Suppose the cost of producing two goods,x and y,can be represented as C = ax + by + cxy.If there are economies of scope,then which of the following must be true? A) c 0 B) a + b = -c C) c = 0 D) c

Question

Suppose the cost of producing two goods,x and y,can be represented as C = ax + by + cxy.If there are economies of scope,then which of the following must be true?
A) c > 0
B) a + b = -c
C) c = 0
D) c < 0

Quizplus · Accepted Answer

Economies of scope occur when it is less costly to produce two goods together than it is to produce them separately. This implies that there is a positive synergy between the production of x and y. In the given cost function, economies of scope are present if Cxy < CaCb. This can be rearranged to give c < a/b. Therefore, c must be negative for there to be economies of scope. Thus, the correct answer is D.

Suppose the Cost of Producing Two Goods,x and Y,can Be