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) Number of Factories Q = 100 Q = 200 Q = 300 Q = 400 Q = 500 Q = 600 1 360 200 160 240 400 720 540 300 160 160 300 540 720 400 240 160 200 360
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) Number of Factories Q = 100 Q = 200 Q = 300 Q = 400 Q = 500 Q = 600 1 360 200 160 240 400 720 540 300 160 160 300 540 720 400 240 160 200 360
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Transcribed Image Text: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 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.
800
720
SRATC,
640
560
480
SRATC,
400
320
SRATC3
240
160
LRATC
80
0.
100
200
300
400
500
600
700
QUANTITY (Bikes)
AVERAGE TOTAL COST (Dollars per bike)
Transcribed Image Text: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)
Number of Factories
Q = 100
Q = 200
Q = 300
Q = 400
Q
= 500
Q = 600
%3D
1
360
200
160
240
400
720
540
300
160
160
300
540
3
720
400
240
160
200
360
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 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.
800
720
2.
Expert Solution
Step 1
There are 3 possibilities in short run:
- If the firm uses only 1 factory then its short run will be stated as SRATC1.
- If the firm uses 2 factories then its short run will be stated as SRATC2.
- If the firm uses 3 factories then its short run will be stated as SRATC3.
- To calculate the long-run ATC (LRATC) we need to consider the minimum of the three costs at a given level of output.
Economies of scale refer to the decrease in per unit cost with the increase in the quantity produced.
Diseconomies of scale refer to the increase in per unit cost with the increase in the quantity produced.
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