Question

Economies of Scope

Suppose the joint total cost function of a telecommuncications company providing internet service, Q₁ and TV cable service Q₂ is the following:

C(Q₁Q₂) = Q₁ + Q₂ + (Q₁ x Q₂)^1/3

A) Does this multi-service firm experience economies of scope when it provides internet access to 75 customers, and cable T.V. access to 125 customers? Does this cost equation suggest that the multi-service firm enjoys cost complementarity among its two services? Please clarify and explain throroughly. (Note, customers do not purchase a bundle so there's no price discrimination.) Hint, the cost function for single service provides are as follows.

C(Q_1,0)=Q₁ + 0 +(Q₁x0)^1/3

C(0,Q₂)=0 + Q₂ + (0xQ₂)^1/3

1. Calculate the marginal cost and the average cost of the multi-service firm (Equation 1) providing internet, and cable T.V. services at the output levels provided above.

2. Determine if this multi-service firm experiences economies of scale when providing internet access to 75 customers, cable T.V., and access to 125 customers.