Which of the following is an advantage of producing inputs internally within a firm?

• A. Greater control over quality and production processes
• B. Increased exposure to market price fluctuations
• C. Reduced ability to coordinate production schedules
• D. Higher transaction costs due to frequent negotiations with external suppliers

Answer: (A)

Verified step by step guidance

1. Understand the concept of vertical integration, which refers to a firm producing inputs internally rather than purchasing them from external suppliers.
2. Recognize that producing inputs internally gives the firm greater control over the quality of those inputs and the production processes, as it can directly manage and monitor these aspects.
3. Contrast this with relying on external suppliers, which can expose the firm to market price fluctuations and reduce its ability to coordinate production schedules effectively.
4. Note that producing inputs internally typically reduces transaction costs because the firm avoids frequent negotiations and contracts with external suppliers.
5. Conclude that the main advantage of internal production is greater control over quality and production processes, while the other options describe disadvantages or characteristics of external sourcing.