BuyFind

ECON MICRO

5th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781337000536
BuyFind

ECON MICRO

5th Edition
William A. McEachern
Publisher: Cengage Learning
ISBN: 9781337000536

Solutions

Chapter
Section
Chapter 14, Problem 1.1P
Textbook Problem

(Make or Buy) List the criteria a firm applies in deciding whether to produce a component part or purchase it in the market.

Expert Solution
To determine

The criteria that firms apply to decide whether to produce a component part or purchase it in the market.

Concept Introduction:

Firms have to list criteria before deciding how to produce a component, based on objectives like profit-making, the cost involved, production limitations like resource availability, etc.

Explanation of Solution

Firms always have to decide between making a component or buying it outside. Their decision is always based on criteria like profit expectation and relevant cost of decision making.

Opportunity cost is the opportunity lost by choosing one alternative over the other. Therefore, such decision is based on total economic cost (opportunity cost + external outlays) between the two alternatives available. The one which is lower would be a choice for them. The relevant cost is different in making and buying as the variable and fixed cost differ. So, if the variable cost in contracting out is low, the firms would like to go for buying from the market. However, reliability on quality, timely delivery, and control over operations is questionable.

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