Question

11. Costs in the short run versus in the long run Ike's Bikes is a major manufacturer of bicydes. 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 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-2000 300 Q = 400 Number of factories Q = 100 Q = 500 Q = 600 580 580 720 480 320 440 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 one factory On the plot the three short average total cost curves (SRATC) foresked from the previous table. Specifically, use the green two factoren mood to bloc short run average total cost if it operates one factory (SRAZC , use the purple points (diamond symbol) to plotid three factories pe r costri operates two factories (SRATC); and use the orange points (square symbol to plotits short run average total e opera r e factories (SRATC Finally, plot the long-run average total cost (LRATC) for the sakes using the blue points (onde symbol

Answer 1

Suppose Ike's bikes is currently producing 100 bikes per month in its only factory .Its short run average total cost is $440 per bike , as mentioned in the given table.

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 one factory because average cost is minimum when 100 bikes is produced using 1 factory.

Long run average cost is the minimum of average cost .

Q	SRATC1	SRATC2	SRATC3	LRATC= minimum of SRATC
100	440	580	720	440
200	320	400	480	320
300	240	240	320	240
400	320	240	240	240
500	480	400	320	320
600	720	580	440	440

By plotting these points we get the following figure:

& AVERAGE TOTAL LOST (Dollars per bike) A SRATC 800 t 720 F G GRATC3 SOFT Sbota 480 12 SRATC TRATE 0 100 200 300 Yoo 500 600 70s son Quantity of output (Bikes)

In the long run , between 300 and 400 bikes per month Ike's bikes experiences constant returns to scale because LRATC is constant in the range. Hence, option(B) is correct.