Question

Other than the plastic production business, you also own a media business and have just founded a camera company which makes and sells sports cameras. Because the sports camera market is relative new and highly competitive, you have to fund your camera company with profits from plastic production business. This is an example of:

		Economies of scale due to specialization
		Economies of scope due to internal capital market
		Diversification to reduce shareholder risk
		Forward vertical integration

Answer 1

Economies of scope due to internal capital market

Using elimination method, it is definitely not economies of scale. It is the cost advantages that a firm obtains by obtaining a decrease in the cost per unit with increasing scale. Forward integration does not mean what is given in the question. It means expanding the business to include the control of companies products. Also there is no point of diversifying risk since these are two different companies. In this the company invests in more than one shares so as to minimise the risk of losing at one place.

Economies of scope make manufacturing of different products, simultaneously, less costly than manufacturing them on their own.