Referring to Exercise 1:

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

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 ($millions)
X1 = ratio of the number of branches to total assets ($millions)
The number in parentheses below each coefficient is its respective t-statistic.

a. Holding constant the effects of branching (X1), determine the level of total assets that minimizes the average operating expense ratio.
b. Determine the average operating expense ratio for a savings and loan association with the level of total assets determined in Part (a) and 1 branch. Same question for 10branches.

Transcribed Image Text:

С 2.38 - .0061 53Q + .000005359Q2 + 19.2x, (2.69) (2.84) (2.37) (2.63)