Question

Read the following hypothetical case study carefully and answer the questions follow on the basis of the same.

Agricultural Developmental Bank of Pakistan uses the production function approach for measuring bank outputs and costs. A translog cost function is estimated to provide an assessment of the bank's scale and scope efficiency, and to quantify the extent to which its production costs are sensitive to the size and output mix. Results show that the bank enjoys both overall and product-specific economies of scale and, therefore, there exists scope for the bank to expand its operations at a declining average cost. Even though bank branches in all size categories enjoy economies of scale, the extent of such economies is larger for branches operating at a smaller scale of production. This implies that as the bank branches grow larger in size in terms of both loan and deposit accounts, they move closer to attaining increasing returns to a factor. It is also shown that the marginal costs of servicing both loan and deposit accounts decline as bank branches grow larger in size in terms of either the number of loans or the number of deposits. This confirms that branches operating at a larger scale of production have attained greater cost-efficiency in terms of servicing the loan and deposit accounts.

The increasing returns to scale in larger branches is due to ______

Options

• Increase in loans

• Increase in deposits

• Both (A) and (B)

• None of them

Answer 1

Both (A) and (B)

Explanation:

The increased returns to scale in larger branches can be attributed to an increase in both loans and deposits.