Question

You have the following information for two financial institutions
	Before Merger
	Assets ($M)	Expenses ($M)
FI 1	550	125
FI 2	275	40
Post-Merger	825	150
Are there economies of scape or scope post-merger?

Answer 1

Yes, there will be economy of scope post merger.

Economy of scope arises when the per unit cost of product declines by producing a variety of products.

Here, with the merger of two financial institutions, the total expenses post merger is less than the total expense of separate firms before merger with same asset base.

Total expense before merger = Expense of FI 1 + Expenses of FI 2

= 125 + 40

= 165 M $

Total expense post merger = 150 M $

Together the firm will incur less cost than before. Hence there will be economy of scope post merger.

Hope it helps!