Question

5. Costs in the short run versus in the long run Ike's Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company's short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.) Number of Factories Q = 25 440 Average Total Cost (Dollars per bike) Q = 50 Q = 75 100 320 240 320 400 - 240 240 480 320 240 Q = 125 480 400 320 = 150 720 580 440 580 720 Suppose Ike's Bikes is currently producing 125 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike's Bikes is expecting to produce 125 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using On the following graph, plot the three SRATC curves for Ike's Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike's Bikes using the blue points (circle symbol).

Answer 1

Blanks-

1) 480

2) three factories

	Average total cost (Dollars per bike) at the various quantity (Q)
No. Of Factories	25	50	75	100	125	150
SRATC 1	440	320	240	320	480	720
SRATC 2	580	400	240	240	400	580
SRATC 3	720	480	320	240	320	440
LRATC	440	320	240	240	320	440

S SRATC 1 SRATC 2 SRATC 3 LRATC * o 20 40 60 80 100 120 140 150

The lowest points on the graph depict the long-run average cost curve

Fewer than 75 = economies of scale

More than 100 = diseconomies of scale

Between 75 and 100 = constant returns to scale