Managerial Economics

b) It is an example of economies of scale, referring to the average cost decrease with the production rate increase. Economy of scope means the varieties of different products. In the context, there is no change of product.

As the below computed, to what extent, the economies of scale can be achieved:

In the original average labor cost= ; later the average labor cost= .

c) According to the below argument, there are economies of scope for a contractor to maintain both escalators and elevators.

Although, escalators and elevators use different technology and parts, resulting in no change in production cost when combined, there are many common clients sharing both products. As a result, brand extension as marketing strategy can be implemented, in which the advertising and promotion cost can be treated as the joint cost to reduce the overall average cost.

Exercise 3:

a) The acquisition will expend Qwest's horizontal boundaries in two aspects. After acquisition, in service provided by Qwest, national long distance voice and data communications and high brandwidth Internet access will be included in its business territory. And in geography, the coverage will be extended from 25 metropolitan areas to West and Midwest.

In industry supply chain, both companies offer services belonging to the same level, bottom parts of industry supply chain. Consequently, the vertical boundaries have not been expanded.

b) Because the operating expenses can be shared by two companies, such as managing cost and maintenance labor. Some fix parts of operating expense are joint costs, which will keep unchanged, the average cost reducing accordingly. As a result, some part of operating expense and capital expenditure can be cut down.

c) National long distance voice and data communications and high brandwidth Internet access are expanding each other's business. And they have common clients, which means in advertising and promotion the average cost can be reduced. As a result, some part of operating expense and capital expenditure can be decreased.

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