Economics of Organizations Exam Solutions
Course Introduction
Economics of Organizations explores how economic principles shape the internal structure, strategy, and behavior of firms and institutions. Drawing on theories from microeconomics, contract theory, and organizational economics, the course examines incentives, information asymmetries, transaction costs, and the allocation of authority within organizations. Key topics include the design of optimal contracts, the boundaries of the firm, principal-agent problems, and mechanisms to align organizational goals. Through case studies and models, students gain insights into how organizational decisions affect efficiency, performance, and competitive advantage in various business environments.
Recommended Textbook
Economics of Strategy 6th Edition by
David Besanko
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14 Chapters
419 Verified Questions
419 Flashcards
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Page 2
Chapter 1: The Power of Principles: an Historical Perspective
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30 Verified Questions
30 Flashcards
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Sample Questions
Q1) What is a benefit of alliances and joint ventures over mergers and acquisitions?
A) Better organizational structure
B) Scale savings
C) Less vertical integration
D) Less horizontal integration
E) Lower likelihood of antitrust scrutiny
Answer: E
Q2) What significant transportation event brought about the first significant growth of the Great Lakes region?
A) Harnessing of the steam engine
B) Invention of the screw propeller
C) Opening of the Erie Canal
D) Integration of railway system
E) Invention of the railway system
Answer: C
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Chapter 2: Economies of Scale and Scope
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Q1) What measure,that depends on how much of a firm's revenues are attributable to product market activities that have shared technological characteristics,production characteristics,or distribution channels,is used to determine how diversified a firm is at a given time?
A) Integration level
B) Rumelt score
C) Conglomerate level
D) Activity share
E) Relatedness
Answer: E
Q2) Which of the following is not generally a potential benefit of diversification?
A) Control systems rewarding/penalizing division managers based on business unit objective
B) Economies of scale and scope
C) Economizing on transaction costs
D) Diversifying shareholder portfolios
E) Identifying undervalued firms
Answer: A
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Chapter 3: The Vertical Boundaries of the Firm
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Q1) 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
Q2) Which of the following has a downstream relationship with a Toyota Motor Corporation?
A) Steel manufacturers
B) Tire companies
C) Dealerships
D) Paint producer
E) Car parts manufacturer
Answer: C
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Chapter 4: Integration and Its Alternatives
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Q1) Which of the following in the late 19 century was predicted by the asset-specificity 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
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6
Chapter 5: Competitors and Competition
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Sample Questions
Q1) Which of the following is the definition of "competitors?"
A) Firms that manufacture similar products
B) Firms located in geographic proximity to each other
C) Firms that sell products to the same group of buyers
D) Firms whose strategic choices directly affect one another
E) Firms that purchase factors from the same suppliers
Q2) Which of the following is not a characteristic of substitute products X and Y?
A) They have the same or similar product performance characteristics
B) They have the same or similar occasions for use
C) They are sold in the same geographic market
D) Customers are indifferent between X and Y
E) A price increase of X while keeping the Y's price constant leads to a drop in purchases of X and an increase in purchases of Y
Q3) In a two firm market,let the marginal cost of producing a product be $20,the market demand be given by the function Q=60-P/2 and the market quantity be equal to Q +Q .What is the Cournot equilibrium quantity each firm would produce in this market?
Q4) In a three firm market where the market share split is 50%,30% & 20%,what is the Herfindahl index?
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Page 7
Chapter 6: Entry and Exit
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Sample Questions
Q1) What is the typical "capacity use" ratio as reported by plant managers to the U.S.Census of Manufacturers annually?
A) 40%
B) 50%
C) 60%
D) 70%
E) 80%
Q2) What is the term defined as the withdrawal of a product from a market?
A) Shut-down
B) Exit
C) Sale
D) Removal
E) Withdrawal
Q3) When are sunk costs a most effective entry barrier?
A) When the incumbent has incurred them and the entrant has not
B) When incumbents have long-standing relationships with suppliers and customers
C) When channels are few and hard to replicate
D) When a firm has a reputation for toughness or competes in multiple markets
E) When marginal costs are low and flooding the market causes large price reductions
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Page 8
Chapter 7: The Dynamics Competing Across Time
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Q1) What term refers to the situation in the used car market where owners are more anxious to sell low-quality cars than high-quality cars?
A) Clunker market
B) Quality conundrum
C) Car scrapping market
D) Low-quality market
E) Lemons market
Q2) Which of the following is an example of a market where barometric price leadership occurs?
A) Breakfast cereal
B) Prime-rate loan
C) Tobacco
D) Steel until 1960s
E) Fast food hamburger
Q3) Suppose Firm #1 dominates a market for widgets priced at $100/unit with a marginal cost of $60/unit.If Firm #2 enters the market and offers comparable widgets at a 3% discount,extending a price umbrella optimal as long as Firm #1 loses no more than what portion of its market share?
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9
Chapter 8: Industry Analysis
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Q1) Which of the following is the most likely substitute for commercial aircraft travel between Chicago and Tokyo?
A) Bicycle
B) Teleconferencing
C) Automobile
D) Commuter train
E) Walking
Q2) Which of the following is not a factor that could intensify internal rivalry in the Chicago hospital market?
A) Relatively large number of hospitals
B) Considerable variation in production costs
C) Relatively small number of doctors
D) Excess capacity
E) Aging baby boomers increasing demand for admissions
Q3) Which of the following does not tend to affect the threat of entry?
A) Expectations about pre-entry competition
B) Government protection of incumbents
C) Consumers highly valuable reputation/consumers are brand loyal
D) Experience curve
E) Network externalities
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Chapter 9: Strategic Positioning for Competitive Advantage
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Q1) What is the perceived benefit of a product per unit consumed minus the product's monetary price?
A) Value creation
B) Competitive advantage
C) Consumer surplus
D) Maximum willingness-to-pay
E) Value chain
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 type of strategy seeks to serve all customer groups in the market by offering a full line of related products?
A) Generic strategy
B) Margin strategy
C) Focus strategy
D) Share strategy
E) Broad-coverage strategy
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Chapter 10: Information and Value Creation
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Sample Questions
Q1) Why do consumers tend to gravitate towards non-profit firms when evaluating credence goods?
A) Consumers like giving to charities
B) Non-profit firms charge lower prices
C) Consumers can deduct some or all of the purchase price for tax purposes
D) Non-profit firms offer goods and services not offered by for profit firms
E) Consumers believe non-profit sllers will be less likely to skimp on quality for profit.
Q2) Which of the following is a source for horizontal differentiation?
A) Price
B) Quality
C) Advertising
D) Location
E) Availability of substitutes
Q3) Motivation bias and survivor bias are most common in which of the following?
A) Input based scorecards
B) Process based scorecards
C) Scorecards on horizontally differentiated products
D) Scorecards on vertically differentiated products
E) Low cost products
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Page 12
Chapter 11: Sustaining Competitive Advantage
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Sample Questions
Q1) What type of isolating mechanisms increase the economic power of a competitive advantage over time once a firm has acquired that advantage?
A) Scarce
B) Imperfectly mobile
C) Early-mover advantages
D) Impediments to imitation
E) Cospecialized
Q2) Which of the following terms best describes the ability of a firm to maintain and adapt the capabilities that are the basis of its competitive advantage?
A) Riskiness of R&D
B) Correlated research strategies
C) Evolutionary economics
D) Dynamic efficiency
E) Dynamic capabilities
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13
Chapter 12: Performance Measurement and Incentives
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Sample Questions
Q1) Given an employee cost of effort function (where e is given in hours worked per week and each unit of e produces an extra $100 in sales):
c(e)= 0 if e<=40 (1/3)*(e-40)² if e>40
If the firm offers a salary-plus-commission job of $500 per week plus 20% of sales,what is the employee's marginal benefit of effort? How much more will the employee work than the standard 40 hour work week? What is the employee's actual salary when they work to maximize their payoff?
Q2) Which of the terms best describes the effect that results from supervisors giving all their subordinates average (or above average)grading to avoid making sharp distinctions between those subordinates when evaluating them?
A) Forced ranking system
B) Subjective assessment
C) Ratings balancing
D) Ratings compression
E) Merit ratings system
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Chapter 13: Strategy and Structure
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Q1) Which of the following terms best describes the division of an organization into formal groupings?
A) Complex hierarchy
B) Coordination
C) Control
D) Hierarchy of authority
E) Departmentalization
Q2) What type of structure is the Japanese keiretsu structure?
A) Unitary functional structure
B) Multidivisional structure
C) Matrix structure
D) Network structure
E) Individual structure
Q3) Which of the following is a dimension along which departmentalization can occur?
A) Tasks
B) Inputs
C) Outputs
D) Geography
E) All of the above
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Page 15
Chapter 14: Environment, power, and Culture
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Q1) What term best describes exchanges of goods,services,or promises on terms that take place outside of traditional economic markets and are not enforceable in court?
A) Handshake agreement
B) Noncontractual exchange relationship
C) Internal context
D) External context
E) Exclusive dealing
Q2) What term best describes a set of values,beliefs,and norms of behavior shared by a firm's members that influence employee preferences and behaviors?
A) Codes
B) Routines
C) Culture
D) Influence
E) Mind-sets
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