Question

A large technology Company decides to create an entrepreneurship friendly space, where small enterprises can operate in close proximity to one another. To create this space, which will be called Zone Forty-Two, the Company will construct office space, which will be rented to tenants for free. The Company is considering two start-up firms, B Enterprises (a business software producer) and M Enterprises (a medical software producer). Both firms are currently located in different small towns of California, where they work out of their homes hence pay no rent. The sales volume for a firm if it locates at Zone Forty-Two depends on whether the other firm is also present. These sales volumes, along with the firms’ sales at their current home locations, are presented in Table 1.
table 1 home- town locations zone forty-two(alone) zone forty-two(with other firm)
b enterprises 600 600 670
m enterprises 700 700 950
Give an intuitive explanation why the sales figures are in the last column of Table 1 differ from the first two columns of the table. Hint: Elaborate on different types of economies that are likely to benefit firms locating next to each other in Zone Forty-Two.

Answer 1

Answer:

Zone-Forty-Two

Types of Economies Benefiting Firms Locating Next to Each Other:

Basically, internal and external economies of scale result from firms locating next to one another.  While internal economies of scale are specific to a firm because they are internally generated savings, external economies of scale bring about larger changes outside the firm so that all the firms that are located next to one another benefit.

For example, when firms locate next to each other, there is increased procurement management, availability of specialized managers, availability of financial sources, and market improvement.  These are internally-focused economies.

On the other hand, the external benefits that come from agglomeration of firms include the availability of common infrastructure, supply chain, innovation and ideas, and ability to lobby the authorities.

As a result of these economies or benefits, firms b and m enterprises are able to generate more increased sales as they locate close to each other at Zone Forty-Two than they could generate while they were located at their home-towns or alone at Zone Forty-Two.

Explanation:

a) Data and Calculations:

Firms' Sales

Firms               Hometown    Zone forty-two     Zone forty-two

                        locations              (alone)          (with other firm)

b enterprises        600                   600                       670

m enterprises       700                   700                       950

These economies resulting from proximate locations of firms include the growth of technical, marketing, commercial, financial benefits, and some network effects.  Therefore, it is always interesting to study how firms grow more as they compete and learn from one another than they do when they dominate their individual hometown markets.