Worksheet 1 + Unit 1

Question 1

Which of the following is a characteristic of economies of scale?

Answer 1

The average cost declines as output increases

Question 2

What is the minimum efficient scale (MES) of production?

Answer 2

The minimum point on a u shaped average cost curve

Question 3

Which of the following is generally a way that LBOs can help a firm realize its potential value?

Answer 3

The transaction requires debt repayment with future free cash flow leaving management no discretion
over the investment of these funds

Question 4

Which of the following best describes economies of scope?

Answer 4

Savings are achieved when a firm produces a wider variety of goods

Question 5

What measure, that depends on how much of a firm’s revenues are attributable to product market

Answer 5

Relatedness

Question 6

Which of the following is not a product specific fixed cost?

Answer 6

The cost of administrative expenses

Question 7

What kind of economies come from reductions in cost due to adoption of technology that has high
fixed costs, but lower variable costs?

Answer 7

Long-run economies of scale

Question 8

Examining which of the following is broadly considered one of the easiest ways to measure
diversifying activity?

Answer 8

Mergers and acquisitions

Question 9

What force does Manne indicate constrains the actions of managers so that they stay focused on the
goals of owners?

Answer 9

Market for corporate control

Question 10

What kind of economies come from reductions in average costs due to increases in capacity
utilization?

Answer 10

Short-run economies of scale

Question 11

What are economies of density as referred to in the airline industry?

Answer 11

Economies of scale along a given route

Question 12

Which of the following is not generally a potential benefit of diversification?

Answer 12

Control systems rewarding/penalizing division managers based on business unit objective

Question 13

Which of the following benefits of diversification explains the idea that mergers are more likely when
there is an expectation of positive changes in market share?

Answer 13

Economies of scale and scope

Question 14

How does carrying inventories contribute to economies of scale?

Answer 14

Minimizes the chance of stock-out

Question 15

Which of the following benefits of diversification explains the idea that combining unrelated
businesses can allow firms to finance projects through cross-subsidization when they previously were
unable to finance the same projects externally?

Answer 15

Use of internal capital markets

Question 16

Which of the following is not a reason a supplier might seek to sell in bulk?

Answer 16

Each sale involves setting up a different production run

Question 17

Which of the following benefits of diversification explains the idea that a firm with many business
lines can reduce swings in value because it receives only a small percentage of its revenue from any one
of those business lines?

Answer 17

Diversifying shareholder portfolios

Question 18

Which of the following practices does not contribute to the strategic fit of Southwest Airlines?

Answer 18

Use of multiple types of planes

Question 19

What type of research looks at the changes in market valuations in response to the announcement of
diversifying acquisitions to assess the success of diversification?

Answer 19

Event studies

Question 20

Which of the following is a source of diseconomies of scale at a large firm?

Answer 20

Capital intensive production processes

Question 21

Which of the following benefits of diversification explains the idea that corporate diversification can
provide situations where an acquiring firm determines the stock price for firm they intend to acquire is too
low?

Answer 21

Identifying undervalued firms

Question 22

Why might a large firm actually be at an advantage over a smaller firm with respect to labor?

Answer 22

Worker turnover is generally lower

Question 23

Which of the following is not a way managers generally benefit from acquisitions?

Answer 23

Consolidation of other senior executives

Question 24

What is the approximate observed median learning curve slope for typical firms?

Answer 24

0.8

Question 25

Why is firm specific learning better in general for an organization?

Answer 25

Ensures worker knowledge is tied to current employment

Question 26

What institution within a firm must fail on some level for managers to be motivated to acquire another
firm for the purposes of increasing their own compensation, shielding themselves against risk, or gaining
prominence by running a larger firm?

Answer 26

Corporate governance

Question 27

If a firm enjoys lower costs due to a complex labor-intensive process, which of the following
statements would then be true?

Answer 27

An example of this process could be the practice of anti-trust law

Question 28

By satisfying which of the following conditions can shareholders prevent management driven
acquisitions?

Answer 28

If shareholders could determine which acquisitions will lead to increased profits and which will not

Question 29

How does umbrella branding aid economies of scale and scope?

Answer 29

Increases effectiveness of advertising due to offering a broad product line under one name

Question 30

Economies of scale are best described as which of the following?

Answer 30

The average cost declines as output increases

Question 31

Consolidation of managers often occurs due to which of the following?

Answer 31

Mergers & acquisitions

Question 32

Increased economies of scale and scope are helped by which of the following?

Answer 32

Umbrella branding

Question 33

Diversifying activity is most often measured by looking at which of the following?

Answer 33

Acquisition and merger activity

Question 34

The minimum point on a U-shaped average cost curve is known as which of the following?

Answer 34

Minimum Efficient Scale of production (MES)