A study of several grocery stores in the midwest yielded the following cost func
ID: 1203863 • Letter: A
Question
A study of several grocery stores in the midwest yielded the following
cost function:
C(q) = 5.3 + 0.05 q - 2.3 M
(1.4) (2.9) (2.2)
Where q is the output of the store, measured in thousands of dollars of sales, and M is 1 if
there is a regional warehouse located within 100 miles and 0 otherwise. The numbers below
each coefficient are the t-values.
a. Which variables are statistically significant in explaining variations in the costs?
b. What type of cost-output relationship is suggested by these statistical results?
c. Based on these results, what can you say about the economies or diseconomies of
scale in the Midwest?
Explanation / Answer
Answer a) total variation =explained variation+unexplained variation
t=derivation from the population parameter/standard error
1.4=5.3/ standard error
standard error=3.78
2.9=0.05/standard error
standard error=0.05/2.9
=0.017
2.2=2.3/standard error
standard error=2.3/2.2
=1.04
less standard error,more significance
b)These statistical results suggest presence of variable,semivariable n fixed cost
c)based on these results it can be interpreted that firm can enjoy economies with more production and thus more warehouses as it would ultimately help in reducing cost thus adding benefit.
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