Part 1How can economies of scale help explain the existence of financial intermediaries LOADING... ?Part 2
A. Financial intermediaries have exclusive access to communications technology in the financial sector. B. Financial intermediaries are relatively large institutions. C. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers. D. Financial intermediaries with their vault technology can specialize in keeping deposits safe.

Question

Part 1How can economies of scale help explain the existence of financial intermediaries LOADING... ​?Part 2
A. Financial intermediaries have exclusive access to communications technology in the financial sector. B. Financial intermediaries are relatively large institutions. C. Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers. D. Financial intermediaries with their vault technology can specialize in keeping deposits safe.

BlackTom AI · Accepted Answer

Take a look at what the question is asking: how economies of scale help explain why financial intermediaries exist. Here, we evaluate each option in light of the idea that large institutions can lower costs per unit of exchange and provide liquidity and risk-sharing.
Option A: 'Financial intermediaries have exclusive access to communications technology in the financial sector.' This statement attributes a unique technological edge as the reason for intermediaries, but economies of scale focus on cost advantages that come from being large, not exclusive tech access. Access to technology is not the defining mechanism implied by economies of scale, and exclusivity is not necessary to explain why intermediaries exist.
Option B: 'Financial intermediaries are relatively large institutions.' While size is correlated with economies of scale, this option merely describes a characteristic (being large) rather than explaining the mechanism by which scale reduces costs. The question is asking for the cost-reduction channel, not just the fact of size. Therefore this option is incomplete as an explanation.
Option C: 'Financial intermediaries are able to operate with lower transaction costs relative to individual lenders or borrowers.' This directly matches the core idea of economies of scale in finance: aggregating multiple borrowers and savers, standardizing procedures, and leveraging bargaining power to lower search, information, and enforcement costs. By pooling funds and using established networks, intermediaries can execute many transactions more cheaply per unit than individuals could, which explains why they exist.
Option D: 'Financial intermediaries with their vault technology can specialize in keeping deposits safe.' While safekeeping is a function of financial intermediaries, it is more about asset custody and risk management technology than the broader economies of scale mechanism. The key insight of economies of scale is about reducing per-transaction costs through scale, not solely about vaulting deposits. Therefore this option doesn’t capture the primary mechanism at play.
In summary, the strongest explanation aligned with economies of scale is the ability to operate with lower transaction costs relative to individual lenders or borrowers, as it directly ties large-scale operation to cost efficiencies that enable intermediation.

Homework:Chapter 8 Homework

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