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 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) Number of Factories O = 100 Q = 200 Q = 300 Q = 400 Q = 500 Q = 600 140 60 40 80 160 320 230 110 40 40 110 230 320 160 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 short-run average total cost curves (SRATC) for Ike's Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its short-run average total cost if it operates one factory (SRATC1); use the purple points (diamond symbol) to plot its short-run average total cost if it operates two factories (SRATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (SRATC3). Finally, plot the long-run average total cost (LRATC) 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. 400 360 320 SRATC, 280 240 SRATC2 200 160 SRATC3 120 80 LRATC 40 100 200 300 400 500 600 700 QUANTITY OF OUTPUT (Bikes) in the long run, over which range of output levels does Ike's Bikes experience constant returns to scale? O Fewer than 300 bikes per month O More than 400 bikes per month Between 300 and 400 bikes per month AVERAGE TOTAL COST (Dollars per bike)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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9. 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 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.)

400
360
320
SRATC,
280
240
SRATC2
200
160
SRATC3
120
80
LRATC
40
100
200
300
400
500
600
700
QUANTITY OF OUTPUT (Bikes)
in the long run, over which range of output levels does Ike's Bikes experience constant returns to scale?
O Fewer than 300 bikes per month
O More than 400 bikes per month
Between 300 and 400 bikes per month
AVERAGE TOTAL COST (Dollars per bike)

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