Suppose one firm buys cattle to process only the skins for leather, and another firm buys cattle to process only the meat for food. If the two firms merged, they would experience
A)increasing returns.
B)economies of scale.
C)economies of scope.
D)increasing marginal product.
E)decreasing marginal cost.

Question

Quizplus · Accepted Answer

The merger of two firms that each specialize in processing a different part of the cattle would result in economies of scope. This is because the merged firm could utilize the byproducts generated by each process to create value and reduce costs. For example, the meat processing side could use the hides for leather products and the leather processing side could use the leftover meat for byproducts such as pet food, fertilizer, or pharmaceuticals. By utilizing both outputs in this way, the merged firm would be able to achieve cost savings and increase efficiency, resulting in economies of scope.

Suppose One Firm Buys Cattle to Process Only the Skins