Which of the following statements is true of outsourcing?

• A. Outsourcing is only possible in monopolistic markets.
• B. Outsourcing allows firms to focus on their core competencies by contracting out non-essential activities.
• C. Outsourcing always leads to higher production costs for firms.
• D. Outsourcing eliminates the need for international trade.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of outsourcing. Outsourcing occurs when a firm contracts out certain business functions or activities to external suppliers or service providers, often to focus on its core competencies or reduce costs.
2. Step 2: Analyze the statement 'Outsourcing is only possible in monopolistic markets.' Consider that outsourcing can happen in various market structures, including perfect competition, monopolistic competition, oligopoly, and monopoly. Therefore, this statement is false.
3. Step 3: Evaluate the statement 'Outsourcing allows firms to focus on their core competencies by contracting out non-essential activities.' This aligns with the economic rationale behind outsourcing, where firms delegate tasks that are not central to their main business to improve efficiency and effectiveness.
4. Step 4: Consider the statement 'Outsourcing always leads to higher production costs for firms.' Outsourcing is often used to reduce costs, so this statement is generally false.
5. Step 5: Review the statement 'Outsourcing eliminates the need for international trade.' Since outsourcing can involve international suppliers but does not eliminate trade, this statement is incorrect.