Question

Suppose the cost of producing two goods, x and y, can be represented as C= ax+by+cxy. If the measure of economies of scope, SC, is zero, then which of the following must be true? A) a+b= -c

B) C < 0
C) a = -C
D) C= 0
E) C > 0

Answer 1

For the measure of economies of scope (SC) to be zero with the cost function C = ax + by + cxy, it must imply that there is no interaction term benefit or loss (i.e., cxy = 0), suggesting that there are neither economies nor diseconomies of scope.

Step-by-step explanation:

The question pertains to the topic of economies of scope in production, and it analyzes the cost function C = ax + by + cxy, where x and y are the quantities of two different goods being produced, with a, b, and c representing constants associated with the production costs of these goods. The measure of economies of scope, SC, is stated to be zero. Economies of scope exist when the total cost of producing two goods together is less than the cost of producing them separately. This situation is represented mathematically when C < ax + by, suggesting synergy in joint production.

If SC is zero, it implies that there are no economies or diseconomies of scope, meaning the cost of producing both goods together is the same as producing them separately. For the given cost function, this condition would occur when the interaction term cxy is zero, as there would then be no cost benefit or penalty for joint production. Therefore, the equation simplifies to C = ax + by, and none of the s