Question 1

If a monopoly firm sells to competitive distributors and the distributors have a constant marginal cost of $5 and they are paying the profit- maximizing wholesale price of $10, what is the retail price of the product?

Accepted Answer

A) $15 
B) $5 
C) $10 
D) $7

Question 2

Crunchy Chips is a potato chip manufacturer. To produce the chips, Crunchy Chips needs to first peel and slice the potatoes and then fry them within two minutes of slicing to prevent browning. If Crunchy Chips is unable to fry the potatoes within two minutes, it must freeze the chips and later defrost them to fry them. Which of the following is true for Crunchy Chips?

Accepted Answer

A) Vertically integrating the slicing and frying process will increase production costs. 
B) Crunchy Chips has no production technological interdependency. 
C) Crunchy Chips has production technological interdependency. 
D) Crunchy Chips faces a hold- up problem.

Question 3

If Big Scoops, a local ice cream parlor, purchases milk from a grocery store to make their ice cream, this is an example of______ .

Accepted Answer

A) outsourcing 
B) using a spot market 
C) backward integration 
D) forward integration

Question 4

Slick Shades has a constant marginal cost of production equal to $40 and the distributors have a constant marginal cost of distribution equal to $20. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds)and charging the profit- maximizing wholesale price, what is the retail price?

Accepted Answer

A) $150 
B) $120 
C) $140 
D) $160

Question 5

Fast Prints has a contract with local couriers to deliver their products to customers located throughout the city and it cost Fast Prints $5,000 in legal fees to establish the contracts. Fast Prints charges $25 for each set of 500 copies delivered in the city. What are Fast Prints' transaction costs?

Accepted Answer

A) $5,000 
B) $25 
C) $5,025 
D) $4,975

Question 6

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to distribute their sunglasses in the spot market has fallen. As a result of the change, which of the following is true?

Accepted Answer

A) The manager has more of an incentive to integrate backward. 
B) The manager has less of an incentive to integrate backward. 
C) The manager has less of an incentive to integrate forward. 
D) The manager has more of an incentive to integrate forward.

Question 7

A tax inversion merger _______ legally reduce the combined firms' taxes and these mergers ______.

Accepted Answer

A) cannot; are only vertical mergers 
B) can; can be horizontal or vertical mergers 
C) can; are only horizontal mergers 
D) cannot; can be horizontal or vertical mergers

Question 8

If Happy Avocados, a ready- made guacamole manufacturer, purchases an avocado farm, this is an example of______ .

Accepted Answer

A) divestiture 
B) forward integration 
C) backward integration 
D) outsourcing

Question 9

If Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30, what is the profit- maximizing number of sunglasses (in hundreds)for Slick Shades to produce?

Accepted Answer

A) 55 
B) 80 
C) 40 
D) 60

Question 10

The manager of View Your World, a high- end window manufacturer, notices that the cost to distribute their windows in the spot market has fallen. As a result of the change, which of the following is true?

Accepted Answer

A) The manager has less of an incentive to integrate backward. 
B) The manager has more of an incentive to integrate forward. 
C) The manager has more of an incentive to integrate backward. 
D) The manager has less of an incentive to integrate forward.

Question 11

If Slick Shades, a sunglasses manufacturer, merges with Best Lens, a lens manufacturer, and the combined firm is able to reduce the number of accounting departments from two to one, the merger created ________.

Accepted Answer

A) synergies 
B) a hold- up problem 
C) managerial diseconomies 
D) technological interdependencies

Question 12

Slick Shades has a constant marginal cost of production equal to $80 and the distributors have a constant marginal cost of distribution equal to $30. If Slick Shades is producing the profit- maximizing number of sunglasses (in hundreds)and charging the profit- maximizing wholesale price, what is the retail price?

Accepted Answer

A) $160 
B) $180 
C) $170 
D) $200

Question 13

The manager of Slick Lens, a sunglasses manufacturer, notices that the cost to purchase lenses for their sunglasses in the spot market has increased. As a result of the change, which of the following is true?

Accepted Answer

A) The manager has more of an incentive to integrate forward. 
B) The manager has less of an incentive to integrate backward. 
C) The manager has less of an incentive to integrate forward. 
D) The manager has more of an incentive to integrate backward.

Question 14

The manager of Steel Works learns of a new technological interdependency between the final stage of production and the distribution of the final product. If Steel Works currently contracts with another firm to distribute the product, which of the following is true?

Accepted Answer

A) The manager has less of an incentive to integrate forward. 
B) The manager has less of an incentive to integrate backward. 
C) The manager has more of an incentive to integrate backward. 
D) The manager has more of an incentive to integrate forward.

Question 15

If View Your World, a high- end window manufacturer, has contracted with a supplier to produce their glass, this is an example of _ ______.

Accepted Answer

A) forward integration 
B) a market transaction 
C) outsourcing 
D) backward integration

Question 16

If a monopoly firm sells to competitive distributors, all of the following are true regarding the demand for the monopoly's product except which one?

Accepted Answer

A) It is a derived demand. 
B) It is the consumers' market demand. 
C) It depends on the consumers' market demand. 
D) It is the distributors' demand.

Question 17

If Slick Shades, a sunglasses manufacturer, contracts with an outside supplier to manufacture the lenses for the sunglasses, this is an example of _ ______.

Accepted Answer

A) outsourcing 
B) divestiture 
C) forward integration 
D) backward integration

Question 18

The manager of Steel Works learns of a new technological interdependency between the first stage and the intermediate stage of production. If Steel Works currently contracts with another firm for the first stage of production, which of the following is true?

Accepted Answer

A) The manager has less of an incentive to integrate backward. 
B) The manager has less of an incentive to integrate forward. 
C) The manager has more of an incentive to integrate forward. 
D) The manager has more of an incentive to integrate backward.

Question 19

If Happy Avocados, a ready- made guacamole manufacturer, contracts with an outside supplier to produce avocados, this is an example of______ _.

Accepted Answer

A) backward integration 
B) outsourcing 
C) forward integration 
D) divestiture

Question 20

If Happy Cows, a dairy manufacturer, sells its sour cream division, this is an example of______ .

Accepted Answer

A) divestiture 
B) outsourcing 
C) backward integration 
D) forward integration

Exam 11: Decisions About Vertical Integration and Distribution