Economies of scope, in which a single enterprise realizes efficiency

Question

Economies of scope, in which a single enterprise realizes efficiency gains by taking on the production of multiple related goods simultaneously, have arisen in American agricultural production since the earliest days of the United States. Ever since colonial farmers first banded together in the 1770s to transition from subsistence farming to commercial production, American farmers have consistently found that multiple-crop farms are more cost-effective than one- or two-crop farms, and that farms mixing livestock and crop production are even more efficient yet.

Further economies of scope are often realized within the livestock operations of a single farm. A cattle ranch that produces both beef and leather hides from its herd will clearly receive greater returns for every dollar originally invested than will a ranch that only produces one or the other. And cattle products are hardly limited to just beef and leather: collagen and glycerin—both widely used across the medical and food industries, in applications ranging from reconstructive surgery to shelf-stable meats—are byproducts of the beef supply chain, and other parts of bovine carcasses play important functional roles in in pet foods, machine lubricants, fabric softeners, and biodegradable firefighting foam, among countless others. It is difficult even to imagine how much more costly these products would be if each manufacturer maintained a separate cattle stock; indeed, few if any of these products could ever have been feasibly brought to market if their manufacturers did not inherit the benefits of scope from suppliers.

Of course,  economies of scope are not universal . If a cattle ranch were to take on dairy production, the ranchers would find themselves chasing several sets of contradictory objectives simultaneously: sourcing nutrient-rich hay for dairy cows while feeding the herd from crops grown on the ranch itself; attending to a strict milking schedule yet vigilantly patrolling all the acres roamed by the herd; and harvesting and marketing milk continuously year-‘round but only attending ranchers’ markets once or twice yearly. Maintaining such starkly incompatible operations would inevitably erode quality and productivity in both of them, causing losses in efficiency overall.

1 
 1. Which of the following most accurately describes the structure of the passage as a whole?  
A. An economic phenomenon is introduced in historical context and illustrated with an example, for which the mechanism and then certain limits of the phenomenon are explained.
B. A controversial topic in economic history is presented, and then two fundamentally opposing views on that topic are presented and analyzed in detail.
C. A business strategy is presented in historical context, followed by a detailed explanation of why one type of business would benefit from adopting that strategy but another type of business would not.
D. A historical economic trend is described; the founding example of that trend is then analyzed in detail, along with a counterexample that developed as an indirect result of that example.
E. A concept from economic theory is introduced in historical context, followed by arguments for and then against the validity of that concept as an explanation for certain findings.

2 
 2. Which of the following businesses would be LEAST likely to benefit from “economies of scope” as described and illustrated in the passage?

A. A fast-food restaurant takes hamburger patties that break apart during grilling, which can no longer be sold as hamburgers, and starts selling chili containing the meat from those patties.
B. A cheesemaker begins to supply whey, which is a waste product of the cheesemaking process, to an athletic supplement company for use in protein shakes.
C. A large producer of frozen fish fillets extracts the iridescent pigments from the scales of the fish and sells them to cosmetics manufacturers.
D. A manufacturer of carbon-fiber auto-body panels begins supplying a local luggage manufacturer with hard-shell suitcase bodies, which it can produce on its existing equipment with minor adjustments.
E. A palm tree grower, which has been a longtime supplier of edible “hearts of palm” to the restaurant industry, begins supplying hearts of palm to a major producer of canned vegetables.
 3 
 3. In stating that “economies of scope are not universal” (see highlighted text), the author most clearly means that

A. only certain types of business enterprises are typically capable of expanding the scope of their operations
B. whether a company will feasibly benefit from taking on additional lines of business may depend on local governance or prevailing economic conditions
C. in widening its scope to take on another line of business, an enterprise may become less cost-effective overall
D. many innovative new products cannot be profitably manufactured and sold until the manufacturer’s suppliers are able to operate at lower unit cost
E. the magnitude of efficiency gains to a company from taking on new lines of business tends to be lower for each new expansion than for previous expansions

RonPurewal · Answer

Please feel free to post your answers and reasoning (or any other relevant discussion). I will reveal the correct answers in a day or two.

Enjoy!

Ron

Carcass · Answer

Explanation of the Passage

Not crazy difficulty but still a pounchy passage. Historic fan of you. I was in the manhattan study hall at the time..........and still here . anyway. Happy you are still here with a priceless contribution to GC

Economies of scope, in which a single enterprise realizes efficiency gains by taking on the production of multiple related goods simultaneously, have arisen in American agricultural production since the earliest days of the United States.

In a nutshell: a firm or company takes a chance to produce multiple things, related to each other. Maybe to exploint economics of scale

Ever since colonial farmers first banded together in the 1770s to transition from subsistence farming to commercial production, American farmers have consistently found that multiple-crop farms are more cost-effective than one- or two-crop farms, and that farms mixing livestock and crop production are even more efficient yet.

Over time, farmers understood that producing more crops on the same farm is more effective and efficient. Less costs

Further economies of scope are often realized within the livestock operations of a single farm. A cattle ranch that produces both beef and leather hides from its herd will clearly receive greater returns for every dollar originally invested than will a ranch that only produces one or the other. And cattle products are hardly limited to just beef and leather: collagen and glycerin—both widely used across the medical and food industries, in applications ranging from reconstructive surgery to shelf-stable meats—are byproducts of the beef supply chain, and other parts of bovine carcasses play important functional roles in in pet foods, machine lubricants, fabric softeners, and biodegradable firefighting foam, among countless others.

A portion that gives you examples of how many products we could have from a single farm

It is difficult even to imagine how much more costly these products would be if each manufacturer maintained a separate cattle stock; indeed, few if any of these products could ever have been feasibly brought to market if their manufacturers did not inherit the benefits of scope from suppliers.

All the benefits above thanks to ecomonics of scope

Of course, economies of scope are not universal If a cattle ranch were to take on dairy production, the ranchers would find themselves chasing several sets of contradictory objectives simultaneously: sourcing nutrient-rich hay for dairy cows while feeding the herd from crops grown on the ranch itself; attending to a strict milking schedule yet vigilantly patrolling all the acres roamed by the herd; and harvesting and marketing milk continuously year-‘round but only attending ranchers’ markets once or twice yearly. Maintaining such starkly incompatible operations would inevitably erode quality and productivity in both of them, causing losses in efficiency overall.

Not all is positive in doing so: there are also downsides, especially in scenarios where the two lines of production are almost in antithesis with each other. of course, this could lead to a reduction in terms of efficiency and cost-effective solutions

Carcass · Answer

QUESTION #1

Explanation:
- Introduced/Historical Context: Paragraph 1 introduces "economies of scope" and places it in the context of colonial American farmers.
- Illustrated/Mechanism: Paragraph 2 provides a detailed illustration (the cattle ranch) and explains the mechanism-utilizing byproducts and shared infrastructure.
- Limits Explained: Paragraph 3 introduces the boundary ("not universal") and explains why the phenomenon fails using the dairy/beef counterexample.

A should be

Carcass · Answer

QUESTION #2

"Economies of scope" involve realizing efficiency gains by producing multiple related goods simultaneously (e.g., using one resource, like a cow, to produce beef, leather, and collagen).

E should be the answer because we have ALL the same products and NOT diversification

Carcass · Answer

QUESTION #3

The statement "economies of scope are not universal" is immediately followed by a counterexample detailing the attempt to combine beef ranching and dairy production. The author concludes this example by stating that "Maintaining such starkly incompatible operations would inevitably erode quality and productivity in both of them, causing losses in efficiency overall."

C should be the answer

RonPurewal · Answer

Very nicely done. The answers are indeed A, E, C.

Excellent summary notes on the passage, too.

Carcass · Answer

Thank you sir

I suggest that all GMAT applicants follow Ron's Critical Reasoning and Reading Comprehension posts.

They are REALLY close to the original GMAT questions, like a few questions around represent the real GMAT exam.

From my experience for almost fifteen years here!!!

RonPurewal · Answer

🔑 —KEY— 🔑

·

1/ The passage begins by introducing the economic phenomenon of increasing economies of scope, quickly moving from the definition to an example from American history (economies of scope in American agricultural production).
The next paragraph is devoted to a series of illustrations of how cattle ranchers achieve greater economies of scope by producing multiple products directly from their cattle, as well as by selling scrap/waste byproducts that they cannot use themselves to other manufacturers that can put those products to use in their supply chains. 
The last paragraph limits the concept of economies of scope, by showing that not all diversification of production is able to produce gains in overall efficiency. An example follows: The cattle ranch of the previous paragraph cannot become more efficient overall by producing dairy products alongside its other outputs, because the day-to-day requirements of dairy farming conflict too strongly with those of core cattle ranching tasks; as a result, trying to perform both types of work together will lead to lower efficiency.
Choice A nicely summarizes these principal parts of the passage content.

INCORRECT ANSWERS:

B. Economies of scope are factually realized in many types of business operations; there is nothing to suggest that anybody disputes this observation or that it is otherwise “controversial”. Moreover, the possible economies and diseconomies of scale for cattle ranches in the second and third paragraphs are not “opposing views”, but rather represent observations that are all simultaneously true.

C. Although economies of scope result from various sensible multi-activity business strategies, the phenomenon of economies of scope itself is not a business strategy. Moreover, all of the specifics in the last two paragraphs pertain to cattle ranches, a single type of business.

D. The ubiquity of economies of scope throughout the history of the United States economy can be accurately described as a historical economic trend, and there is indeed information to confirm that its manifestation in agriculture was the earliest (“founding”) instance of that trend. The example whose economies of scope are then analyzed in detail, however, is the cattle ranch—not the “founding example” of cooperative farms established in the 1770s by groups of colonial farmers. Furthermore, while the third paragraph discusses business expansions that would have the opposite of the effect discussed in the rest of the passage, this discussion is not a “counterexample” because it does not argue against the existence of economies of scope in general—it merely shows that those gains would not obtain from the single extra line of business discussed in that paragraph.

E. The first part of this answer choice accurately describes the opening part of the passage. The remaining text, however, does not give “arguments for and then against the validity of” the concept of economies of scope, but rather illustrates that concept for one specific type of agricultural enterprise (the cattle ranch) with examples of business diversification that did lead to economies of scope and then a hypothetical instance that would have produced the opposite result.

·

2/ The passage defines economies of scope as “efficiency gains   taking on the production of multiple related goods simultaneously”. The examples used to illustrate this concept include a pair of items sold by cattle ranches as ready-to-use products, as well as other products sold by the ranches to other manufacturers for further processing into other types of goods.
The negative phrasing of the question (“LEAST likely”—which, in these questions, is equivalent to “NOT”) tells us that there will be four answer choices that DO describe the simultaneous production and sale of multiple different products, either to end users or to secondary manufacturers, and one answer that describes no such thing. That latter choice will be the correct answer.

Let’s have a look through the choices:

A. The hamburgers and the chili are two different products that the restaurant both sells to consumers, so this is a valid illustration. Furthermore, the economies of scope are particularly obvious in this case, as we’re explicitly told that the broken hamburgers could not be sold at all if they WEREN’T turned into a second product.)

B. The sale of whey to secondary manufacturers is analogous to the corresponding sale of collagen, gelatin, and bovine carcasses for further processing as described in the passage.

C. The sale of fish scales—which are removed from frozen fish fillets, and are therefore a waste byproduct of that manufacturing process—to cosmetics manufacturers is analogous to the corresponding sale of collagen, gelatin, and bovine carcasses for further processing as described in the passage.

D. The manufacturer’s production and sale of suitcase bodies alongside auto-body panels is analogous to the cattle ranch’s simultaneous production and marketing of beef products and bovine leather hides as mentioned in the passage.

E. The grower in this answer choice is not diversifying its business operations into any  additional  product; it has merely found another customer for the same single type of good that it already produces. This additional volume of business may lead to economies of   scale   for the grower, but not to economies of scope as described in this text. This choice is therefore the correct answer to the problem.

·

3/ The entirety of the last paragraph is an illustration of exactly what is meant by this statement, so the correct answer will be whichever choice most accurately expresses the point being illustrated in more general terms. The point is that economies of scope will not necessarily result from ANY randomly chosen combination of two or more possible lines of business; if an enterprise attempts to pursue two business activities with mutually exclusive demands on the operators, it may ultimately produce less per unit of input—i.e,. may experience diseconomies rather than economies of scope. That’s exactly what choice C says.

INCORRECT ANSWERS:

A. The author neither says nor implies that there are businesses without any realistic opportunities to realize economies of scope. Only one type of business—which can, in fact, diversify its output in many possible ways—is presented as an example.

B. “Universal” could certainly mean “under any imaginable economic conditions or local laws” in some other context, but this passage does not discuss underlying economic conditions or government regulation.

D. This answer choice does not describe anything that might limit economies of scope; it describes possible limitations on secondary manufacturers that are downstream in a supply chain from the businesses with potential economies of scope.

E. Diminishing returns are still positive returns. Likewise, the diminishing economies of scope described in this answer choice are still, in fact, positive economies of scope—so this choice is exactly the opposite of anything that could conceivably address the question.

RonPurewal · Answer

Thank you for your kind words. ❤︎

StanleyVu · Answer

For Q2, I expected the right answer to describe businesses with conflicting lines of production (as in paragraph 3) and just tried to find the answer that fitted that pattern the most. I ended up choosing C, thinking that extracting fish figments would mean developing a new and incompatible operation. It turned out that the question actually aimed at finding businesses not diversifying their products

RonPurewal · Answer

Your main take-away lesson here:  The reasoning behind your answer MUST be EXPLICITLY SUPPORTED BY THE TEXT.  You can't just  guess  that the two processes mentioned in choice C are incompatible or in conflict; if that were the case, then the text would either  SAY  that those two processes placed conflicting demands on X resource or Y person, or else would spell out effects that were clearly in mutual conflict (like the demands of dairy farmers and cattle ranchers, as described in ¶3 here).

As far as that question (of whether the extraction and sale of the scales would lead to economies of scope, diseconomies of scope, or neither), the only possibly relevant part of the text is the description of how cattle ranchers derive economies of scope from selling off byproducts of their own processes that they don't use themselves, such as collagen, glycerin, and other non-leather parts of cow carcasses. There's a very close analogy here to the frozen fish company's extracting the fish scales (which do not go into frozen fish fillets, and therefore which the frozen food company can't use for its own work flow) and selling them off to other businesses for other processes—so, on the strength of that analogy, it can be reasonably concluded that the frozen fish company WILL derive positive economies of scope in choice C.

Economies of scope, in which a single enterprise realizes efficiency

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GMAT Reading Comprehension (RC) Questions

Economies of scope, in which a single enterprise realizes efficiency

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