Diversification, Microeconomics

Diversification 

- Assume that a firm has a choice of selling air conditioners, heaters, or both of them.

- The probability of it being hot or cold is 5%.

- The firm would be better off by diversification probably.

* 5% probability of hot or cold weather 

*  If firm sells only heaters or air conditioners their income will be $12,000 or $30,000.

*  The expected income would be:

- 1/2($12,000) + 1/2($30,000) = $21,000

*  If the firm divides their time evenly between appliances their air conditioning and heating sales would be half of their original values.

*  If it were hot, their expected income will be $15,000 from air conditioners and $6,000 from the heaters, or $21,000.

*  If it were cold, then their expected income would be $6,000 from air conditioners and $15,000 from the heaters, or $21,000.

* With diversification, the expected income is $21,000 having no risk 

*  Firms can reduce risk by diversifying among the variety of activities which are not closely related to each other.

*  Stock Market

- How can the process of diversification reduce the risk of investing in stock market?

- Can diversification remove the risk of investing in stock market? 

Posted Date: 10/10/2012 8:56:08 AM | Location : United States







Related Discussions:- Diversification, Assignment Help, Ask Question on Diversification, Get Answer, Expert's Help, Diversification Discussions

Write discussion on Diversification
Your posts are moderated
Related Questions
what is the profit maximising quantity of L

Question-1 : This question is designed to show your understanding of stock market terminology and also the impact of currency exchange rate. You are a Swiss Franc (CHF) based inv

The cross elasticity of demand calculates the responsiveness of the quantity demanded of one product to alters in the price of another product.  For example, the quantity demanded

why is the concept of elasticity crucial to the study of economics?

Long run equilibrium - Perfect competition: In the long-run, on the other hand, the firm in perfect competition is making normal profit or zero economic profit as shown in Fig

CleanAuto Inc. has four workers: Julie, Ian, Devon, and Thomas. CleanAuto Inc. provides two services: interior vacuuming and exterior wash. Julie can perform each of these tasks in

Prove the theory of second best with the help of a diagram

How might governments lower the natural rate of unemployment? An easy way to organise the answer is to separate possible solutions into two broad groups; interventionist and m

GROWTH OF PRODUCTION: The performance of Indian agriculture during more than half a century of planned economic development can be broadly characterised by three distinct phas

Cost Sharing in Higher Education - Increasing the Fees A commonly suggested cost recovery method is to increase the fees charged for the courses in higher education. The share