A computer company produces hardware and software using the same facility. (i.e., with the same L and K). The total cost of producing software (S) and hardware (H) equals:

Question

TC = a S + b H - d S H,
where a, b, and d are positive constants. Are there economies of scope in the production of H and S? Explain why or why not.

Answer 1

Do a little research, then take a shot. What do you think?

Hint: raise both S and H by some percentage (say 10%). Does TC rise by:
a) more than 10% (dis-economies of scope)
b) less than 10% (economies of scope), or
c) exactly 10% (zero economies of scope)