Question

You're the manager of Archer-Daniels Midland Company (ADM). ADM uses corn to produce high fructose corn syrup (HFCS) and corn oil (e.g., Mazola). Assume that the production of corn oil is positively related to the production of oil. Write out a cost function and show that there are cost complementarity and economies of scope in the production of HFCS and corn oil.

Based on the solution to the last question, assume that you would like to increase production of HFCS and corn oil. You have decided to add night-shift to the production of these two products. The justification you have given your boss is that adding the night-shift does not increase fixed costs in the short-run. Based on economic theory, explain your justification.

Answer 1

Cost function for producing HFCS =>

C = f ( price of corn oil, price of oil )+ Fixed cost

There is cost complementarity and economies of scope in production of HFCS and corn oil because HFCS is also produced from corn and corn oil is also produced from corn. From corn, corn oil is produced and from corn oil, HFCS is produced. So both HFCS and corn oil should be produced together. Economies of scope here would be that cost of producing both together will be less than if they both are produced separately. Cost complementarity is that both HFCS and corn oil are produced from corn.

So now if we want to increase production of corn oil and HFCS, then we can add night shift to the production of these two products. It does not increase fixed costs in the short run. Both these products need corn as the common material. If night shift is added, we dont need to pay the rent separately for the night. So in this case fixed cost is not increased. Instead we can produce more. Both these products need corn. There are Economies of scope.