Intro and horizontal boundaries

Question 1

What do horizontal boundaries define?

Answer 1

• How much of the total market the firm serves

- What variety of products the firm offers

Question 2

What are the three reasons size/scope can represent an advantage?

Answer 2

• Market power
• Entry barriers
• Lower unit costs

Question 3

What are determinants of horizontal boundaries

Answer 3

• Economies of scale
• Economies of scope
• Learning curve

Question 4

What is Economies of scope?

Answer 4

Cost savings when different goods/services are produced within the same plant/company

Question 5

What is the learning curve?

Answer 5

Cost advantage from accumulated expertise and knowledge

Question 6

What are advantages of larger size?

Answer 6

• Less vulnerable to predators

- If scale results in lower AC, this results in competitive advantage

Question 7

What are three disadvantages of bigger size?

Answer 7

• Loss of control
• Slow information flows
• Potential diseconomies of scale (higher AC) if too large

Question 8

We can say there are economies of scale when MC:

Answer 8

Is less than AC

Question 9

What are some reasons for economies of scale

Answer 9

• Fixed costs
• Physical properties of production
• Inventories
• Purchasing power
• Advertising
• Umbrella

Question 10

What does “indivisibilities” mean?

Answer 10

Certain inputs cannot be scaled down below a minimum size

Question 11

What are reasons for Diseconomies of scale

Answer 11

• Specialised resources stretched too thin
• Coordination
• Incentives

Question 12

U shaped cost function shows:

Answer 12

• Average cost declines as fixed costs are spread over larger volumes
• Average costs eventually start increasing as capacity constraints kick in
• U shape implies cost disadvantage for very large firms

Question 13

If output needs to be increased beyond a point, capital intensive technology may need to be substituted for:

Answer 13

Labour intensive technology

Question 14

Short run EOS brings:

Answer 14

Cost reduction through better capacity utilisation

Question 15

Long run EOS brings:

Answer 15

Cost reduction by switching to higher fixed cost

Question 16

Internal growth strategies involve:

Answer 16

• New product development

- Geographical expansion

Question 17

External strategies for growth include:

Answer 17

Mergers to exploit inter firm synergies

Question 18

Economies of scope are present if costs are lower when:

Answer 18

Outputs are produced together rather than separately

Question 19

What are determinants of learning effects

Answer 19

• Labour efficiency
• Standardization and specialization
• Tech driven learning
• Better use of equipment

Question 20

If a firm’s objective is short term profit then learning economies:

Answer 20

Might not be fully exploited

Question 21

Firms use the cash generated by cash cows to exploit the learning economies of:

Answer 21

• Stars

- Question marks

Question 22

What are diseconomies of scope?

Answer 22

Efficiency lost by producing more than one good compared to two firms producing both separately

Question 23

What is related diversification?

Answer 23

A multiproduct firm whose products display a high degree of commonality

Question 24

What is unrelated diversification?

Answer 24

Multiproduct firm whose products disply little or no commonality

Question 25

What are two types of justification for diversification and mergers?

Answer 25

• Efficiency based

- Problematic justifications

Question 26

What are some efficiency based justifications for diversification

Answer 26

• Economies of scale and scope
• Economising on transaction costs and sharing skills and systems
• Internal capital markets

Question 27

What are two problematic justifications for diversification?

Answer 27

• Shareholder’s diversification of risk

- Identifying overvalued firms

Question 28

Mergers that capture economies of scale and scope will:

Answer 28

Improve costs and competitiveness of firms

Question 29

In a diversified firm, some units generate surplus funds that can be:

Answer 29

Channeled to units that need funds

Question 30

What does diversification do?

Answer 30

Reduces the firm’s risk and smoothes the earnings stream

Question 31

When the target firm is in unrelated business, is the acquiring firm likely to value the target correctly?

Answer 31

No

Question 32

What’s the cost of diversification?

Answer 32

Diversified firms may need elaborate control systems to reward and punish managers

Question 33

Why might managers prefer growth even when it is unprofitable?

Answer 33

It adds to their social prominence, prestige and political power

Question 34

How can managers enhance their compensation?

Answer 34

Increasing the size of the firm