Reference no: EM132277930

1. John's Leather Company produces leathers that are supplied to a few handbag makers. John's Leather Company is more likely located in the:

A) Upstream of the vertical chain

B) Downstream of the vertical chain

C) Midstream of the vertical chain

D) OEM part of the vertical chain

2. One of the handbag companies decides that it needs to produce its own leathers to be used in making handbags, rather than sourcing from John's Leather Company. This is called:

A) Learning curve

B) Vertical integration

C) Economies of scale

D) Product diversification

3. One of the handbag companies require that John's Leather Company to produce leathers in certain shapes, because handbag production using such shaped leathers as inputs is a lot faster and cheaper. John's Leather Company is hesitant to accept this request, as no other handbag companies they supply leather to want shaped leathers. Further, producing shaped leather means the company has to install new equipments designed to make the requested shapes.

What best describes such equipments mentioned in the case?

A) Specific site

B) Quasi rent

C) Specific human assets

D) Specific physical assets

4. One of the handbag companies, named Uptown Fashion Inc., requires that John's Leather Company to produce leathers in certain shapes, because handbag production using such shaped leathers as inputs is a lot faster and cheaper. John's Leather Company is hesitant to accept this request, as no other handbag companies they supply leather to want shaped leathers. Further, producing shaped leather means the company has to install new equipments designed to make the requested shapes. Because these equipments operate differently, workers need to be trained to operate them.

What best describes these workers?

A) Specific human assets

B) Specific site

C) Specific physical assets

D) Dedicated assets

5. If John's Leather Company decide to supply specifically shaped leathers to Uptown Fashion Inc., it will be paid $50 per square feet. Other handbag makers prefer leathers that are not specifically shaped, but will accept specifically shaped ones if they are below market price for leathers (so that they could use the savings to remake the leathers). The best offer from these other customers for specifically shaped leathers will be $10 per square feet, which is about $10 below market price for leathers in general.

How much is the quasi rent (per square feet)? ________________

6. John's Leather Company has installed equipments and trained workers, and has started to produce specifically shaped leathers. Uptown Fashion Inc. realizes that pay $50 per square feet is nonsensical because no one else wants these leathers and John's will have no other customers anyway. It decides to lower the rate to $11, which is below market price of $20 for leathers and just slightly above $10 which is what others will pay for specifically shaped leathers. This move by Uptown Fashion Inc. is called

A) Hold out

B) Learning curve

C) Hold up

D) Transfer pricing

7. Suppose production of handbags involves a vertical chain with 4 steps: sourcing raw leathers, make raw leathers into finished leathers, use finished leathers to make handbags, and sell or distribute handbags. Which company below is more integrated?

A) Firm A sources raw leathers and transform them into finished leathers, which are sold to downstream handbag firms

B) Firm B is part of the Handbag Alliance which includes firms that source raw leathers and those that make finished leathers, and handbag producers

C) Firm C sources its own raw leathers and makes its own finished leathers, has its own brand of handbags made from its finished leathers. It is also the parent company of Handbag World, a retail chain that sells luxury goods, including Firm C's branded handbags.

D) Firm D is a specialized handbag producer and has a long term contract with a finished leather maker

8. If John's Leather Company decide to supply specifically shaped leathers to Uptown Fashion Inc., it will be paid $50 per square feet. However, producing these shaped leathers incurs extra costs of worker-training and equipment installment; these extra costs are about $20 per square feet, netting a profit of $30 per square feet if John's supplies to Uptown Fashion. There is a chance Uptown Fashion will "hold up" by renegotiating for a lower price, knowing John's have no other options. Should this happen, John's will sell shaped leathers at $30 to Uptown Fashion. Alternatively, John's could simply make unshaped regular leathers to the broad marketplace, where the price is $20 per square feet. Producing regular leathers requires no special training or equipment and incurs no extra costs.

In the worse case scenario, what is the economic profit accurred to John's Leather Co. by selling specialized leathers to Uptown Fashion? _____________

9. While knowing or suspecting that I have developed some illness in recent weeks, I nevertheless signed a contract with the insurance company which only sees my health report from last year. I reasoned that even if the insurance company were to find out later on, it would still be very hard or costly for it to legally prove that I know about the illness at the point of signing. This scenario supports the idea that

A) Asymmetric information can be a source of transaction costs

B) Performance is hard to measure, making contracting incomplete

C) People have bounded rationality so that they cannot enumerate all possible outcomes and contingencies in the contract

D) Agency costs can make "buy" more preferable than "make"

10. Increased chance of potential hold up problems can cause which of the following? Multiple correct answers may apply.

A) Occurrence of renegotiating contract terms

B) Reduced transaction costs in market transactions

C) Transacting parties become reluctant to invest in specialized plants

D) Transacting parties start to seek out alternative suppliers and/or buyers

E) Increased specialization as firms start to focus on fewer parts of the vertical chain