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Information Economics Coursework
Assignment 2

Technical Economies-of-Scale
The ‘Six-Tenth’ rule. This is commonly used to mathematically characterise internal economies-of-scale. The rule is used to determine the associated costs and gains in expansion that might result from a decision to increase, or decrease the technical capability of a department or firm.
The Scenario
You are the operations manager of Hypersave, a large food retailing firm, with a portfolio of responsibilities that includes the processing of customers, from entry to the car park, into the store, and exit from the car park. To cater for the increased customer volume resulting from a nearby housing development, you have been asked to evaluate the impact of an increase in car parking facilities on customer throughput at Hypersave.

Hypersave’s existing parking capacity is 480 car park bays, which are fully utilised. The daily cost of a car park bay is free for customers, but fully borne by the store and is estimated at £1.75 per square metre. Each car park bay is 5 metres long and 3 metres wide, but only 65 percent of the overall car parking space is available for parking bays.

An estimate of the average rate of customers leaving the car park on the basis of the current capacity is 185 customers per hour. Access to the store, which will remain the same prior to and after expansion, is 8 hours per day, 7 days per week, and 48 weeks per year.

To facilitate the proposed expansion, Hypersave intends to purchase the lease of an adjacent plot of land of area 15,000 square metres and an annual cost of £70,000. The construction of and associated work on the new car parking facilities are estimated at £480,000, which will take the form of a one-off annual cost, payable over twelve monthly payments following completion of the work. As before, only 65 percent of this new site can be converted to parking bays, and daily costs of parking remain at £1.75 per square metre.

Required: Answer the following questions relating to the application of the ‘Six-Tenths’ rule and Grosch’s Law.

(a) From the data presented in the scenario, above, determine the values of the parameters C1, C2, Y1, Y2 of the ‘Six-Tenths’ rule. As an aide memoire in using the ‘Six-Tenth’ rule, you may refer to and select one of the equations given in Appendix CW2, below
(30 %)

(b) Hence, use a relevant equation in Appendix CW2 to calculate the increase in the average rate of customers leaving the car park as a consequence of going ahead with the expansion. You can assume that the exponent n =0.6.
(15%)
(c)
Comment briefly upon the assumptions that underlie the value of the exponent of 0.6 in the ‘Six-Tenths’ rule
(20%)

(d) Derive a relationship that describes Grosch’s Law, and compare and contrast this relationship with the ‘rule of six tenths’.
(35%)

++++++++++++++++++++++++++++++++++++*End of Assignment++++++++++++++++++++++++++++++++++++++++

Note that marks will be awarded to solutions that show the logic and approach taken to arrive at the final answer. Please ensure that answers to calculations are clearly indicated and underlined. Additional credit will also be given to students who focus not only on the quantitative, but also the qualitative issues that relate to the question.

The submission deadline is Thursday 19th May 2005. Assignments must be submitted at the usual place, and the Faculty’s submission policy applies.
APPENDIX CW2
…………….………….….Equation 1
Taking logs on both sides of the equation,
…………Equation 2
From which,

…………...Equation 3

C2 is the total relevant cost of the large set of technical units
C1 is the total relevant cost of the small set of technical units
Y2 is the capacity of the large set of technical units
Y1 is the capacity of the small set of technical units
n is 0.6 or ‘Six-Tenths
:eek: