Book: economics a contemporary introduction Chapter 14

Questions for Review 1. Rationale for the Firm Explain Ronald Coase's theory of why 8. The Principal-Agent Problem Discuss the nature of the firms exist. Why isn't all production consolidated in one huge firm? principal-agent problem. Determine which is the principal and which is the agent in each of the following relationships: 2. Boundaries of the Firm Define vertical integration. What fac- tors should a firm consider when determining how much verti- a. A firm that produces goods for export and the export cal integration to undertake? management company that helps market its goods overseas mi Boundaries of the Firm Ashland Oil buys its crude oil in the b. The management of a firm and its stockholders market. Larger oil refiners, such as Texaco, drill for their own c. A homeowner and the plumber hired to make repairs crude oil. Why do some oil companies drill for their own crude d. A dentist and a patient oil and others buy crude oil in the market? e. An employee-pension management firm and the company Boundaries of the Firm In the movement to downsize govern- using its services + ment, advocates often recommend turning over some govern- ment services to private firms hired by the government. What 9. Adverse Selection and Moral Hazard Describe the problems are the potential benefits and costs of such outsourcing? faced by health insurance companies as a result of adverse selection and moral hazard. How do insurance companies try 5. Economies of Scope Distinguish between economies of scale to reduce these problems? and economies of scope. Why do some firms produce multiple product lines, while others produce only one? 10. Signaling Give an example of signaling in each of the follow- ing situations: 6. Search with Imperfect Information Fifty years ago, people shopped by mail using catalogs from large mail-order houses. In a. Choosing a doctor the last few years, catalog shopping has again become a widely b. Applying to graduate school used method of buying. Online shopping is also growing. What c. Filling out a form for an online dating service reasons can you suggest for the growth in these forms of shopping? 11. Signaling and Screening What roles do signaling and screening 7. Asymmetric Information Define asymmetric information. play in a labor market with asymmetric information? Distinguish between hidden characteristics and hidden actions. Which type of asymmetric information contributes to the 12. Unbounded Willpower Provide examples of markets that help principal-agent problem? people stick with decisions that involve short-term costs for long-term benefits