Managerial Economics and Strategy, 2/e

6.5 The Costs of Producing Multiple Goods

If a firm produces two or more goods, the cost of one good may depend on the output level of another. Outputs are linked if a single input is used to produce both of them. For example, cattle provide beef and hides (for leather), and petroleum supplies both heating fuel and gasoline. It is less expensive to produce beef and hides together than separately. If the goods are produced together, a single animal yields one unit of beef and one hide. If beef and hides are produced separately (throwing away the unused good), the same amount of output requires two animals and more labor.

A cost function exhibits economies of scope if it is less expensive to produce goods jointly than separately (Panzar and Willig, ...