ECO- A study of 86 savings and loan associations in six northwestern states

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 econo-mies or diseconomies of scale in savings and loan associations in theNorthwest

Part B

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