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.

Points:

Close Explanation

Explanation:

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 selector 1one factory   

• one factory

• two factories

• three factories

.

Points:

Close Explanation

Explanation:

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.

Created with Raphaël 2.1.2SRATC1SRATC2SRATC3LRATC0100200300400500600700800720640560480400320240160800AVERAGE TOTAL COST (Dollars per bike)QUANTITY OF OUTPUT (Bikes)

Created with Raphaël 2.1.2

Points:

Close Explanation

Explanation:

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
Between 300 and 400 bikes per month
More than 400 bikes per month
Fewer than 300 bikes per month

Answer 1

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 $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. In the factory number one he can produce at a lowest cost of $440. If he stays at 100 units, he should operate in the 1^st factory only.

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.

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
LRAC	440	280	240	240	280	440

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
Between 300 and 400 bikes per month		Constant returns to scale
More than 400 bikes per month			Diseconomies of scale
Fewer than 300 bikes per month	Economies of scale