A Level Economics AQA Practice Exam

In terms of risk bearing, how do larger firms manage uncertainty?

1. By specializing in a single product

2. By diversifying their activities

3. By maintaining a low-cost production strategy

4. By investing in new technology

The correct answer is: By diversifying their activities

Larger firms manage uncertainty and reduce risk by diversifying their activities. This means that instead of relying on a single product or market, they spread their investments across various products, services, or geographical areas. Diversification helps firms mitigate the impact of fluctuations or downturns in any specific market or product line. When one segment of the business may be underperforming, others may be doing well, thus balancing the overall risk and stabilizing income streams. This approach not only protects against potential losses but can also enable the firm to capitalize on emerging opportunities in different sectors, ultimately leading to more consistent long-term growth. The breadth of operations allows for a more resilient business model that can adapt to changes in consumer preferences, economic conditions, and competitive pressures. While maintaining a low-cost production strategy or investing in new technology can be beneficial in their own right, they primarily focus on efficiency or innovation rather than directly addressing the uncertainties in multiple markets or products. Specializing in a single product, on the other hand, increases vulnerability to market changes, which is contrary to effective risk management.