Question

A company produces two goods, X and Y. Production technology exhibits the following costs, where C (Qx, Qy) represents the cost of producing Qx units of good X and Qy units of good Y: C (0.50) = 100, C (5,0) = 150, C (0,100) = 210, C (10,0) = 320, C (5,50) = 240, and C (10,100) = 500. Respond and justify your answers to the next questions: Does this technology exhibit economies of scale? Does this technology exhibit economies of scope?

Answer 1

Note that economies of scope are existing when combined production has a lower cost than producing two

goods separately. Now when QX = 0 and QY = 50, Cost is 100. When QX = 5 and QY = 0, Cost is 150. So total

cost of QX = 5, QY = 50 is 100 + 250. When combined, Cost of QX = 5, QY = 50 is 240. Now that the cost of

combined production is less than the cost of separately producing X and Y, we have economies of scope.

AC of producing 50 units of Y (with no X) = 100/50 = 2. AC of producing 100 units of Y (with no X)

= 210/100 = 2.1. AC of Y is increased with production.

AC of producing 5 units of X (with no Y) = 150/5 = 30. AC of producing 10 units of X (with no Y) = 320/10 = 32.

Hence we see that for both X and Y, increased production increases AC. This shows that there are

diseconomies of scale