Question

Average Total Cost (Dollars per bike) Q = 150 Q = 200 Number of Factories Q = 50 220 310 120 160 = 100 140 190 240 = 250 240 190 140 Q = 300 400 310 220 120 400 120 160 120 Suppose Ike's Bikes is currently producing 300 bikes per month in its only factory. Its short-run average total cost is per bike. Suppose Ike's Bikes is expecting to produce 300 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using On the following graph, not 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 (SRATC); use the purple points (diamond symbol) to plotits SRATC curve if it operates two factories (SRATC); and use the orange points (square symbol) to plotits SRATC curve if it operates three factories (SRATC). 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 300 bikes per month in its only factory . Its short run average total cost is $400 per bike , as mentioned in the given table.

Suppose Ike's bikes is expecting to produce 300 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 300 bikes is produced using 3 factories.

Long run average cost is the minimum of average cost .

Q	SRATC1	SRATC2	SRATC3	LRATC= minimum of SRATC
50	220	310	400	220
100	140	190	240	140
150	120	120	160	120
200	160	120	120	120
250	240	190	140	140
300	400	310	220	220

By plotting these points we get the following figure:

Averase titl lart (olls por th SRATC 320 2A -SRA 240 A 1bo LRATC 120 Olantity of output (Bkes) als cos ast oot asi co

Range	Economies of scale	Constant returns to scale	Diseconomies of scale
More than 200 bikes per month			YES because LRATC is increasing.
Fewer than 150 bikes per month	YES because LRATC is decreasing.
Between 150 and 200 bikes per month		YES because LRATC is constant in this range.