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

• A. Firms guarantee perfect competition in all markets.
• B. Firms always eliminate the need for specialization among workers.
• C. Firms prevent economies of scale from occurring.
• D. Firms can reduce transaction costs by coordinating production internally.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a firm in microeconomics: A firm is an organization that combines inputs to produce outputs, coordinating economic activity internally rather than relying solely on market transactions.
2. Recognize what transaction costs are: These are the costs associated with using the market, such as searching for information, negotiating contracts, and enforcing agreements.
3. Analyze how firms reduce transaction costs: By organizing production internally, firms can avoid some of the costs and uncertainties involved in market exchanges, such as bargaining and contracting with multiple external parties.
4. Consider the role of specialization and economies of scale: Firms often encourage specialization among workers and can achieve economies of scale, which are cost advantages from producing larger quantities.
5. Evaluate the given options in light of these concepts: The advantage of firms lies in their ability to reduce transaction costs through internal coordination, rather than guaranteeing perfect competition, eliminating specialization, or preventing economies of scale.