Question

Suppose a firm has the ability to produce​ soap, toothpaste, or both. If the firm produces q Subscript Upper S units of soap and no​ toothpaste, then the total cost of production will be ​$30 thousand. If instead the firm produces q Subscript Upper T units of toothpaste and no​ soap, then the total cost of production will be ​$34 thousand.​ However, if the firm produces both q Subscript Upper S units of soap and q Subscript Upper T units of​ toothpaste, then the​ firm's total cost of production will be ​$36 thousand. Does this firm potentially experience economies of​ scope, diseconomies of​ scope, or no economies of​ scope? This firm potentially experiences economies of scope . What is the​ firm's degree of economies of​ scope? The degree to which this firm potentially experiences

Answer 1

a) This firm potentially experience economies of scope.

b) 0,77

Step-by-step explanation:

a) A company faces an economiy of scope whenever the cost of producing a variety of products is lower than the sum of each producing cost if they are produced in a stand-alone production line.

In this case the sum of the stand-alone costs is = $30,000+$34,000= $64,000

And when they are produced together the total production cost is 36,000, so we are facing an economy of scope.

b) to calculate the degree of scope economy we apply the following formula=

(Cost of producing Toothpaste alone + Cost of producing Soap alone- Cost of combinated production)/ Cost of combinated production=

(30,000+34,000-36,000)/(36,000)=0,77

It's a positive degree so we are facing an economy of scope