✏ Economies of Scope Example

✏️ Costs to insurance company to provide insurance: (administrative and payout)
Umbrella insurance = $1200
Renter’s insurance = $900
Combo of Umbrella and Renter’s insurance $1900

Are there economies or diseconomies of scope?
What are the degrees of economies of scope?

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$$SC = \frac{C\left( q_1 \right) + C\left( q_2 \right) - C\left( q_1, q_2 \right)}{C\left( q_1, q_2 \right)} = \frac{\$1200 + \$900 - \$1900}{\$1900} = 0.105$$

Because $SC > 0$, economies of scope are present.

Intuitively, this means that it costs more to offer the services separately rather than in the same firm. In other words, it would cost $1200 + $900 = $2100 to offer the two services separately, but only $1900 to offer them in the same firm. Presumably this is because the same salespeople, managers, underwriters, facilities, etc., can be used in offering both forms of insurance.  ✅