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Lecture15

# Lecture15 - Lecture 15 Optimizing output mix with economies...

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Unformatted text preview: Lecture 15 Optimizing output mix with economies of scope Economies of Scope vs. Economies of Scale Learning Curves Learning curves vs. economies of scale Sample Midterm problems Optimizing output mix with economies of scope • Let p x be the price of X , p y be the price of Y . Then revenues = p x X + x y Y . A constant revenue curve has slope -p x /p y . • Maximize revenues for any level of costs – i.e., for each product tranformation curve R= p x X + x y Y X Y Scope vs. scale • A computer company produces hardware and software using the same plant and labor. The total cost of producing computer processing units H and software programs S is given by TC = aH + bS – cHS where a, b, and c are positive. Is this total cost function consistent with the presence of economies or diseconomies of scale? With economies or diseconomies of scope? TC = aH + bS – cHS • Economies of scale: increase outputs by a factor α > 1 and see what happens to total cost: a( α H) + b( α S) – c( α H)( α S) = α [aH + bS – α cHS] < α TC. This cost function exhibits scale economies • Economies of scope: TC(H|S = 0) + TC(S|H = 0) = aH +bS > aH + bS – cHS = TC(H, S) Learning curves...
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Lecture15 - Lecture 15 Optimizing output mix with economies...

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