Multiple Choice
According to Adam Smith, which concept is fundamental to the efficient allocation of resources in a market economy?
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0. Basic Principles of Economics
Introduction to Economics
Multiple Choice
Which of the following is an advantage of organizing economic activity inside of a firm?
A
Decreased ability to monitor employee performance
B
Increased exposure to market price fluctuations
C
Reduced transaction costs due to internal coordination
D
Greater reliance on external contracts for every transaction
Verified step by step guidance1
Step 1: Understand the concept of organizing economic activity inside a firm, which refers to conducting transactions and coordinating production within a single organization rather than through market exchanges between independent parties.
Step 2: Recall that one key advantage of internal organization (inside a firm) is the reduction of transaction costs, which include costs of searching for information, negotiating contracts, and enforcing agreements in the market.
Step 3: Recognize that organizing activities inside a firm allows for better monitoring and coordination of employee performance, which typically reduces inefficiencies compared to relying solely on external contracts.
Step 4: Compare the options given: decreased ability to monitor employees and increased exposure to market price fluctuations are disadvantages, while reduced transaction costs due to internal coordination is an advantage.
Step 5: Conclude that the correct advantage of organizing economic activity inside a firm is the reduction of transaction costs through internal coordination, which improves efficiency and control over production processes.
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