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.) Average Total Cost (Dollars per bike) Q=300 Number of Factories Q= 100 440 620 800 Q=200 280 380 480 240 240 320 Q=400 320 240 240 Q=500 480 380 280 Q=600 800 620 440 Suppose Ike's Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is S per bike Suppose Ike's Bikes is expecting to produce 600 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 (SRAT℃1); 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 (SRATC1). Finally, plot the long-run average total cost (LRATC) curve for Ike's Bikes using the blue points (circle symbol)

Answer 1

Suppose Ike's bikes is currently producing 600 bikes per month in its only factory. Its short run average total cost = $ 800 per bike

Suppose Ike's bikes is expecting to produce 600 bikes per month for several years.In this case, in the long run, it would choose to produce bikes using 3 factories. (lowest ATC)

Q	SRATC1	SRATC2	SRATC3	LRATC
100	440	620	800	440
200	280	380	480	280
300	240	240	320	240
400	320	240	240	240
500	480	380	280	280
600	800	620	440	440

LRATC = min (SRATC1, SRATC2, SRATC3)

Economies of scale - Fewer than 300 bikes per month (LRATC decreases)

Constant returns to scale - Between 300 and 400 bikes per month (LRATC remains constant)

Diseconomies of scale - More than 400 bikes per month