[ 2009 FRM Sample Exam ] Investment Management Q10 Investment, advantage, efficient, providing, average

lalamei

 

10. Diseconomies of scale imply that:

As the output of a financial institution increases, average costs of production decrease.

Small financial institutions are more cost efficient than large ones.

Small financial institutions do not prosper in a freely competitive environment.

Revenues derived from major technological investments fail to cover development costs providing a distinct advantage to smaller financial institutions.

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xiaodouding

[em55]

binsi

[em55]

lalamei

 

Correct answer is B

Diseconomies of scale imply that as the output of a financial institution increases, its average costs of production increase.  In general larger institutions have an advantage over smallerfficeffice" />

institutions simply due to their size and potential efficiencies when trying to recoup the cost of large technology expenditures.  In this case, if a smaller institution has an advantage, it is considered a diseconomy of scale.

Reference: Anthony Saunders. Financial Institutions Management, 5th ed. Chapter 14.