Chapter 08
Corporate Strategy: Vertical Integration and Diversification
Multiple Choice Questions
1. 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.
2. 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.
3. 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
,4. 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.
5. 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
6. 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
7. 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.
,8. 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.
9. 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.
10. 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
11. 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.
, 12. _____ 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
13. 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
14. 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
Corporate Strategy: Vertical Integration and Diversification
Multiple Choice Questions
1. 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.
2. 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.
3. 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
,4. 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.
5. 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
6. 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
7. 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.
,8. 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.
9. 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.
10. 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
11. 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.
, 12. _____ 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
13. 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
14. 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
