-greater volume of output.

Question 9

What are indivisibilities

Answer 9

Indivisbility means that an input cannot be scaled down below a certain minimum size, even when the level of output is very small.

Question 10

Explain Economies of Scale due to spreading of product-specific Fixed costs

Answer 10

For example setting up an production line for aluminimum cans. A single line can cost about 50 million euros. But the average fixed cost on that falls as output increases.

Question 11

Explain Economies of Scale due to Trade-offs among alternative technologies

Answer 11

For example setting up a production line for aluminimum cans and instead of using a fully automated production line, a partially automated line because that is cheaper.

Question 12

Reductions in average costs due to increases in capacity utilization are…

Answer 12

Short-run Economies of scale

Question 13

Reductions in average costs due to an adoption of technology that has high fixed costs but lower variable costs are…

Answer 13

Long-run Economies of scale

Question 14

When do we say that production is capital intensive

Answer 14

When the costs of productive capital such as factories and assembly lines represent a significant percentage of total costs.

Question 15

Why is productive capital a source of scale economies?

Answer 15

Because it is indivisible

Question 16

When do we say that production is materials/labor intensive

Answer 16

When most production expenses go to raw materials or labor

Question 17

Substantial product-specific economies of scale are likely when…

Answer 17

Production is capital intensive

Question 18

Minimal product-specific economies of scale are likely when…

Answer 18

Production is materials or labor intensive

Question 19

What are the special sources of Economies of Scale and Scope

Answer 19

Economies of density
Purchasing
Advertising
Research and development
Physical properties of production
Inventories

Question 20

Describe Economics of Density

Answer 20

The Economics of density refer to cost savings that arise within a transportation network due to a greater geographic density of customers. (Example: An airline’s unit costs decline as more passengers are flown over a given route, or selling beers in densely populated area compared to a sparsely populated area.)

Question 21

Describe Economics of Purchasing

Answer 21

The Economics of purchasing refer to the conventional wisdom that purchasing power through bulk buying invariably leads to discounts.
Here are three scenarios where that can happen:
1. It is less costly to sell to a single buyer
2. A bulk purchaser has more to gain from getting the best price
3. The supplier may go bankrupt if it fails to do business with a large purchaser

Question 22

Describe Economics of Advertising

Answer 22

Larger firms may enjoy lower advertising costs per consumer either because they have lower costs of sending messages per potential consumer or because they have higher advertising reach

Question 23

What is umbrella branding

Answer 23

For example; an advertisement for a samsung phone may encourage customers to consider products made by samsung

Question 24

Describe Economics of Research and development

Answer 24

All firms can lower average costs by amortizing R&D expenses over large sales volumes, but does not imply that larger firms are more innovative smaller firms.

Question 25

Describe Economics of Physical properties of production

Answer 25

Economies of scale may arise because of the physical properties of processing units. Oil pipelines are an excellent example of this in regards to cube-square rule. The cost of transporting oil is an increasing function of the friction between the oil and the pipe. The average cost of a pipeline declines as desired throughput increases

Question 26

Describe Economics of Inventories

Answer 26

Inventory costs are proportional to the ratio of inventory holdings to sales. The need to carry inventories creates economies of scale because firms doing a high volume of business can usually maintain a lower ratio of inventory to sales while achieving a similiar level of stock-outs

Question 27

What are complementarities

Answer 27

Complementaries describe synergies among organisational practices. Practices display complementaries when the benefits of introducing one practice are enhanced by the presence of others. For example southwest strives for a 30 min turnaround time, therefor it does not cater it flights.

Question 28

What is a other term for complementaries

Answer 28

Strategic fit

Question 29

What is strategic fit essential for

Answer 29

To seek long term competitive advantage

Question 30

What are diseconomies of scale

Answer 30

Labor cost and firm size
Spreading specialized resources too thin
Bureacracy

Question 31

What is the definition of the learning curve

Answer 31

The learning curve refers to advantages that flow from accumulating experience and know-how

Question 32

Give an example why you don’t need economies of scale to realise learning economies

Answer 32

This is the case in complex labor-intesive activities, like the practice of the antitrust law

Question 33

What are conglomerates

Answer 33

Firms that involved in urelated diversification

Question 34

Give efficiency-based reasons for diversification

Answer 34

Scope economics
internal capital markets

Question 35

Give problematic justifications for diversification

Answer 35

Diverifying shareholders portfolios
Identifying undervalued firms

Question 36

What is the winners curse

Answer 36

The firm with the most optimistic assessment of the target’s value will win in the bidding. Given that all other bidder’s estimates of the target’s value are below the final purchase price, it is likely that the winner has overpaid.

Question 37

High marketshare / High market growth

Answer 37

Rising star

Question 38

Low marketshare / High market growth

Answer 38

Problem child

Question 39

High marketshare / Low market growth

Answer 39

Cash cow

Question 40

Low marketshare / Low market growth

Answer 40

Dog

Question 41

What is the BCG growth matrix

Answer 41

The matrix distinguishes a firm’s product lines on two dimensions: growth of the market in which the product is situated, and the product’s market share relative to the share of its largest competitors. It is used to allocate working capital within conglomerates.

Question 42

Reasons not to diversfy

Answer 42

That well performing divisions have to pay for losing divisions
That a uniform organisational design hurt certain business units which benefit from other organisational designs

Question 43

Managerial Reasons for diversification

Answer 43

Managers want to diversify because they like running larger firms
Problems of corporate governance

Question 44

What is the overall concensus of diversified firms

Answer 44

They have consistently failed to find significant value added from diversification.