The Economics of
Organisations and Strategy
Chapter 1
Economic Organisations and Efficiency
The Economics of
Organisations and Strategy
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Chapter 1 - Question 1
In order to create value, a firm must:
A
Have both a corporate and business strategy;
B
Have a deep knowledge of its customers;
C
Be both productively and allocatively efficient;
D
Minimise the costs of production.
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Organisations and Strategy
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Chapter 1 - Question 2
In the profit equation p = TR - TC the quantity produced
influences:
A
Total revenue and total costs;
B
Total revenue and variable costs;
C
Net revenue and total costs;
D
Only the price paid.
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Organisations and Strategy
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Chapter 1 - Question 3
The strategic environment within a firm operates is
determined by:
A
The national economic system and policies;
B
Globalisation involving trade and economic integration;
C
The industry in which the firm operates;
D
All of the above.
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Organisations and Strategy
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Chapter 1 - Question 4
The game of Prisoners Dilemma succinctly demonstrates one of the
major tensions facing a firm in a strategic setting. Namely, rivals are
more likely to receive a better payoff eg, larger profits, if they:
A
Ruthlessly compete and distrust the actions of rivals;
B
Attempt to capture market share by misleading rivals;
C
Refuse to enter into any form of cooperative behaviour;
D
Are prepared to trust rivals and cooperate in
successive time periods.
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Organisations and Strategy
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Chapter 1 - Question 5
QY
A
C
D
B
Given the illustrated
production possibility
frontier which of the
following reveals that more
value could be created:
A
;
C
B
or
;
D
QX
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Organisations and Strategy
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Chapter 1 - Question 6
QY
A
C
Moving between which
two points involves an
opportunity cost:
D
B
A
A to B;
B
C to A;
C
C to B;
D
None of the above.
QX
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Organisations and Strategy
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Chapter 1 - Question 7
A firm’s organisational architecture provides the
framework which determines how its workforce:
A
Is always at maximum efficiency;
B
Can share hidden information;
C
Can choose how to behave;
D
Is coordinated and motivated.
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Organisations and Strategy
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Chapter 1 - Question 8
Rivals
Passive
Aggressive
The Firm
3
2
X
3
5
A
Rivals choose either
passive or aggressive;
B
Rivals choose passive;
C
Rivals choose aggression;
D
Information is perfect.
1
3
2
Y
In choosing between X and
Y the latter should be
preferred if:
2
The Economics of
Organisations and Strategy
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Chapter 1 - Answer 1
Correct answer: A firm needs to be productively
efficient if it is to avoid waste and minimise its
costs, but it must also ensure that it is using its
resources in ways that maximise the potential value
of what it produces; that is, the firm’s resources
must be allocated efficiently between alternative
uses.
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Chapter 1 - Answer 2
Correct answer: The equation p = TR - TC can
be expanded to p = pQ - c(Q) - K where Q is the
quantity produced, p the price received, c(Q)
variable costs and K depreciated capital costs and
0 <  < 1. Capital costs are incurred before the start
of production and are uninfluenced by the quantity
of products produced.
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Organisations and Strategy
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Chapter 1 - Answer 3
Correct answer: Although an individual firm’s
strategic environment is most directly influenced by
the nature of the market in which it competes, this
market and acceptable behaviour is influenced by
the national economic system and government
policies eg, competition policies, and in turn,
national economic systems and government
policies are influenced by and are forced to respond
to the process of globalisation.
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Chapter 1 - Answer 4
Correct answer: The game of Prisoners Dilemma
demonstrates that the best pay-off arises if both
prisoners do not confess. But held
incommunicado in separate cells, the prisoners
must believe that they can absolutely trust the other
not to confess. Only if absolute trust exists –
which maybe interpreted as being able to punish a
fellow prisoners for cheating – is the best course of
action likely to be taken.
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Organisations and Strategy
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Chapter 1 - Answer 5
Correct answer: The production possibility
frontier passes through all the points where the
firm’s resources are being used efficiently –
that is, there is no wastage. Any point inside
the production possibility frontier indicates that
more of one or both products could be
produced with the firm’s existing resources.
Hence, at point C resources are being used
inefficiently and by improving efficiency the
firm increases the value produced.
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Chapter 1 - Answer 6
Correct answer: An opportunity cost is the
cost of what has to given up or foregone in
order to carry out an action. In moving from
point A to point B the firm must give up
producing some of x in order to produce more
y; this is a positive opportunity cost. However,
in moving from point C to A or to point B the
firm does not have to forego any y or x, hence
the opportunity cost is zero.
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Chapter 1 - Answer 7
Correct answer:
A firm’s organisational
architecture determines the assignment of decision
rights, the evaluation of performance and incentive
systems. It cannot guarantee that individuals are
motivated to maximum efficiency or that they no
longer have private information, but its purpose is to
coordinate and motivate individuals.
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Chapter 1 - Answer 8
Correct answer: If X and Y represent alternative
strategies, the firm, given imperfect information
regarding the behaviour of rivals, should always
choose Y as this is its dominant strategy. That is,
regardless of what action the rivals take, by
choosing Y, the firm will always receive the best
possible payoffs.
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