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.)

Average total cost (dollars per bike)

# of factories	Q=25	Q=50	Q=75	Q=100	Q=125	Q=150
1	130	100	80	100	140	200
2	165	120	80	80	120	165
3	200	140	100	80	100	130

Suppose Ike’s Bikes is currently producing 25 bikes per month in its only factory. Its short-run average total cost is

per bike.

Suppose Ike’s Bikes is expecting to produce 25 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.

Plot SRATC1 SRATC2 SRATC3 SRATC

200

180

160

140

120

100

0 25 50 75 100 125 150 175\

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 100 bikes per month
Fewer than 75 bikes per month
Between 75 and 100 bikes per month

Answer 1

Given,

Suppose Ike’s Bikes is currently producing 25 bikes per month in its only factory.

Suppose Ike’s Bikes is expecting to produce 25 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using three factories as the long run cost is lowest there.

No. Of Factories	25	50	75	100	125	150
SRATC 1	130	100	80	100	140	200
SRATC 2	165	120	80	80	120	165
SRATC 3	200	140	100	80	100	130

Plot the graph as follows:

Connect all the lowest points, this would represent the LRATC curve of the firm

Range	Economies of Scale	Constant Returns to Scale	Diseconomies of Scale
More than 100 bikes per month			Yes
Fewer than 75 bikes per month	Yes
Between 75 and 100 bikes per month		Yes