Are small banks at a major cost disadvantage

Reference no: EM133552819

Question: Consider the following assessment of economies of scale for 476 actual banks in Texas. Economies were assessed for 2015 data where output is assets, and inputs are labor and two types of deposits. An index for Average Cost is given on the vertical axis and banks are arrayed by number of locations on the horizontal axis. This simulates a LRAC curve for Texas banks. (Reference ECO, section 7.5 for more detail on LRAC).

Based on the graph, are there increasing returns to scale (IRS) for Texas banks? Explain by defining IRS and, if IRS exists, the range of bank-size for economies of scale.
Based on the graph, are there constant return to scale (CRS)? Explain by defining CRS and, if CRS exists, the range of bank-size for economies of scale.
Based on the graph, are there decreasing return to scale (DRS)? Explain by defining DRS and, if DRS exists, the range of bank-size for economies of scale.
Are small banks (those with less than 10 locations) at a major cost disadvantage relative to large Texas banks (those with 300 locations)? If so, what is the scale of the relative disadvantage (e.g., 5:1 ratio means $5 AC for small banks and $1 AC for large banks). Explain in one sentence.

Reference no: EM133552819

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