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Self-test Questions
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1

Two firms producing the same product in the same market agree to merge. This is an example of:
A)Horizontal Merger
B)Vertical Merger
C)Diversified Merger
D)Output Merger
2

When one firm merges with one of its suppliers, this is referred to as a:
A)Horizontal Merger
B)Vertical Merger
C)Diversified Merger
D)Output Merger
3

When a firm expands its operations by merging with a company in an unrelated market this is known as:
A)Horizontal Merger
B)Vertical Merger
C)Diversified Merger
D)Output Merger
4

A firm is said to benefit from the learning effect if total cost per unit falls when which of the following increases:
A)Price
B)Fixed costs
C)Output
D)Cumulative Output
5

Horizontal growth is often undertaken in order to exploit:
A)Economies of scale
B)Learning effects
C)Power over pricing
D)All of the above
6

Which of the following is a transaction cost:
A)Cost of labour
B)Cost of capital
C)Cost of raw materials
D)Cost of contracting
7

The outsourcing of call centre work to India suggests that the transaction costs of buying in call centre work are:
A)Higher than the costs making the call centre services inside the company.
B)Lower than the costs of making the call centre services inside the company.
C)Higher than the production costs.
D)Lower than the production costs.
8

Over time the US and UK economy are seen to be highly correlated. By investing in both the UK and US economy a diversified company is:
A)Reducing the diversity of its portfolio of activities and likely to lead to lower profits.
B)Reducing the diversity of its portfolio of activities and likely to lead to higher profits.
C)Increasing the diversity of its portfolio of activities and likely to lead to lower profits.
D)Increasing the diversity of its portfolio of activities and likely to lead to higher profits.
9

Which of the following are likely to create an economy of scope?
A)Brand capital
B)Bank branches
C)Lecture notes
D)All of the above
10

Shareholders place less value on firm diversification than managers do, because:
A)Horizontal merger is more popular.
B)Risk can be diversified by shareholders more cheaply through a portfolio of investments.
C)Diversification costs money.
D)Firms can enter new markets by vertically integrating, which is cheaper.
11

Horizontal merger may lead to a rise in the market price and a reduction in output.
A)TRUE
B)FALSE
12

The transaction costs associated with selling rights to firm specific assets are generally high.
A)TRUE
B)FALSE
13

Exploiting economies of scale is a motive for vertical disintegration.
A)TRUE
B)FALSE
14

Diversification by firms is not in the interest of shareholders.
A)TRUE
B)FALSE
15

Vertical Integration can raise market entry barriers.
A)TRUE
B)FALSE
16

Transaction costs will be lower when a contract is _________.
A)Incomplete
B)Complete
C)Legal
D)Illegal
17

Monitoring and enforcing a contract are made more difficult by outputs that are __________.
A)Large
B)Objective
C)Subjective
D)Small
18

An economy of scope is __________.
A)C(A) + C(B) is more than C (A+B)
B)C(A) + C(B) is less than C (A+B)
C)C(A) - C(B) is more than C (A+B)
D)C(A) - C(B) is less than C (A+B)
19

Managers like diversification because their employment risk is ________.
A)Increased
B)Correlated
C)Reduced
D)Negligible
20

Compared with cleaning your own house, hiring a cleaner will have both a ______ and _______ cost component.
A)Revenue, fixed
B)Revenue, variable
C)Fixed, variable
D)Production, Transaction





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