Lecture 1 Flashcards
Following Adam Smith, the division of labour leads to specialization and significant increase in productivity.
However, there is a limit to DoL due to the additional types of cost that it imposes., leading to a necessary trade-off between the cost and benefits from DoL.
What are these costs?
With DoL, people become interdependent, as they work in a sequence where the entire eco-system may fail to function if any entity fails.
This results in the distinction of the costs from DoL:
Cooperation costs: incl. agency problems; issues related to motivation, incentives, moral hazard
Coordination costs: arising from increased complexity related to e.g., sequence, timing, intensity
Following Adam Smith, specialization and the implied division of labour can result in tremendous increases in productivity. What are the three main reasons for this?
A) Increased level of skill
B) Information asymmetry is reduced
C) Greater possibilities of mechanization
D) Shorter time wasted in switching from one task to the next
E) Decreased opportunity costs
A) Increased level of skill
C) Greater possibilities of mechanization
D) Shorter time wasted in switching from one task to the next
Following statement does not hold true for cooperation problems:
A) Cooperation refers to the joint pursuit of agreed-on goal(s) in a manner corresponding to a shared understanding of contributions and payoffs
B) cooperation problems can be captured in a prisoner’s dilemma game: a suboptimal outcome is reached due to lack of trust
C) Firms cannot solve cooperation problems by means of authority and incentives
D) Markets solve cooperation problems by means of incentives embodied in the price system (residual rights to profits)
E) Cooperation problems can lead to frictions, underinvestment, relationship-breakup
WRONG: C) Firms cannot solve cooperation problems by means of authority and incentives
Through authority: firms can solve cooperation problems through the power of employment termination
Through incentives: firms can solve cooperation problems to introducing a bonus-structure creating incentives to cooperate
Following statement does not hold true for coordination problems:
A) Coordination refers to the deliberate and orderly alignment or adjustment of actions to achieve jointly determined (or desired) goals
B) Firms solve coordination problems by means of procedures, planning, cultures, etc.
C) Markets solve coordination problems by means of prices
D) Coordination problems can lead to frictions, underinvestment, relationship-breakup
E) Coordination problems can lead to omitting of important activities, incompatible activities, suboptimal resource allocation
WRONG: D) Coordination problems can lead to frictions, underinvestment, relationship-breakup –> these are potential results of cooperation problems
Coordination: refers to the deliberate and orderly alignment or adjustment of actions to achieve jointly determined (or desired) goals.
Which of the following are coordination problems?
A) unclear division of labour
B) hold-up
C) undesired knowledge leaks
D) lack of communication
E) differing beliefs and culture
F) lack of incentives
G) insufficient pre-planning
H) lack of motivation
I) lack of trust
A) unclear division of labour
D) lack of communication
E) differing beliefs and culture
G) insufficient pre-planning
Cooperation: refers to the “joint pursuit of agreed-on goal(s) in a manner corresponding to a shared understanding of contributions and payoffs.”
Which of the following are
cooperation problems?
A) unclear division of labour
B) hold-up
C) undesired knowledge leaks
D) lack of communication
E) differing beliefs and culture
F) lack of incentives
G) insufficient pre-planning
H) lack of motivation
I) lack of trust
B) hold-up
C) undesired knowledge leaks
F) lack of incentives
H) lack of motivation
I) lack of trust
Which of the following is not an implication of coordination and cooperation problems?
A) Reduced value creation
B) Coordination and cooperation problems can be fully eliminated through formal contracts
WRONG: B) Coordination and cooperation problems can be fully eliminated through formal contracts
Such problems cannot be eliminated entirely. Instead, we look for the solutions that best deal with these problems
According to Coase’s definition of the firm, which of the following statements are true? (Multiple may be correct)
A) A firm is characterized by the employment contract, in which an employee accepts to take unspecified future orders within limits against payment
B) An employment contract, as opposed to paying for the execution of a specific task, allows for greater flexibility
C) An employment contract, as opposed to paying for the execution of a specific task, allows for saving of resources
All answers are CORRECT
Because a manager is unlikely to know in advance which services are needed, he can pay for the FTEs time, and decides tasks later. This permits the saving of resources whilst increasing flexibility. This is what makes an employment contract more efficient in most cases.
If cost can be reduced each time a transaction is “internalized”, then why don’t firms grown without limit? What determines the size of the firm?
A) There is increasing complexity and marginal costs of organizing as the firm grows (coordination cost)
B) Bounded rationality: managers make more mistakes as the firm becomes larger, e.g., due to information overload
C) The optimum size of the firm is when costs of organizing a transaction within a firm is equal to the cost of organizing it using the market (price mechanism)
D) All of the above
D) All of the above
Which one of the following arguments is proposed by the law of comparative advantage?
A) individuals, firms, and countries benefit together from specializing in activities they are relatively good at. The total production output of a group is largest when each good is produced by the person with the lowest opportunity cost (having comparative advantage)
B) When one can produce a good or service in less time or with less resources than another person. If everyone has such an advantage in a different task, specialization is clearly attractive, since it results in the highest possible level of production
A) individuals, firms, and countries benefit together from specializing in activities they are relatively good at. The total production output of a group is largest when each good is produced by the person with the lowest opportunity cost (having comparative advantage)
B) is the definition of ABSOLUTE ADVANTAGE
