Question

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 = 150 200 120 160 Number of Factories - 100 140 Q = 300 400 Q = 50 220 310 400 250 240 190 140 190 310 220 Suppose Ike's Bikes is currently producing 300 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike's Bikes is expecting to produce 300 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using

Answer 1

Its short-run average total cost is $400 per bike. Because, in the short-run, the firm cannot build the new factories due to the fixity of the factors so it will keep producing 300 bikes by using only one factory.

In the long-run, it would choose to produce bikes using the third factory because the average total cost is lower in the third factory and firm can move to the new factory in the long-run as there will be no fixed factor in the long-run.