Question

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.)

Number of Factories	Average Total Cost
	(Dollars per bike)
	Q = 100	Q = 200	Q = 300	Q = 400	Q = 500	Q = 600
1	440	280	240	320	480	800
2	620	380	240	240	380	620
3	800	480	320	240	280	440

Suppose Ike’s Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost is____

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, two factories or three factories)

n 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 (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). 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.

SRATC, SRATC2 AVERAGE TOTAL COST (Dollars per bike) SRATCZ LRATC + 0 + 100 200 500 600 700 300 400 QUANTITY (Bikes) In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production. Range Economies of Scale Constant Returns to Scale Diseconomies of Scale More than 400 bikes per month Fewer than 300 bikes per month Between 300 and 400 bikes per month

  

Answer 1

Answer:

Q	SRACT1	SRACT2	SRACT3	LRATC
100	440	620	800	440
200	280	380	480	280
300	240	240	320	240
400	320	240	240	240
500	480	380	280	280
600	800	620	440	440

Suppose Ike’s Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost is 440 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.

SRATC, SRATC AVERAGE TOTAL COST (Dollars per bike) O SRATC; LRATC 0 100 200 600 700 300 400 500 QUANTITY (Bikes)

Range
More than 400 bikes per month	Diseconomies of Scale
Fewer than 300 bikes per month	Economies of Scale
Between 300 and 400 bikes per month	Constant Returns to Scale