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 1 2 3 AVERAGE TOTAL COST (Dollars per bike) 400 360 320 280 240 200 160 Suppose Ike's Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is $ 120 80 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 40 Q = 50 180 270 360 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 (SRATCs). 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. 0 50 Q = 100 100 150 200 100 Average Total Cost (Dollars per bike) Q=200 120 80 80 150 200 QUANTITY (Bikes) Q 150 200 bis manti = 150 80 250 80 120 Q=250 200 300 350 SRATC SRATC₂ 150 --0- 100 SRATC Q=300 360 LRATC 270 180 per bike. 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
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 1 2 3 AVERAGE TOTAL COST (Dollars per bike) 400 360 320 280 240 200 160 Suppose Ike's Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is $ 120 80 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 40 Q = 50 180 270 360 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 (SRATCs). 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. 0 50 Q = 100 100 150 200 100 Average Total Cost (Dollars per bike) Q=200 120 80 80 150 200 QUANTITY (Bikes) Q 150 200 bis manti = 150 80 250 80 120 Q=250 200 300 350 SRATC SRATC₂ 150 --0- 100 SRATC Q=300 360 LRATC 270 180 per bike. 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
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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: Qequals the total quantity of bikes produced by all factories.)
Number of Factories Q = 50
1
180
2
270
3
360
AVERAGE TOTAL COST (Dollars per bike)
400
360
320
280
240
Suppose Ike's Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is
200
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
160
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.
120
80
40
50
100
Q=100
100
150
200
150
200
QUANTITY (Bikes)
Range
Between 150 and 200 bikes per month
More than 200 bikes per month
Average Total Cost
(Dollars per bike)
Q = 150
80
80
120
Fewer than 150 bikes per month
250
Q200
120
80
300
80
350
Q = 250
200
150
4
SRATC
100
SRATC₂
-0-
Q = 300
360
270
180
SRATC
LRATC
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.
Economies of Scale Constant Returns to Scale Diseconomies of Scale
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