Question

Conclude whether a multiple-output production process exhibits economies of scope or cost complementarities and explain their significance for managerial decisions.

Try these problems: 7, 21

Short answer

Yes, a multiple output production process exhibits economies of scope or cost complementarities.

Step-by-step solution

Introduction:

The term "multiple output production process" refers to a process that produces multiple outputs from multiple input sources. This technique has numerous advantages.

A producer can generate more than one type of product at the same time, and he can choose a technique based on market demand and his needs. This system has a wider range of applications than a single-output production system.

Assume you're using the multiple output system to make products and .You can also make either of the products, so you may now choose which one to produce and in what quantity.

Explaining whether a multiple-output production process exhibits economies of scope or cost complementarities

A linked economy means that producing one good reduces the cost of producing another related good. Economies of scope arise when it is cheaper to produce a wider variety of goods and services together than to produce a smaller variety of goods and services or one single product. In such cases, the production of complementary goods and services reduces the long-term average and marginal costs of a company, organization, or economy.

• Cost complementaries represent a situation where producing two or more commodities together has a lower marginal cost than producing them separately.

• Economies of the scope are different from economies of scale, the former means producing different products together to reduce costs, and the latter produces more of the same products to increase efficiency and reduce costs.

• Economies of scope in the range can arise from commodities that are by-products or complements of production, commodities with complementary production processes, or commodities that share inputs to production.

Explaining their significance for managerial decisions.

• Decreased productivity when there are too few workers or insufficient materials.
• Increased costs when there are too many workers or too many materials when the storage life of the material is either limited or expensive to store.
• And employee frustration, demoralization, and increased sales (which can be costly to the organization) if decisions include employee management and training.