2. Exercise 9.2

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

C	=	3.12	-	0.006768Q	+	0.000005359Q22	+	21.1X11
		(3.12)		(2.61)		(2.89)		(2.96)

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

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

X11= 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 (X11), what is the level of total assets that minimizes the average operating expense ratio?

$1,262.92 million

$1,558.81 million

$631.46 million

$460.99 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?

5.63%

1.02%

3.15%

1.17%

What is the ratio with 10 branches instead?

5.93%

3.45%

1.32%

1.47%