Question

The economies of scale curve in Figure 4.1 can be represented algebraically in the following equation:

Average costs = a + bQ + cQ2

where Q is the quantity produced by a firm and a, b, and c are coefficients that are esti- mated from industry data. For example, it has been shown that the economies of scale curve for U.S. savings and loans is:

2 Average costs = 2.38 - .615A + .54A

where A is a savings and loan’s total assets. Using this equation, what is the optimal size of a savings and loan? (Hint: Plug in different values of A and calculate average costs. The lowest possible average cost is the optimal size for a savings and loan.)