Seminar 6: Vertical Integration of Firms

Question 1

What do the vertical boundaries of a firm refer to?

Answer 1

The activities the firm itself performs versus purchases from independent
firms

Question 2

Which of the following statements best describes the difference between vertical and horizontal integration?

Answer 2

vertical integration is where a firm diversifies into businesses adjacent to its
current activities in the value chain whereas horizontal integration is where a firm diversifies into businesses competitive with or complementary to its
current activities

Question 3

Which of the followings are examples of vertical integration?

Answer 3

a food manufacturer acquiring a chain of supermarkets

Question 4

Which of the following transactions can be categorized as outsourcing?

a. A U.S. furniture manufacturer buying a lumber facility.
b. A U.S. firm transferring some of its operations to its new subsidiary in India.
c. Nike selling its sportswear to customers through its franchisees across the
world.
d. A U.S. cosmetics firm using an advertising agency to market its products.

Answer 4

A U.S cosmetics firm using an advertising agency to market its products

Question 5

A firm chooses vertical integration to reduce all of the following costs, EXCEPT:

a. the cost of investing in diversified assets.
b. the cost of finding a trading partner.
c. the cost of devising and enforcing an agreement.
d. the cost of evaluating the other party’s performance.

Answer 5

a. the cost of investing in diversified assets.

Question 6

If assets are relatively _____, and uncertainty is _____, transactions usually take place in markets

a. specific; quite low
b. nonspecific; quite low
c. specific; quite high
d. nonspecific; quite high

Answer 6

b. nonspecific; quite low

Question 7

Firms generally prefer not to outsource product design and manufacturing because:

Answer 7

these operations require investment in highly specific assets

Question 8

Which of the following bet described internal “agency costs”?

a. costs associated with slack effort and with the administrative controls to deter it
b. costs relating to the sales force
c. costs associated with outsourcing of firm functions
d. costs attributed to the use of professional service firms

Answer 8

a. costs associated with slack effort and with the