(Appendix 11A) Ganus Products, Inc

question 54

Multiple Choice

(Appendix 11A) Ganus Products, Inc., has a Relay Division that manufactures and sells a number of products, including a standard relay that could be used by another division in the company, the Electronics Division, in one of its products. Data concerning that relay appear below:
The Electronics Division is currently purchasing 7,000 of these relays per year from an overseas supplier at a cost of $59 per relay.
-Assume that the Relay Division is selling all of the relays it can produce to outside customers.Does there exist a transfer price that would make both the Relay and Electronics Division financially better off than if the Electronics Division were to continue buying its relays from the outside supplier?

• A) Yes, the minimum transfer price that the selling division should be willing to accept is less than the maximum transfer price that the buying division should be willing to accept.
• B) No, the minimum transfer price that the selling division should be willing to accept exceeds the maximum transfer price that the buying division should be willing to accept.
• C) Yes, both divisions are always better off regardless of whether the selling division has enough idle capacity to handle all of the buying division's needs.
• D) The answer cannot be determined from the information that has been provided.

Understand the concept of asymmetric information and its implications in markets.

Identify and describe the problems of adverse selection and moral hazard.

Interpret the role of market signals in mitigating issues related to information asymmetry.

Analyze measures that can reduce the effects of adverse selection in various markets.

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Definitions:

Underfunded

Lacking sufficient financial resources or investment.

Stereotype Threat

The effect of a negative stereotype about one’s self upon one’s own test performance.

Inequality

The state of not being equal, especially in status, rights, and opportunities; discrepancies in resources and power within a society.

Culturally Specific

Pertaining to or characteristic of a particular culture, indicating that certain practices, beliefs, or preferences are unique to that culture.