Business I / Concept of the Firm
Practice question · Multiple choice

Coase asked why firms exist at all if markets allocate efficiently. What does the existence of large firms tell us about markets?

Hints
  1. Ask what it costs to arrange an exchange, not to produce the good.
  2. Why would you employ someone rather than contract the work out each morning?
Show the answer

B. That using a market is not free: search, negotiation, enforcement

Why

The boundary of the firm sits where the two costs balance. Falling transaction costs — better contracts, better search — push work back out to the market, which is exactly what outsourcing and gig platforms are.

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