2. Exercise 9.2

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

CC	=	3.69	-	0.007999QQ	+	0.000005359Q2Q2	+	25.0X1X1
		(3.69)		(3.08)		(3.42)		(3.50)

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.

Holding constant the effects of bank branching (X1X1), what is the level of total assets that minimizes the average operating expense ratio?

$1,492.63 million

$461.31 million

$1,562.70 million

$746.31 million

What is the average operating expense ratio for a savings and loan association with the level of total assets determined in the previous part and 1 branch?

3.72%

1.17%

0.74%

4.31%

What is the ratio with 10 branches instead?

1.04%

1.48%

4.61%

4.03%