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 = 100 440 620 800 Q = 200 280 380 480 Average Total Cost (Dollars per bike) Q = 300 Q = 400 240 320 240 240 320 240 Q = 500 480 380 280 Q = 600 800 620 440 Suppose Ike's Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike's Bikes is expecting to produce 600 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

Currently the firm is operating in 1 factory producing 600 bikes. For Q = 600 and N= 1, SRATC is $800. In case it produces 600 bikes in long run its cost is minimum when N= 3. Hence it should work with 3 factories. In the short run there are three possibilities. In case the firm uses only 1 factory, its short run ATC is given by SRATC1. When it uses 2 and 3 factories respectively, its short run ATCs are SRATC2 and SRATC3. To get Long run ATC, we need to add the minimum of all these three costs at a gives level of output. For example, when Q = 200, SRATC1 is 280, SRATC2 is 380 and SRATC3 is 480. Out of these the minimum is 280 so SRATC1 is tangent to LRATC at Q = 200. Below is the table and the graph plot for SRATCs and LRATC. Data plots are provided in the graph a table is more helpful. Also note that LRATC will cover all the minimum of SRATCs so it might not be visible but it lies below the SRATC.

Short run and long run costs Q 880 800 720 800 100 SRATCI SRATC2 SRATC3 (Factory (Factory (Factory LRATC = 1) = 2) = 3) 440 620 800 440 280 380 480 280 240 240 320 240 320 240 240 240 480 380 280 800 620 440 440 640 200 300 400 500 600 620 560 280 480 480 Costs 440 440 380 400 320 1380 320, 280_ 280 More Fewer Between than than 300 Diseconomies of scale Economies of scale Constant returns 300 240 P 240 and 400 100 200 300 400 Quantity 500 600 700 SRATC1 (Factory = 1) ---SRATC2 (Factory = 2) -SRATC3 (Factory = 3) ---LRATC