Kelsey produces microwaves. Last year, she made 10,000 microwaves at an average cost of $4 per microwave. Lamar produces toasters, and last year he made 4,000 toasters at an average cost of $11 per toaster. They are thinking about merging their companies, to see if they could produce output at a lower cost. (a) Suppose their engineers gave them an estimate that if they wanted to form one big company and keep making 10,000 microwaves and 4,000 toasters, it would cost at total of $75,000 to produce that output. What would our measure of this firm's economy of scope (SC) be? Should they merge companies? (b) Suppose instead their engineers had suggested that it would cost $90,000. What would our economies of scope be in that case? Should they merge companies?
Kelsey produces microwaves. Last year, she made 10,000 microwaves at an average cost of $4 per microwave. Lamar produces toasters, and last year he made 4,000 toasters at an average cost of $11 per toaster. They are thinking about merging their companies, to see if they could produce output at a lower cost.
(a) Suppose their engineers gave them an estimate that if they wanted to form one big company and keep making 10,000 microwaves and 4,000 toasters, it would cost at total of $75,000 to produce that output. What would our measure of this firm's economy of scope (SC) be? Should they merge companies?
(b) Suppose instead their engineers had suggested that it would cost $90,000. What would our economies of scope be in that case? Should they merge companies?
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