5. A firm produces 100 units of good A at a total cost of $1,500 and...
5. A firm produces 100 units of good A at a total cost of $1,500 and separately 200 units of good B at a cost of $2,000. By combining the production of A and B, it is possible to produce the same quantities of A and B respectively at a combined total cost of $2,800. Compute the economies of scope experienced by this firm.
6. The production manager of a clothing manufacturer estimates that the total annual cost of producing men’s suits is given by the equation: C = 5,000 + 4,100Q – 8Q2 + .004Q3. If the market price of suits is constant, what is the shutdown level of output in the short run? What is the minimum price the firm can accept?
Homework Answers
Answer)
CA = Cost of producing 100 units good A = $1500
CB = Cost of producing 200 units of good B = $2000
CA+B = Cost of producing A and B together = $2800
Formula for calculation of Economies of Scope is as follows:
S = (CA + CB - CA+B)/(CA+B)
= (1500 + 2000 - 2800)/(2800)
= (3500 - 2800)/(2800)
S = (700/2800) = 1/4 = 0.25
The cost of producing goods together is 25% less as compared to the cost when the goods are produced seperately.
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5. A firm produces 100 units of good A at a total cost of $1,500
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A firm produces 100 units of good A at a total cost of $1,500 and separately 200 units of good B at a cost of $2,000. By combining the production of A and B, it is possible to produce the same quantities of A and B respectively at a combined total cost of $2,800. Compute the economies of scope experienced by this firm.
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