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

Option b)

Economies of scope imply that unit cost to produce a product will decline as the variety of products increases. Thus producing one good lowers the cost of producting for the other.

Thus if two goods are produced jointly then total cost of production falls as compared to the case when they are produced separately.

Internal capital market imply that insiders can allocate capital across division efficiently than the external capital market .

Thus profits from one industry is invested in the other ( as capital) , hence financial Economies of scope