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 = 100 360 Average Total Cost (Dollars per bike) Q = 300 Q = 400 160 240 160 160 160 Q = 200 200 300 400 Q = 600 720 Q = 500 400 300 200 540 540 720 240 360 Suppose Ike's Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike's Bikes is expecting to produce 100 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 (SRATC 3). Finally, plot the long-run average total cost (LRATC) curve for Ike's Bikes using the blue points (circle symbol). Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

Answer 1

Suppose Ike's bikes...... $ 360 per bike

Suppose Ike's bikes........ using one factory.

More than 400 bikes per month: diseconomies of scale

Fewer than 300 bikes per month: economies of scale

Between 300 and 400 bikes per month: constant returns to scale

800 220 ISRATLI 640 560 480 „SRATE VDO SRATEZ IRATO 320- 240 160 LRATC 100 200 300 400 soo 600 too