1.Evaluate the following:

a."The major advantage to outsourcing is that it reduces the company's capital costs, freeing the company to use scarce capital for other purposes." (8 points)

b.A manufacturer of pencils contemplates backward integration into the production of rape seed oil, a key ingredient in manufacturing rubber-like material (called fractice) that forms the eraser. Rape seed oil is traded in world commodity markets and its price fluctuates as supply and demand conditions change. The argument that has been made in favor of vertical integration is 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 rape seed oil insulates us from short run supply and demand imbalances and therefore will give us a competitive advantage over rival products." Do you agree or disagree with this argument? Explain. (8 points)

2.What is asymmetric information? (4 points) What is the difference between hidden action and hidden information? (4 points)Give one example of each. (4 points) Why does asymmetric information lead to inefficient actions? (4 points)