1.The following are the total asset (TA) and average cost (AC) data for three FIs. AC is calculated as cost per dollar of asset (AC =TC/TA):

TA

AC

TC

AlphaMortgage bank

300M

20%

Beta

Life Ins. Co

400M

30%

Gamma

Commercial bank

400M

25%

Gamma knows it can reduce its average cost by taking over Alpha and Beta but is unsure about the magnitude of the cost reduction.

a.Calculate the total cost (TC) of each firm and the total cost of the merged entity if no cost cutting occurs.

b. Suppose you are asked to advise Gamma on the wisdom of the merger. How would you decide to support or oppose the merger? What can be the sources of the decline in costs in this merger?

c. If operating costs fall by $60M after the merger, what will be the average cost of the combined firm? What if they fall by $82M?

d. Define scope economies and scope diseconomies. Do you expect scope economies to be generated due to the merger? Based on the data given here, can we judge whether scope economies are in effect due to merger?

e. Define technical and allocative efficiencies.