A multiproduct firm's cost function was recently estimated as CQ1, Q2) = 90 -0

Economics Dec 17, 2020

A multiproduct firm's cost function was recently estimated as CQ1, Q2) = 90 -0.5Q.Q2 +0.40,² +0.3022 a. Are there economies of scope in producing 10 units of product 1 and 10 units of product 2? b. Are there cost complementarities in producing products 1 and 2?

Expert Solution

a) There are economies of scope when 90 - 0.5Q1Q2 > 0

90 - 0.5*10*10

= 40

> 0

Hence there are economies of scope

b) There are cost complementarities when dMC1/Q2 < 0

Here MC1 = -0.5Q2 + 0.8Q1

Now dMC1/dQ2 = -0.5

since this value is negative there are cost complementarities

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