Economics of Organization
Exam Answer Key
Course Introduction
Economics of Organization examines how firms and institutions are structured to achieve economic objectives efficiently. The course explores theories of the firm, transaction cost economics, incentive structures, and the role of contracts in mitigating information asymmetries. Key topics include vertical and horizontal integration, principal-agent problems, the boundaries of the firm, and governance mechanisms. By leveraging microeconomic frameworks, students learn how organizational design impacts decision-making, resource allocation, and overall economic performance in diverse business environments.
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Economics of Strategy 7th Edition by David Dranove
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Chapter 1: The Power of Principles: A Historical Perspective
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Sample Questions
Q1) What was a key factor that aided foreign steel producers in penetrating U.S.markets?
A)Shifting demand in the economy to "lighter" products
B)Invention of the basic oxygen furnace
C)Development of the continuous casting process
D)U.S.steelmakers' commitment to "light" products
E)Development of the electric arc furnace
Answer: A
Q2) What is the accounting concept of inventory turnover as developed by Sears in the late 19 century?
A)To systemize and circulate credit information
B)To manage the requirements of operating efficiencies
C)To publicly disclose the details of a firm's operations
D)To present the payment of dividends out of profits
E)To link profits to fluctuations in sales volume
Answer: E
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Chapter 2: The Horizontal Boundaries of the Firm
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Q1) Which of the following practices does not contribute to the strategic fit of Southwest Airlines?
A)No in-flight catering
B)Use of multiple types of planes
C)No use of congested airports
D)Re-engineered boarding process
E)No first class section on plane
Answer: B
Q2) Which of the following is not a way managers generally benefit from acquisitions?
A)Increased compensation
B)Consolidation of other senior executives
C)Shielding against risk
D)Political power
E)Social prominence
Answer: B
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Chapter 3: The Vertical Boundaries of the Firm
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Q1) Which of the following is not a method to protect intellectual property?
A)Patents that are specific and complete
B)Complete contracts regarding IP with all suppliers
C)Non-disclosure agreements for employees
D)Limiting access to IP to a few key employees
E)Charging higher prices to limit access to IP
Answer: E
Q2) Which of the following is not a characteristic of a complete contract?
A)The contract allows for a party to exploit weaknesses in another party's position as the transaction unfolds
B)Elimination of opportunistic behaviors
C)Stipulation of each party's responsibilities and rights
D)Binding instruction for each party on courses of action as the transaction unfolds
E)Must be enforceable
Answer: A
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5
Chapter 4: Integration and Its Alternatives
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Q1) Which of the following in the late 19 century was predicted by the firm-size hypothesis?
A)Forward integration was most likely to occur for products that require specialized investments in human capital
B)Increases in the size of manufacturing firms led to independent wholesale and marketing agents losing scale/scope cost advantages and in turn led to manufacturers forward integrating into marketing and distribution
C)Forward integration was most likely to occur for products that do not require specialized investments in equipment and facilities
D)For industries with small manufacturers,marketing relied on specialized assets
E)For industries with small manufacturers,distribution relied on specialized assets
Q2) What term describes when a firm is using the least-cost production process?
A)Agency efficiency
B)Matrix purchasing
C)Technical efficiency
D)Economizing
E)All of the above
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Chapter 5: Competitors and Competition
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Q1) What term describes existing firms in a monopolistically competitive market?
A)Anchors
B)Primaries
C)Base
D)Incumbents
E)Pioneers
Q2) What group/type of preferences describes when tastes differ markedly from one person to the next and result in horizontal differentiation?
A)Search preferences
B)Horizontal preferences
C)Consumer preferences
D)Spatial preferences
E)Idiosyncratic preferences
Q3) The Herfindahl index solves which problem with the N-Firm ratio?
A)Inaccuracy when dealing with more than 4 firms
B)Inability to measure concentration if market shares are split evenly
C)Inability to measure concentration across borders
D)Invariance with changes in the size of the largest firms
E)High variability when firm sizes are small
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Page 7
Chapter 6: Entry and Exit
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Q1) Which of the following is not an exit barrier for firms in an industry?
A)Sunk costs
B)Labor agreements or commitments to purchase raw materials
C)Obligations to input suppliers
D)Excess capacity
E)Government restrictions
Q2) Which of the following is a potential risk of a brand umbrella?
A)The brand umbrella reduces the incumbents sunk cost of introducing a new product
B)The umbrella brand may help the incumbent navigate the vertical chain
C)The brand umbrella allows an incumbent offset uncertainty about the quality of a new product
D)A brand umbrella may make suppliers and distributors more willing to enter relationship specific investments in or sell credit to incumbents
E)If a new product under the umbrella fails,consumers may become disenchanted with the entire brand
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Chapter 7: The Dynamics Competing Across Time
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Q1) Why do price-sensitive buyers tend to harm cooperative pricing in a market?
A)They cause an increase in detection lags because competitor prices become more difficult to monitor
B)There is a resultant decrease in the frequency of interaction between competitors
C)There is an increase in the probability of misreads
D)The is an increase in temptation to cut price,even if competitors are expected to match
E)There is an increase in detection lags because prices of competitors are more difficult to monitor
Q2) Which of the following practices can help firms facilitate cooperative pricing?
A)Price leadership
B)Advance announcement of price changes
C)Price following
D)Most favored customer clauses
E)Uniform delivered prices
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Chapter 8: Industry Analysis
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Sample Questions
Q1) Which of the following is a component of the Value Net?
A)Suppliers
B)Customers
C)Competitors
D)Complementors
E)All of the above
Q2) Which of the following is not a way teams "collude" within professional sports markets?
A)Agreeing on ticket prices
B)Agreeing on rules and schedules
C)Employing the same pool of referees
D)Sharing national broadcast revenues
E)Agreeing on rookie drafts
Q3) Which of the following is not a significant entry barrier in the commercial airframe manufacturing market?
A)High development costs
B)Learning curve in production
C)Raw materials and labor
D)Airlines prefer to purchase from the same manufacturer
E)Airlines are reluctant to purchase from startups
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Chapter 9: Strategic Positioning for Competitive Advantage
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Q1) Which of the following is a concept developed by Michael Porter that describes,in broad terms,how it positions itself to compete in the market it serves?
A)Value chain
B)Generic strategy
C)Benefit leadership
D)Cost Leadership
E)Focus
Q2) The steepness (slope)of an indifference curve indicates which of the following?
A)The tradeoff a consumer is willing to make between price and quality
B)The change in price holding product benefit constant
C)The change in benefit holding price constant
D)The tradeoff between consumer surplus and producer surplus
E)None of the above
Q3) What is one way to measure a firm's willingness-to-pay?
A)Marginal profit per unit of production
B)Value added analysis
C)Cost-benefit analysis
D)Input-output analysis
E)Sales-per-cost analysis
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Chapter 10: Information and Value Creation
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Q1) Products for which consumers cannot easily evaluate quality even after purchasing and using the product are called:
A)Experience goods
B)Search goods
C)Retail goods
D)Consumer goods
E)Credence Goods
Q2) When consumers learn about one seller at a time it is known as a :
A)Simultaneous search
B)Parallel search
C)Serial search
D)Sequential search
E)Divided search
Q3) Products for which consumers can easily obtain the information required to compare alternatives are called:
A)Experience goods
B)Search goods
C)Retail goods
D)Consumer goods
E)Credence Goods
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Chapter 11: Sustaining Competitive Advantage
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Q1) What term refers to the costs incurred by sellers when they deliver substandard,or defective products?
A)Switching costs
B)Buyer costs
C)Reputation costs
D)Learning costs
E)Customer costs
Q2) Which of the following terms describes a nation's position with regard to the elements (e.g.human resources,infrastructure)of production that are necessary to compete in a particular industry?
A)Factor conditions
B)Demand conditions
C)Supply conditions
D)Related supplier or support industries
E)Strategy,structure,and rivalry
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13
Chapter 12: Performance Measurement and Incentives
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Q1) What is a key factor in determining how a firm resolves coordination problems?
A)Incentive based pay
B)Effective IT systems
C)Firm culture
D)Alignment of goals
E)Organizational structure
Q2) Which of the following factors is an effective tool for companies to use to mitigate hidden action and hidden information problems in agency relationships?
A)Monitoring
B)Offshoring
C)Coordination
D)Objectives
E)Confrontation
Q3) How does a centralized organization solve coordination problems?
A)Allows for face to face communication
B)Creates a smaller organization
C)Reduces the costs of business
D)Concentrates decision making authority in a one or a small group of people
E)Information can take more time to trickle down
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Page 14
Chapter 13: Strategy and Structure
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Q1) What term best defines a complex set of behavior patterns that Nelson and Winter view the actions of firms to be a result of?
A)Routines
B)Decisions
C)Heuristics
D)Relationships
E)Resolutions
Q2) Which of the following modes of task interdependence exists when two or more workers or work groups depend on each other to do their work?
A)Technology interdependence
B)Environment interdependence
C)Reciprocal interdependence
D)Sequential interdependence
E)Pooled interdependence
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15
Chapter 14: Environment, Power, and Culture
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Q1) What technique did Google use to preserve its "evil-free" culture when going public with an initial public offering in 2004?
A)Used an IPO underwriter
B)Allow clients to purchase underpriced IPO shares
C)Used a "Dutch auction"
D)Committed to sell a certain number of shares at a set price
E)Drastically underpriced its shares (by 200%)
Q2) What does Gary Miller identify as the focus for actors around which a consensus can form within an organization?
A)Contracts
B)Incentives
C)Formal controls
D)Norms and Social conventions (culture)
E)Exclusive deals
Q3) Which of the following is true about culture?
A)Culture increases agency costs
B)Culture reduces bargaining costs
C)Culture reduces transactions costs
D)Culture increases economic costs
E)culture has no effect on costs
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Chapter 15: Economics Primer
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Q1) What is a Nash equilibrium?
A)A state where each player is doing the best it can,given the strategies of all other players
B)A state where the sum of all payoffs is maximized
C)A state where the players always have achieved their best possible result
D)A state at which the MR=MC for a firm
E)A state where each player always must play a dominant strategy
Q2) What is the revenue destruction effect?
A)The loss in revenue a firm incurs on units it would have sold at a higher price when reducing price to sell extra units
B)The loss in revenue a firm incurs as a result of selling fewer units of output when raising price to increase profit
C)The loss in revenue a firm incurs due to brand level elasticities
D)The loss in revenue a firm incurs due to being in a perfectly competitive market
E)The loss in revenue a firm incurs due to predatory pricing
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