Why are firm-specific assets so important in the decision to build internally, negotiate a long-term contract, or buy on the open market?
What will be an ideal response?
The issue hinges on the incentive to invest in firm-specific assets. Open market transactions offer the lowest incentives to invest in firm-specific assets relevant to the input. Long-term contracting increases the incentive to invest because it is more likely the investing party will reap gains at least during the contract. The likelihood of vertical integration increases with the specificity of the asset, especially under high uncertainty, since contracting under a wide range of future contingencies is very difficult.
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The divergence between money costs and opportunity costs is the smallest in which of the following situations?
A. China hires millions of otherwise unemployable workers to build roads using picks and shovels. B. Wilhelm, a petroleum engineer, is drafted, and his army salary is $1,000 per month. C. Colleen quits her job to stay at home and raise her children. D. A university employs a private contractor to build a field house on land it purchased at full market value from a local farmer.
A circular flow model shows the interrelationship between the ________ markets and the ________ markets
A) expenditure; income B) household; goods C) business; household D) goods; factor E) household; factor
Since the War on Poverty was started in 1965, the United States has spent more than $12 trillion on income maintenance programs. The effect has been to
A) reduce poverty levels substantially. B) reduce poverty levels moderately. C) have virtually no effect on poverty levels. D) increase poverty substantially.
Robert Fogel's upper bound estimate of the social savings from the railroad industry came to about ____ of the GNP in 1890
a. 7 b. 15 c. 20 d. 120