One of three questions below will be the essay question on the midterm. Of course you should prepare for the exam as you see fit, but I encourage you to work through an answer to each question so you are ready for the test.
By the way, the exam is closed book, closed notes. The only materials you're allowed are pen and pencil and a calculator.
A. This question concerns transaction costs. The underlying cause for the transaction costs are specific inputs so that finding alternative suppliers is difficult if not impossible. The input supplier then has the power to "hold up" the organization. There are multiple potential ways to manage transaction costs. Here we'll consider three:
(i) monitoring performance coupled with the appropriate carrots or sticks,
(ii) extrinsic reward for excellent performance via bonuses, and
(iii) intrinsic reward by giving the input supplier some control over organization goals and strategies to implement those goals.
Discuss the upside and the downside with each particular method. Provide an example of a circumstance where that method is the preferred one,
B. This question concerns transfer prices. Provide a working definition for what a transfer price is. In a for-profit organization how should ownership (shareholders) want the transfer price to be set? Explain why others in the organization might want the transfer price to be set differently. What transfer price would these others like to see? When service quality is jointly set with the transfer price, what service quality would ownership like to see? Explain why this is the case. Others may want a different service quality level. Explain how their preferred service quality level differs from what ownership wants.
C. This question concerns economic efficiency concepts. There is a partial equilibrium concept and a general equilibrium concept. Describe each of these. Do the two concepts always coincide? If not, under what additional assumptions do they coincide. Provide an argument for why we should expect efficient outcomes. Economic efficiency has been critiqued on several grounds. Explain some of these criticisms and provide settings where the particular critique appears valid.