Question

Problem 05-07 A multiproduct firm's cost function was recently estimated as: C1Q1,Q2) = 90 -0.5Q1Q2 +0.4Q 2 + 0.3Q22 a. Are there economies of scope in producing 10 units of product 1 and 10 units of product 2? You cannot determine if there are economies of scope. Yes - there are economies of scope. No - there are no economies of scope. b. Are there cost complementarities in producing products 1 and 2? You cannot determine if there are cost complementarities. Yes - there are cost complementarities. No - there are no cost complementarities. c. Suppose the division selling product 2 is floundering and another company has made an offer to buy the exclusive rights to produce product 2. How would the sale of the rights to produce product 2 change the firm's marginal cost of producing product 1? Marginal cost would increase. Marginal cost would decrease. Marginal cost would not change.

Answer 1

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(a) :((Q,,G₂) = 90-0.5Q, Gato. "Q? + 0.392 The firm can enjorg economies of scope when fald, Q270 , so 90 - (-0.5) (16) (10270 out 507 o Mo 70 : Ives - there are economies of scope, when a, 64, = 10 (b). There exists a compementerity between the two products I if aco. Confering, Cla, ,Gz) – 90 – 0.56, 62 to 462 +0.3622 with the Standard production func. C.Cande) = ft a G, 92 tarta? reveals that a=-0.5. Ives – there are cost complementorities (6) Maorginal cost would increase