Peter,
There are a number of reasons why you would dilute the developer instead of using it full strength. The first is that it allows you more time to complete the development stage. The timing is less critical to the second with greater development times as each second becomes less of a total percentage of time. The prolonged development time allows the emulsion to become totally wet and soft again for a more even development. Another reason for dilute development is to control contrast and grain. A rapid developer will typically give you a higher contrast and larger grain structure as compared to a slower acting developer. This will keep the highlights from blockig up too fast. Although beware, there is a happy medium, as excessively long development times will cause grain clumping and actually accentuate the visible grain structure. So there is a point where too much dilution is no good depending on your desired rusults.
I am sure there are other reasons, but those are a few that come to mind.
Phil
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