MGMT 490 FINAL EXAM QUESTIONS AND VERIFIED
ANSWERS
1. Define and discuss economies of scale, diseconomies of scale, principle-agent
problem,
and economies of scope. - Answers -
Economies of Scale: - Answers - factors that cause a producer's average cost per unit
to fall as output rises
(Decreases in cost per unit as output increases.)
Diseconomies of Scale: - Answers - the property whereby long-run average total cost
rises as the quantity of output increases
(Increases in cost per unit when output increases)
Principle-agent problem: - Answers - When the agent (worker or manager) doesn't act in
the best interest of the principal (owner).
Economies of Scope: - Answers - a proportionate saving gained by producing two or
more distinct goods, when the cost of doing so is less than that of producing each
separately.
2. Define and discuss the relationship between transaction cost and firm boundary. -
Answers - Costs associated with an economic exchange
External transaction costs - Answers - -Searching for a firm individual to contract with
-Negotiating, monitoring, and enforcing the contract
Internal transaction costs - Answers - -Recruiting and retaining employees
-Paying salaries and benefits
-Setting up a shop floor
-Providing office space and computers, etc.
3. Define backward integration, forward integration and discuss their pros and cons. -
Answers -
Backward integration - Answers - occurs when a buyer moves upstream in the industry
value chain, into the seller's business.
Pros: Lowers costs, improves quality, Facilitates scheduling and planning, Facilitates
investments in specialized assets, Secures critical supplies and distribution channels
Costs/Risks- Increase in costs, Reduction in quality, Reduction in flexibility, Increase in
the potential for legal repercussions
ANSWERS
1. Define and discuss economies of scale, diseconomies of scale, principle-agent
problem,
and economies of scope. - Answers -
Economies of Scale: - Answers - factors that cause a producer's average cost per unit
to fall as output rises
(Decreases in cost per unit as output increases.)
Diseconomies of Scale: - Answers - the property whereby long-run average total cost
rises as the quantity of output increases
(Increases in cost per unit when output increases)
Principle-agent problem: - Answers - When the agent (worker or manager) doesn't act in
the best interest of the principal (owner).
Economies of Scope: - Answers - a proportionate saving gained by producing two or
more distinct goods, when the cost of doing so is less than that of producing each
separately.
2. Define and discuss the relationship between transaction cost and firm boundary. -
Answers - Costs associated with an economic exchange
External transaction costs - Answers - -Searching for a firm individual to contract with
-Negotiating, monitoring, and enforcing the contract
Internal transaction costs - Answers - -Recruiting and retaining employees
-Paying salaries and benefits
-Setting up a shop floor
-Providing office space and computers, etc.
3. Define backward integration, forward integration and discuss their pros and cons. -
Answers -
Backward integration - Answers - occurs when a buyer moves upstream in the industry
value chain, into the seller's business.
Pros: Lowers costs, improves quality, Facilitates scheduling and planning, Facilitates
investments in specialized assets, Secures critical supplies and distribution channels
Costs/Risks- Increase in costs, Reduction in quality, Reduction in flexibility, Increase in
the potential for legal repercussions
