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 1 180 100 80 120 200 360 2 270 150 80 80 150 270 3 360 200 120 80 100 180 Suppose Ike’s Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is $ per bike. Suppose Ike’s Bikes is expecting to produce 50 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. SRATC 1 SRATC 2 SRATC 3 LRATC 0 50 100 150 200 250 300 350 400 360 320 280 240 200 160 120 80 40 0 AVERAGE TOTAL COST (Dollars per bike) QUANTITY OF OUTPUT (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 Between 150 and 200 bikes per month Fewer than 150 bikes per month More than 200 bikes per month Grade It Now Save & Continue Continue without saving

Answer 1

ANSWER :-

We can need to constrict long run average total cost schedule which is the minimum cost of each plant / factory. it sens to envelop the short run cost.

Q	SRATC 1	SRATC 2	SRATC 3	LRATC
50	180	270	360	180
100	100	150	200	100
150	80	80	120	80
200	120	80	80	80
250	200	150	100	100
300	360	270	180	180

where there is only one factory, the average cost of production in short run for Q = 100 is 100. for future , if Q. remains fired at 50, it will find that cost is lower lay using only , factor. he will continue to use one factory

In the following table, indicate whe there the long - run economies of scale, constant returns of scale, or dis economies of scale for each range of bike production

Range	Economics of scale	constant Returns to scale	Diseconomles of Scale
More than 100 bikes per month	NO	NO	YES
Between 75 and 100 bikes per month	NO	YES	NO
Fewer than 75 bikes per month	YES	NO	NO

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