Lecture 1: Existence of firms

Question 1

Benefits and Cost of Specialisation

Answer 1

Benefits:

• choose job according to skill
• saves times from switching jobs
• increases productivity

Costs

• costly- need to avoid mismatch of skills
• need to efficiently coordinate activities+importnant to have relevent info

Question 2

Situations where market failure occurs

Answer 2

• market power of firms
• externalities
• economies of scale
• missing markets
• asymmetric information
• indivisibilities
• public goods

Question 3

Discuss marginalisation problem under transfer pricing

Answer 3

look at pg 7 on word doc

Question 4

3 inefficeincies cteated by transfer prices

Answer 4

page 7 of word doc