Case Study 2

Solution

a. t (0.025, 84) = 2.000 less than t(Q),t(Q2),t(X1) , therefore Q,Q2 and X1 are all
statically significant in explaining the average operating expense ratio.

b. By the statistical result, the cost-output relationship is in quadratic form

c. the cost –output relationship is U-Shape, we can conclude: the savings and
loans association in Northwest is economies of scale at lower output levels and
diseconomies of scale at higher output levels

d. Minimizing the average operating expense(C) , considering X1 as constant

C is minimum when

dC = – 0.006153 + 2x0.000005359Q = 0

 Q = 574.08 ($ millions)

e. C

= 2.38 – 0.006153 x 574.08 + 0.000005359 x (574.08)2 +19.2 X1

= 0.6138 +19.2 X1

1 branch:

C1 = 0.6138 +19.2 /574.08 = 0.647 (%)

10 branches
C10 = 0.6138 +19.2 x 10/574.08 = 0.948 (%)