Question

Supplier contracts:

a. increase the likelihood of opportunism.

b. lower transaction costs and increase flexibility in procuring inputs.

c. can lessen the hold-up problem.

d. are appropriate when inputs are standardized.

e. None of the above.

An advantage of vertical integration is:

a. input quality control.

b. firms are able to specialize in the firm’s core activities.

c. opportunism.

d. a simpler management structure.

e. None of the above.

Suppose that the marginal benefit of writing a contract is $40 and the marginal cost

of the contract is $50. The life of the contract:

a. should be extended.

b. should be shortened.

c. is unrelated to the marginal costs and marginal benefits of writing the

contract.

d. All of the above are possible in a complicated contracting environment.

e. None of the above.

Answer 1

1) b. Lower transaction costs and increase flexibility in procuring inputs.

Supplier Contract is an agreement by which a seller agrees to supply all the particular goods or services in which a buyer needs over a definite time period at a fixed price and at the same time the buyer promises to purchase the goods and services completely from the seller over the time period.

2) c. Opportunism.

The vertical integration provides more opportunities to differentiate in the sense of increased control over the inputs.

3) b. Should be shortened.

If the Marginal cost is higher than the Marginal benefit then the life of contract should be decreased.