A study of 86 savings and loan associations in 6 NW states yielded the following cost function


    C= 2.38        0.006253Q     +     0.000005359Q^2        +         19.2X_1


         (2.84)           (2.37)                      (2.63)                                     (2.69)


Where C= average operating expense ratio, expressed as a percentage and defined as total operating expense   ($million)    divided by total assets ($million) times 100%.


Q= output; measured by total assets ($million)


X_1 =ration of the nos. of branches to total assets ($million)


Note: the nos. in parentheses below each coefficient is its respective t-statistic


  1. Which variables is/ are statistically significant in explaining variations in the average operating expense ratio?

  2. What type of cost-output r/ship is suggested by these statistical results?

  3. Based on these results, what can we conclude about the insistence of the economies or diseconomies of scale in savings and loan associations in the NW?

  4. Holding constant the effects of bank branching (X_1), determine the level of total assets that minimizes the average expense ratio?

  5. Determine the average operating ratio for a savings and loans association with level of toatal assets determined in part (a) and 1 branch. Solve the same question for 10 branches.


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