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A multiproduct firm's cost function is:

C(Q1, Q2) = 50 +0.2Q12 + 0.1Q22

a. Are there economies of scope? Why?

b. Are there cost complementarities in producing products 1 and 2? Why?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019
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  1. Commercial bakeries typically sell a variety of products (bread, rolls, muffins, cakes, etc.) to local grocery stores. There are substantial economies of scale in the production of each one of the bakery products, which makes it cost-effective to specialize in the production of just one product. Grocery stores, however, prefer to buy from multiproduct bakeries that sell a full line of bakery products. How might managers organize production to take advantage of the economies of scale and scope in production and marketing that exist in the baking industry?

Suppose a firm produces two goods, pizzas and subs. Let Qp represent the number of pizzas produced and Qs represents the number of subs produced. The firm's cost function is given by TC= 4 + 12Qp + 4Qs.

a. Calculate the average incremental cost for pizza (AICp).

b. Calculate the scale economy index for pizza (Sp). Are the scale economies in the production of pizza?

c. Does this firm possess economies of scope? Why?

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