1. When an input has well-defined and measurable quality characteristics and requires narrow down investments, the optimal procurement method is a puzzle. A slue reduces the likelihood of opportunistic behavior and underinvestment by creating a levelheaded obligation between the firms. One disadvantage of a contract is that it increases a firms transaction costs. An example, Boeing contracting with an aluminium manufacturer. When a firm requires a limited number of standardized inputs that ar sold by many firms in the marketplace, the optimal method of procurement is piece modify. One advantage of choose exchange is that they permit firms to specialize. A disadvantage is that the firm may potentially face the hold-up problem. An example, a winderer purchasing paint from a local paint store.
2.
3. a. Contract. b. Vertical Integration. c. Spot exchange (or possibly contract if a specific investment in many motors is required). d. Spot exchange. 4. Engine manufacturing involves specific investments and a complicated contracting environment. By vertically integrating, the potential for opportunism is reduced. Mirrors are relatively uniform products that can be purchased by spot exchange or contract.
5. a. Human capital. b.
Physical asset specificity; channel that the assembly line was designed especially for a cross firms product. c. Site specificity. 6. The manager prefers the compensation avoidance that pays a fixed salary plus a percent of the profits. Essentially, the manager is faced with a choice between devil consumption bundles: (1) a $125,000 fixed salary plus 10 hours of on-the-job leisure and (2) $125,000 in salary plus gift plus 3 hours of on-the-job leisure. Since the original compensation megabucks of a $125,000 and 10 hours of shirking is still available, the fact that she chose to practice 7 hours reveals that she prefers the second pay scheme.
Managerial Economics and line Strategy, 5e
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