1.(Bounds of the Firm) Ashland Oil, Inc., buys its crude oil in the market. Larger oil refiners, such as Texaco, drill for their own crude oil. Why do some oil companies drill for their own crude oil and others buy crude oil in the market?
2. (Economies of Scope) Distinguish between economies of scale and economies of scope. Why do some firms produce multiple product lines, while others produce only one?
3. (Asymmetric Information) Define asymmetric information. Distinguish between hidden characteristics and hidden actions. Which type of asymmetric information contributes to the principal-agent problem?
4. (Signaling) Give an example of signaling in each of the following situations.
a. Choosing a doctor
b. Applying to graduate school