Question

5. 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 = 50	Q = 100	Q = 150	Q = 200	Q = 250	Q = 300
1	140	60	40	80	160	320
2	230	110	40	40	110	230
3	320	160	80	40	60	140

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   .

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 (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.

SRATC1SRATC2SRATC3LRATC05010015020025030035040036032028024020016012080400AVERAGE TOTAL COST (Dollars per bike)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
Fewer than 150 bikes per month
More than 200 bikes per month
Between 150 and 200 bikes per month

Answer 1

Suppose Ike's bikes is currently producing 100 bikes per month in its only . Its short run average total cost is $60 per bike , as mentioned in the given table.

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 because average cost is minimum when 100 bikes is produced using only 1 factory.

Long run average cost is the minimum of average cost .

Q	SRATC1	SRATC2	SRATC3	LRATC= minimum of SRATC
50	140	230	320	140
100	60	110	160	60
150	40	40	80	40
200	80	40	40	40
250	160	110	60	60
300	320	230	140	140

By plotting these points we get the following figure:

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