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.) Average Total Cost (Dollars per bike) Q = 300 Q = 400 160 240 Number of Factories Q = 100 O = 200 Q = 500 Q = 600 1 360 200 400 720 540 300 160 160 300 540 2 3 720 400 240 160 200 360 per Suppose Ike's Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost is ($ 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 (SRATC3). 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 is currently producing 100 bikes per month in its only factory. Its short run average total cost is $360 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 only.

Becaus the ATC of Q = 100 is minimum for 1 factory.

Q	SRATC1	SRATC2	SRATC3	LRATC
100	360	540	720	360
200	200	300	400	200
300	160	160	240	160
400	240	160	160	160
500	400	300	200	200
600	720	540	360	360

• SRATC1 is average cost of producing each Q in one factory.
• SRATC2 is average cost of producing each Q in two factories.
• SRATC3 is average cost of producing each Q in three factories.
• LRATC is the minimum cost of producing each Q among three factories.

800 720 640 560 480 SRATC1 Average total cost ($ per bike) 400 SRATC2 320 SRATC3 240 160 LRATC 80 0 0 100 200 500 600 700 300 400 Quantity (Bikes)

• Economies of scale if LRATC decreases as quantity increases.
• Diseconomies of scale if LRATC increase as quantity increases
• Constant return to scale if LRATC remains same as quantity increases.

Between 300 and 400 bikes per month (Constant retrun to scale)

Fewer than 300 bikes per month (Economies of scale)

More than 400 bikes per month (Diseconomies of scale)