Chapter 2 - The horizontal boundaries of the firm

Question 1

economies of scale

Answer 1

the production process for a specific good or service exhibits economies of scale over a range of output when AC declines over that range

Question 2

diseconomies of scale

Answer 2

if AC is increasing, MC > AC

Question 3

economies of scope

Answer 3

if a firm acquires savings as it increases the variety of goods and services it produces

Question 4

indivisibility

Answer 4

an input cannot be scaled down below a certain minimum size, even when the level of output is very small

Question 5

economies of scale can appear due to:

Answer 5

• spreading of product-specific fixed costs

- tradeoffs among alternative technologies

Question 6

short-term economies of scale

Answer 6

reductions in AC due to increases in capacity utilization (occur within a plant of a given size)

Question 7

long-term economies of scale

Answer 7

reductions due to adoption of a technology that has high FC, but lower VC. If enough time, a firm can choose a plant that best meets its production needs

Question 8

throughput

Answer 8

movement of raw material into the plant and the distribution and sale of finished goods

Question 9

indivisibilities are more likely when …

Answer 9

… production is capital intensive

Question 10

capital intensive

Answer 10

when the costs of productive capital (e.g., factories and assembly lines) represent a significant percentage of total costs

Question 11

material or labor intensive

Answer 11

when most production expenses go to raw materials or labor

Question 12

substantial product-specific economies of scale are likely when …

Answer 12

… production is capital intensive

Question 13

minimal product-specific economies of scale are likely when …

Answer 13

… production is material or labor intensive

Question 14

division of labor

Answer 14

the specialization of productive activities

Question 15

extent of the market

Answer 15

magnitude of demand for productive activities

Question 16

smith’s theorem states that:

Answer 16

individuals/firms will not make specialized investments unless the market is big enough to support them

–> larger markets will support narrower specialization

Question 17

special sources of economies of scale and scope

Answer 17

• density
• purchasing
• advertising
• R&D
• physical properties of production
• inventories

Question 18

economies of density

Answer 18

cost saving that arises within a transportation network due to greater geographic density of customers

Question 19

umbrella branding

Answer 19

is effective when consumers use the information in advertisement about one product to make inferences about other products with the same brand name –> reducing advertising costs per effective image

Question 20

cube-square rule

Answer 20

as the volume of the vessel increases by a given proportion, the surface area increases by less than this proportion

Question 21

complementarities

Answer 21

describe synergies among organizational practices

Question 22

practices display complementarities when …

Answer 22

… the benefits of introducing one practice are enhanced by the presence of others

Question 23

sources of diseconomies of scale

Answer 23

• labor costs and firm size
• spreading specialized resources too thin
• bureaucracy

Question 24

compensating differential

Answer 24

the wage premium that firms must pay to lure workers to less attractive jobs

Question 25

learning (experience curve)

Answer 25

advantages that flow from accumulating experiences and know-how

Question 26

a learning curve slope of 1.0 implies …

Answer 26

… no learning effect

Question 27

firm-specific learning

Answer 27

worker knowledge is tied to the current employment

Question 28

task-specific learning

Answer 28

capture value for themselves

Question 29

learning economies

Answer 29

reductions in unit costs due to an accumulating experience over time

Question 30

dominant general management logic

Answer 30

the way in which managers conceptualize the business and make critical allocations

Question 31

internal capital market

Answer 31

allocation of available working capital within the firm as opposed to the capital raised outside the firm

Question 32

advantages for firms to rely on cash cows to find capital to fund raising stars:

Answer 32

• difficulties finding external investors due to asymmetric information
• outsiders will be reluctant to provide capital to firms that have existing debt
• external finance consumes monitoring resources

Question 33

problematic justification for diversification

Answer 33

• diversifying shareholders’ portfolios

- identifying undervalued firms

Question 34

corporate governance

Answer 34

mechanisms through which corporations and their managers are controlled by shareholders