Dr. Hobbs - Economics of Strategy – Fall 2005

Mid-Term Examination - Chapters 1 through 5

Instructions: First – review the web page information about answering essay questions. Then answer the following questions succinctly. Content is graded – not length. Type your answers, double-spaced. Put the last four digits of your SSN in the footer of each page but no other identifying mark or name. Start each individual question at the top of a new page and staple together the pages for that question. (I grade one question at a time for all and then move to the next question for all so please do not staple the entire package, paper clip it.) All questions have their point values indicated. Again -

1)(50 points) 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 by contract, much in the same way that a network organization links freestanding businesses. Why do you suppose that universities are so highly integrated?

2)(40 points) A recent (December 31, 2001) article in The Economist magazine, titledOut of the Back Room notes that the “most repetitive aspects of human-resource management [are] vanishing – [through] outsourcing.” Write an essay from what you have learned so far in this class that outlines the benefits and costs of outsourcing this part of the firm. What aspects of human resources might the firm want to maintain control of? Would they need a human resources department to do that?

3)(50 points) Economies of scale and scope…

a)Differentiate between economies of scale and scope.

b)What causes economies of scale to occur? What effect do economies of scale have on cost curves?

c)What causes economies of scope to occur? What effect do economies of scope have on cost curves?

4)(50 points) I have a boyhood friend, Jeff Gibson, who is VP of a structural steel company near Cape Canaveral. NASA is building a number of new launch gentry's and his company won the contract. This is, by far, the largest contract ever signed for his company. As a result they have had to buy some very heavy, specialized equipment for fabrication of the launch structures. How would you describe this situation drawing from the material we have covered so far? What aspects of the contract with NASA might Jeff want to address? How might the situation described affect the costs of market transaction?

5) (60 points)

a) Two parts in a taillight for an automobile are the exterior cover of the light (the red part viewed by other drivers) and the light bulbs. Use a model from class to describe which of these parts the automobile manufacturing company is most likely to produce in house. Be sure to clearly describe the model.

b) Maitial describes how Robert Goizzetta (the CEO of Coke) began charging managers a “cost of capital.” Why did he do this and what were the effects? Does charging managers a cost of capital make good economic sense?

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