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 (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.) Number of factories Q = 50 180 270 360 Q = 100 100 1 50 200 Average Total Cost (Dollars per bike) Q = 150 Q = 200 80 120 80 80 120 80 Q = 250 200 150 100 Q = 300 360 270 180 Suppose Ike's Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike's Bikes is expecting to produce 50 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 bike is currently producing 50 bikes per month in its only firm. Its short run average total cost is $180 per bike.

In the long run it would choose to produce using one factory.

Reason- One factory has the lowest cost.

Plot the various SRATC.

for LRATC take the lowest cost in each quantity level.

-350 300 -250 —200- —1501 100- 50- | 50 | 100 150 200 250 300 |

Between 150 and 200 bikes per month= constant returns to scale

Reason- LRATC is constant when Q rises.

More than 200 bikes per month= Diseconomies of scale

Reason- LRATC rises as Q rises.

Less than 150 bikes per month= Economies of scale

Reason- LRATC falls as Q rises.

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