Micro Chapter 11 Expansion of firms

Question 1

State the definition of Horizontal expansion.

Answer 1

A firm expands into a business at the same production stage of the same product.

Question 2

State the motives of Horizontal expansion.

Answer 2

1. Enjoy economies of scale and lower its average production cost
2. Enlarge its market share
3. Number of competitiors in the market is reduced
4. Reduction in the amount of duplication of facilities

Question 3

State the definition of vertical expansion.

Answer 3

Vertical expansion occurs when a firm expands into a business into a business in a different production stage of the same product.

Question 4

State the definition of vertical backward expansion.

Answer 4

A firms expands into a preceding stage of production.

Question 5

State the definition of verical forward expansion.

Answer 5

A firms expands into a later stage of production.

Question 6

State the motives of vertical expansion.

Answer 6

1. Ensure adequate and a steady supply of raw materials ( backward )
2. Ensure adequate market outlets for the products and collect information on buyer’s preferences more easily ( forward )
3. Enjoy economies of scale and lower its average production cost
4. Extend its brand name to products

Question 7

State the definition of lateral expansion.

Answer 7

A firm expands into a business of producing related but not competitive products

Question 8

State the motives of lateral expansion

Answer 8

1. Enjoy economies of scale and lower its average producting cost
2. Make good use of its brand name because the goodwill can be extended to new products
3. The firm can diversify its products to spread the risk
4. Can use the resources more flexibly

Question 9

State the definition of conglomerate expansion.

Answer 9

A firm expands into a business of unrelated products.

Question 10

State the motives of conglomerate expansion.

Answer 10

1. Diversify its products to spread the risk
2. Enjoy economies of scale and lower the average production cost.
3. Make use of its brand name to sell unrelated products
4. Make more efficient use of the resources available