Which of the following is an advantage of organizing economic activity inside of a firm?

• A. Decreased ability to monitor employee performance
• B. Increased exposure to market price fluctuations
• C. Reduced transaction costs due to internal coordination
• D. Greater reliance on external contracts for every transaction

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of organizing economic activity inside a firm, which refers to conducting transactions and coordinating production within a single organization rather than through market exchanges between independent parties.
2. Step 2: Recall that one key advantage of internal organization (inside a firm) is the reduction of transaction costs, which include costs of searching for information, negotiating contracts, and enforcing agreements in the market.
3. Step 3: Recognize that organizing activities inside a firm allows for better monitoring and coordination of employee performance, which typically reduces inefficiencies compared to relying solely on external contracts.
4. Step 4: Compare the options given: decreased ability to monitor employees and increased exposure to market price fluctuations are disadvantages, while reduced transaction costs due to internal coordination is an advantage.
5. Step 5: Conclude that the correct advantage of organizing economic activity inside a firm is the reduction of transaction costs through internal coordination, which improves efficiency and control over production processes.