Question

According to lecture, when there is a high degree of uncertainty

surrounding a particular transaction, a firm may have a good reason
to use
Group of answer choices
1. the 80-20 rule
2. insurance
3. transferrence
4. hierarchy

Answer 1

When facing high uncertainty in transactions, a firm may use hierarchy to reduce transaction costs, opting for decision-making through a centralized authority structure.

Step-by-step explanation:

According to lecture, when there is a high degree of uncertainty surrounding a particular transaction, a firm may have a good reason to use hierarchy. This means delegating decision-making power to a single person or a small set of people, instead of a broad group, to act on behalf of all concerned.

This mechanism is chosen because it reduces transaction costs, even though it might increase conformity costs. This approach is compared to alternatives such as reliance on reputation, guarantees, warranties, and service contracts to address imperfect information in the goods market, or the use of occupational licenses and certifications in the labor market.