1. Describe the vertical chain for the production of motion pictures. Describe the extent of vertical integration of the steps in this chain. 2. A manufacturer of pencils contemplates backward integration into production of rapeseed oil, a key ingredient in manufacturing the eraser. Rapeseed oil is traded in world commodity markets, and its price fluctuates as supply and demand conditions change. The pencil manufacturer argues this: "Pencil production is very utilization sensitive (i.e., a plant that operates at full capacity can produce pencils at a much lower cost per unit than a plant that operates at less than full capacity). Owning our own source of supply of rapeseed oil insulates us from short-run, supply-demand imbalances and therefore will give us a competitive advantage over rival producers." Explain the merits and problems with this argument. 3. In Spring 2012, Delta Airlines purchased an oil refinery from Phillips 66, the downstream business spinoff of ConocoPhillips. The purchase, made by Delta's subsidiary, Monroe Energy, LLC, for $150 million, was touted as an attempt to save money on rising jet fuel costs. According to Delta's CEO Richard Anderson, "While Delta wil remain hostage to fluctuating crude oil costs, the facility would enable it to save on the cost of refining a barrel of jet fuel, which is currently more than $2 billion a year for Delta and has been rising in the wake of U.S. refinery shutdowns." Delta also announced that after the purchase, it would spend an additional $100 million to convert the existing refinery to optimize the production of jet fuel. The refinery, located in Pennsylvania along the Delaware River, produces more than 185,000 barrel a day. The acquisition also includes pipelines and transportation assets that reach delta's operations throughout the Northeast. To allay concerns that Delta had no experience in running a refinery, Delta planned on hiring executives from the refinery business to manage its new facility. Evaluate Delta's decision to backward integrate into jet fuel refining in light of the discussion of make-or buy fallacies in this chapter. 4. In each of the following situations how could firms benefit from vertical integration? 1. A grain elevator is located at the terminus of a rail line. 2. A manufacturer of a product with a national brand-name reputation usesdistributors that arrange for advertising and promotional activities in localmarkets. 3. A biotech firm develops a new product that will be produced, tested, anddistributed by an established pharmaceutical company. 5. Consider the following pairs of situations. In each pair, which situation is more likely to be susceptible to coordination problems (PS-think about design attributes)? 1. Maintenance of corporate landscaping by a gardening company versus maintenance of a football or soccer stadium's grass turf by a gardening company. 2. Design of a toolbox to hold tools versus design of a wafer to hold the wires of a microscopic silicon chip. 6. Universities tend to be highly integrated-many departments all belong to the same organization. There is not a technical reason why a university could not consist of freestanding departments linked together with contracts or other market arrangements. Why do you suppose that universities are not organized in this way? 7. Discuss the main fallacies that drive many vertical integration plans. Why are they fallacies? 8. Think about AT&T's structure. Were they able to take advantage of horizontal integration? Why or why not?1. A firm produces two products: X and Y. The production technology displays the following costs, where C(i,j) represents the cost of producing i units of X and j units of Y: C(0,50) = 100 C(5,0) = 150 C(0,100) = 210 C(10,0) = 320 C(5,50) = 240 C(10,100) = 500 Does this production technology display economies of scale? Of scope? 2. Economies of scale are usually associated with the spreading of fixed costs, such as when a manufacturer builds a factory. But the spreading of fixed costs is also important for economies of scale associated with marketing, R&D, and purchasing. Explain. 3. How does the globalization of the economy affect the division of labor? Can you give some examples? 4. How does the digitization of books, movies, and music affect inventory economies of scale? 5. U.S. and European bricks and mortar retailing is increasingly becoming dominated by "hypermarts," enormous stores that sell groceries, household goods, hardware and other products under one roof. What are the possible economies of seale that might be enjoyed by "hypermarts?" What are the potential diseconomies of seale? How ean "hypermarts" fend off competition from Web-based retailing? 6. Explain why learning reduces the effective marginal cost of production. 7. In rapidly developing economies --- such as India and South Korea --- conglomerates are far more common than they are in the United States and Western Europe. Use the BCG growth/share matrix to explain why this organizational form is more suitable for nations where financial markets are less well developed. 8. The following is a quote from a GE Medical Systems website: "Growth Through Acquisition - Driving our innovative spirit at GE Medical Systems is the belief that great ideas come from anyone, anywhere, at any time. Not only from within the company, but from beyond as well.... This belief is the force behind our record number of acquisitions." Under what conditions can a "growth-through-acquisition" strategy create value for shareholders? 9. Many publicly traded companies are still controlled by their founders. Research shows that the share values of these companies often increase if the founder unexpectedly dies. Use the theory of the market for corporate control to explain this phenomenon. 10. Define the differences between economies of scale vs economies of learning. Give examples of each. 11. Summarize the empirical evidence on diversification. Is the evidence consistent with economic theory