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: QQ equals the total quantity of bikes produced by all factories.) Number of Factories Average Total Cost (Dollars per bike) QQ = 100 QQ = 200 QQ = 300 QQ = 400 QQ = 500 QQ = 600 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 500 bikes per month in its only factory. Its short-run average total cost is per bike. Suppose Ike’s Bikes is expecting to produce 500 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 (SRATCSRATC) 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 (SRATC1SRATC1); use the purple points (diamond symbol) to plot its short-run average total cost if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATCLRATC) 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. In the long run, over which range of output levels does Ike’s Bikes experience economies of scale? Fewer than 300 bikes per month More than 400 bikes per month Between 300 and 400 bikes per month

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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11. 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: QQ equals the total quantity of bikes produced by all factories.)

Number of Factories	Average Total Cost
(Dollars per bike)
QQ = 100	QQ = 200	QQ = 300	QQ = 400	QQ = 500	QQ = 600
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 500 bikes per month in its only factory. Its short-run average total cost is

per bike.

Suppose Ike’s Bikes is expecting to produce 500 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 (SRATCSRATC) 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 (SRATC1SRATC1); use the purple points (diamond symbol) to plot its short-run average total cost if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATCLRATC) 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.

In the long run, over which range of output levels does Ike’s Bikes experience economies of scale?

Fewer than 300 bikes per month

More than 400 bikes per month

Between 300 and 400 bikes per month

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