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: equals the total quantity of bikes produced by all factories.) Number of factories Q = 75 110 145 180 Q = 150 80 100 120 Average Total Cost (Dollars per bike) Q = 225 Q = 300 60 80 60 60 80 60 Q = 375 120 100 80 Q = 450 180 145 110 Suppose Ike's Bikes is currently producing 375 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike's Bikes is expecting to produce 375 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

Blank 1: 120

Blank 2: Three Factory

	Aveage total cost (Dollors per bike) at various quantity (Q)
No. Of Factories	75	150	225	300	375	450
1	110	80	60	80	120	180
2	145	100	60	60	100	145
3	180	120	80	60	80	110

Series1 Series2 +-Series3 100 200 300 400 500

Series 1: SRATC 1

Series 2: SRATC 2

Series 3: SRATC 3

All lowest points on the graph are LRATC points

More than 300 bikes: Diseconomies of scale

Fewer than 225: Economies of scale

Between 225 & 300: Constant returns of scale