Question

Please help me check the answer and complete the graph (the line called “LRATC”). Also for the graph, please mark the accurate coordinate points. Thank you for your help and work.

9. Costs in the short run versus in the long run Aa Aa Ike's Bikes is a major manufacturer of bicycles. Currently, the company produces bikes in 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 | Average Total Cost Q = 200 Q = 300 120 Q Q = 400 180 Q = 100 160 240 280 120 = 500 280 240 180 160 Suppose Ike's Bikes is currently producing 400 bikes per month in its (only) factory. Its short-run average total cost is $180 per bike. Suppose Ike's Bikes is expecting to produce 400 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 short-run average total cost curves 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 (ATCI): use the purple points (diamond symbol) to plot its short-run average total cost of it operates two factories (ATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (ATC3), Line segments will automatically connect the points. Be sure to plot from left to right Finally, plot the long-run average total cost (LRATC) for Ike's Bikes using the red points (cross symbol).

Answer 1

Ike's Bikes are given to produce 400 bikes with its only factory, which means that the number of factories is one. So when Q=400, the average costs of bikes is $180 per bike .

Next we are given that the company is producing 400 bikes over several years which would mean that long run would be considered. Also in this case the bikes would be produced using all three factories. The reason being that the in long run, we would see at which number of factories is the average total cost lowest which is $120 when all three factories are producing. So answer is all three factories.

Now we are given the graph of both short and long run. In short run , the coordinates would be as given in the table in the question while the long run graph would be the lowest points of all three graphs.

(Price per bike.) TUT 50+ of 100 200 300 400 500 600 out but ATC?(100,160), (260,120), (300, 120) (400, 180), (500, 280 ATC2 + (100,240),( 200,160), (800,120) (400, 160). (500, 240) ATC 3 (100, 280), (200, 180), (300, 120) 400,120). (500, 160) LATC (100,160), (200, 120) (300,120) 1400, 120),(500, 160)

The coordinates of all graphs have been written in the image along with the colour of the graph.The long run curve is the minimum of all the average costs which is shown with the red graph.

At more than 400 bikes, the company is experiencing diseconomies of scale . This is because the long run costs or the lowest costs after 400 bikes has increased to $160 per bike. Option B is the answer.

(You can comment for doubts )