Question

A firm produces 100 units of good A at a total cost of $2,124 and separately 200 units of good B at a cost of $1,227. 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 $2,500. Compute the economies of scope experienced by this firm

Answer 1

• A firm is said to experience economies of scope when it experiences a lower cost from producing two or more goods together than the cost of producing each good seperately.
• Here a firm is producing 100 units of good A with a total cost of $2,124 and it is producing 200 units of good B with a total cost of $1,227. The total cost of producing both the goods together is $2,500. Which is lower than the cost of producing both the goods.
• The formula to calculate economies of scope is given by :
• S = (C(Qa) + C(Qb) - C(Qa + Qb)) / C(Qa + Qb)
• Here C(Qa) = cost of producing 100 units of good A, C(Qb) = cost of producing 200 units of good B, C(Qa+Qb) = total cost producing goods A and B together.
• We now Substitute the values in the equation given above as,

S = (2,124 + 1,227 - (2,500)) / 2,500

= 851 / 2,500 = 0.34//