Chapter 15, Problem 1LO

To determine

Relationship between economies of scope and conflict of interest in the financial industry.

Explanation of Solution

Financial industries achieve economies of scope when they provide various financial services, such as banking and insurance, simultaneously. Economies of scope originate the problem of conflict of interest.

Conflict of interest is a virtuous threat which arises when an industry has more than one objective. A conflict can rise up the dissemination of deceptive information about the other objectives.

Economies of scope, reduce the cost of production when a variety of products, produced, simultaneously, whereas conflict of interest is a virtuous situation where working for one could be against the other. Thus, economies of scope may originate the problem of conflict interests in financial industries.

Economics Concept Introduction

Introduction:

Economies of scope are the relative savings which are gained as the variety of products is increasing.

The cost to produce goods (different variety of products) together is less than the cost to produce each product separately.

Conflict of interest is when an industry has more than one interest and serving one could be against the other.