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 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 = 100 260 330 400 Q = 200 200 240 280 Average Total Cost (Dollars per bike) Q = 300 Q = 400 160 200 160 160 200 160 Q = 500 280 240 200 Q = 600 400 330 260 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 short-run average total cost curves (SRATC) for Ike's Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its short-run average total cost if it operates one factory (SRATC1); use the purple points (diamond symbol) to plot its short-run average total cost if it operates two factories (SRATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (SRATC3). Finally, plot the long-run average cost curve (LRAC) 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. SRATC, SRATC COST PER BIKE (Dollars) SRATC LRAC 0 100 600 700 200 300 400 500 QUANTITY OF OUTPUT (Bikes) In the long run, over which range of output levels does Ike's Bikes experience constant returns to scale? O More than 400 bikes per month O Fewer than 300 bikes per month Between 300 and 400 bikes per month

Answer 1

100 bikes per month in only factory. Short run average total cost is $260 per bike.

Reason- Producing 100 bike in one factory costs $260.

100 bikes per month. In the long run, it would choose to produce using ONE FACTORY.

Reason- 100 bikes per month will be produced in factory with least cost. $260 is the cost of one factory.

7480 Cost per bike 440 400 360 320 280 240 200 160 -120 80 40 100 200 300 400 -100 0 --407 500 600 Quantity

CONSTANT RETURNS TO SCALE-

● Between 300 and 400 bikes per month.

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