Management

• Who is Ronald Harry Coase?

  British economist and Nobel laureate
• When did Ronald Coase receive the Nobel Prize in Economics?

  1991
• What is the title of Coase's article published in 1937?

  The nature of the firm
• What does Coase's article attempt to explain?

  Why individuals form firms instead of trading
• What does Coase criticize about traditional economic theory?

  Failure to clearly state its assumptions
• What assumption did traditional economic theory hold about markets?

  Markets are always cheaper than firms
• What does Coase mean by "the normal economic system works itself"?

  It operates without central control
• How does the price mechanism coordinate the economic system?

  By directing resources based on prices
• What does Coase suggest about the role of firms in the economy?

  Firms eliminate complicated market transactions
• What is the main reason Coase identifies for establishing firms?

  Cost of using the price mechanism
• What are transaction costs?

  Costs of using the market instead of firms
• What do policing and enforcement costs refer to in transaction costs?

  Costs of ensuring contract compliance
• What does Coase conclude about the operation of markets and firms?

  Markets incur costs that firms can save
• What happens as a firm grows larger according to Coase?

  Decreasing returns to the entrepreneur function
• What does the U-shaped average cost curve illustrate?

  Cost per unit decreases then increases
• What determines the size of a firm according to Coase?

  Costs of organizing transactions vs. market costs
• What is the trade-off in determining the optimal boundaries of a firm?

  Coordination via authority vs. price mechanism
• Who is George Akerlof?

  American economist and Nobel laureate
• What is the title of Akerlof's 1970 article?

  The Market for Lemons
• What problem does Akerlof identify in his article?

  Asymmetric information causing market failure
• What is information asymmetry?

  Unequal knowledge between transaction parties
• How does information asymmetry affect market transactions?

  It creates an imbalance of power
• What is adverse selection?

  Market participation affected by asymmetric information
• How does adverse selection manifest in the used car market?

  High-quality cars are withdrawn from the market
• What happens to the average quality of cars in the market due to adverse selection?

  Average quality decreases as good cars leave
• What is one solution to minimize adverse selection?

  Guarantees for consumer durables
• How do brand names help reduce adverse selection?

  Indicate quality and allow consumer retaliation
• What role do licensing practices play in reducing adverse selection?

  Certify proficiency and ensure quality
• What is the agency theory about?

  Relationship between principal and agent
• What is the agency problem?

  Conflict of interest between principal and agent
• What are the two major agency problems?

  Goal conflict and monitoring issues
• What is the principal-agent relationship in agency theory?

  One party delegates work to another
• What does agency theory use to describe the principal-agent relationship?

  A metaphor of a contract
• What is the agency problem also known as?

  Principal-agent problem
• What is a key question regarding the outcome of a contract in agency theory?

  Is it always aligned with the principal's interest?
• What are the two major agency problems identified in agency theory?

  Goal conflict and risk sharing
• What does the first agency problem involve?

  Goal conflict and monitoring issues
• What is the second agency problem related to?

  Different attitudes toward risk
• What is a key assumption about human behavior in agency theory?

  Self-interest
• What does bounded rationality refer to in agency theory?

  Decision-making within limits of information