ECONOMICS
FINANCIAL MARKETS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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investing in a diversified collection of assets
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providing depositors with a variety of savings certificates.
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hiring more support staff so that customers don’t have to wait so long for assistance.
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spreading the cost of writing a standardized contract over many borrowers.
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Detailed explanation-1: -Economies of scale occur when the per-unit cost of production falls as the number of units produced increases. 1 In the context of banking, scale economies exist when the cost per dollar of loans (or assets) declines as the number of loans (or assets) increases.
Detailed explanation-2: -Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between the per-unit fixed cost and the quantity produced. The greater the quantity of output produced, the lower the per-unit fixed cost.
Detailed explanation-3: -Financial intermediaries enjoy economies of scale since they can take deposits from a large number of customers and lend money to multiple borrowers. The practice helps to reduce the overall operating costs that they incur in their normal business routines.
Detailed explanation-4: -Risk sharing benefits financial intermediaries because they are able to earn a spread between the returns they earn on risky assets and they returns they pay on the less-risky assets they sell. Investors benefit because they are able to invest in a better diversified portfolio then would otherwise be available.