Question

In which of the following companies is decentralized production most appropriate?

a. company A which sells a product that serves universal needs, uses production technology with high fixed costs

b. company B which sells a product with high value-to-weight ratio, operates in an industry where location externalities are important.

c. company C which selles a unique prodduct, operates in an industry where location externalities are important.

d.Company D, which sells a product with low value-to-weight ratio, expects exchange rate to remain relatively stable.

e. Company E, which sells a product that does not serve universal needs operates in an industry where location externalities are not important

Answer 1

Answer: Option (E) - Company E, which sells a product that does not serve universal needs operates in an industry where location externalities are not important

Explanation: The decentralization of production is most appropriate when:

• Product value-to-weight ratio is low.
• Company does not manufactures and sells products with universal needs.
• Location externalities are not very important.
• Exchange rates are volatile i.e. not stable.
• Trade barriers are high.
• Production fixed costs are low.

Given the above parameters, the decentralized production is most appropriate in Company (E).