1. Exercise 9.1

A study of 86 savings and loan associations in six northwestern states yielded the following cost function.

CC	=	2.38	-	0.006153QQ	+	0.000005359Q2Q2	+	19.2X1X1
		(3.33)		(3.08)		(3.16)		(2.96)

where CC= average operating expense ratio, expressed as a percentage and defined as total operating expense ($ million) divided by total assets ($ million) times 100 percent.

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

X1X1= ratio of the number of branches to total assets ($ million)

Note: The number in parentheses below each coefficient is its respective t-statistic.

Which of the variable(s) is (are) statistically significant in explaining variations in the average operating expense ratio? (Hint: t0.025,70=1.99t0.025,70=1.99.)Check all that apply.

Q2Q2

X1X1

QQ

What type of average cost-output relationship is suggested by these statistical results?

Linear

Cubic

Quadratic

Based on these results, what can we conclude about the existence of economies or diseconomies of scale in savings and loan associations in the Northwest?

Economies of scale at all output levels

Diseconomies of scale at lower output levels and economies of scale at higher output levels

Diseconomies of scale at all output levels

Economies of scale at lower output levels and diseconomies of scale at higher output levels