Question

a) A firm 's motivation for diversification.

b) The alternative methods of measuring firm's diversification

c) The relationships between diversification, competition and economic welfare.

Answer 1

a) There are several reasons for a firm's motivation for diversification. It helps in having a bouquet of products which will help in gaining attention for the customers and this will help in increasing the sales volume. Through diversification, the untouched market can also be touched which helps in expanding the business. It also helps in increasing the technological capability of the firm with the help of various research and development programs done for diversification. The brand equity is also boosted as a variety of product is increased and customers are attracted towards those products. As there are a mix of new and old products this helps in minimizing the risk as the reliance is not on a single product rather there are various different products. So, these are the motivation for firm's diversification.

b) The alternative method for measuring the firm's diversification is to use the MPT which stands for modern portfolio theory. It helps in determining the importance of the optimization of portfolio to achieve all the objectives and goals with the help of diversification. It helps in analyzing the amount of return which can be achieved by taking various risks.

c)Diversification and competition play a very important role in defining the economic performance and welfare. A small amount of competition brings a positive change in the economic welfare and it is necessary. But intense competition is not that good for economic welfare. Diversity among the buyers and the sellers also helps in creating an efficient economic performance which helps in economic welfare. Thus, diversification and competition are guiding force for the economic welfare to a certain extent.