A study of 86 savings and loan associations in six northwestern states yielded thefollowing cost function: C= 2. 38 (2.84) - .006153Q (2.37) + . 000005359 Q2(squared) (2.63) + 19.2 X (2.69
where C = average operating expense ratio, expressed as a percentage and de � nedas total operating expense ($ million) divided by total assets ($ million) times100 percent
Q = output ; measured by total assets ($million)
X 1 = ratio of the number of branches to total assets ($million)
Note: The number in parentheses below each coefficient is its respective t -statistic.
a. Which variable(s) is(are) statistically significant in explaining variations inthe average operating expense ratio?
b. What type of cost-output relationship (e.g., linear, quadratic, or cubic) issuggested by these statistical results?
c. Based on these results, what can we conclude about the existence of economies or diseconomies of scale in savings and loan associations in theNorthwest
d.) holdign constant the effects of branching (X1) determine the level of total assets that minimizes the average operation expense ratio.
e.) Determine the average operating expense ration for a savings and loan association with the level of total assests determined in in Part (a) and 1 Branch. Same question for 10 Branches