Exercise 9.2

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

CC	=	3.41	-	0.007384QQ	+	0.000005359Q2Q2	+	23.0X1X1
											(3.41)		(2.84)		(3.16)		(3.23)

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?

$1,377.87 million

$461.81 million

$1,557.42 million

$688.93 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?

0.90%

1.18%

4.94%

3.44%

What is the ratio with 10 branches instead?

3.74%

5.24%

1.48%

1.20%