Question

4. 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) Number of Factories Q=100 Q 200 Q300 Q 400 Q 500 Q600 1 440 280 240 320 480 800 2 620 380 240 240 620 380 3 800 480 320 280 240 440 Suppose Ike's Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is $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 three factories On the following graph, plot the three SRATC curves for Ike's Bikes from the previous table. Specificaly, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC); 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 (SRATCs). 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.

The first drop down has (one, two, three factories).

Answer 1

Suppose Ike's bikes is currently producing 600 bikes per month in its only factory . Its short run average total cost is $800 per bike , as mentioned in the given table.

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 three factories because average cost is minimum when 600 bikes is produced using 3 factories.

Long run average cost is the minimum of average cost .

Q	SRATC1	SRATC2	SRATC3	LRATC= minimum of SRATC
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

By plotting these points we get the following figure:

1 Average total cost (Vellers per bike) LSRATC To SRATC ygo you -LRATC 320 240 160 o los 200 30s Yoo soo boo too Quantity of output ( Bikes

Range	Economies of scale	Constant returns to scale	Diseconomies of scale
More than 400 bikes per month			YES because LRATC starts increasing in this range.
Between 300 and 400 bikes per month		YES because LRATC is constant in this range.
Fewer than 300 bikes per month	YES because LRATC is decreasing in this range.