file:////home/vdimitrov/17046/ac3175e09c8600eaf2d7c86da5383348161e94dc.xls Economies of Scale Exercise In this exercise you wil develop your skil s at estimating cost curves from periodic financial data. You wil treat quarterly observations of costs and volume as if they are direct observations on the underlying cost curve. This is a reasonable approach as long as the underlying cost curve is relatively stable over time. If it is shifting dramatical y because of cost-cutting, for example, this would be a less accurate method for estimating a cost function. You wil use the financial information below from Guest-Tek, which is pul ed directly off of the public financial statements. Guest-Tek is a provider of high speed Internet service to hotels around the country. Recently, they have acquired a company to increase the number of guest hotel rooms they serve. They have been pricing very aggressively in the market at about the 10 cents per room per day (CPRPD) mark. Another major competitor wonders how long Guest-tek can sustain this pricing threshold and whether they wil have to lower their price to match Guest-tek in order to win new contracts. 1. Using the information provided in the Guest-tek financials, plot the total cost curve as a function of the number of hotel rooms "installed." Fit a curve through these points and identify the total cost function. (Hint #1: I suggest you use a power function, as other functions may lead you astray in this cost range) (Hint #2: Remember that economies of scale are calculated using TOTAL (i.e. fixed + variable) cost.) dol ars are in thousands. You don't use formula from No. 1 here.)
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