3. Costs in the short run versus in the long run Ike’s Bikes is a major manufacturer of bicycles. Currently, the company

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3. 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 = 100
Q = 200
Q = 300
Q = 400
Q = 500
Q = 600
Suppose Ike’s Bikes is currently producing 600 bikes per month
in its only factory. Its short-run average total cost isper
bike.
Suppose Ike’s Bikes is expecting to produce 600 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 (SRATC1SRATC1); use the purple points (diamond symbol) to
plot its SRATC curve if it operates two factories (SRATC2SRATC2);
and use the orange points (square symbol) to plot its SRATC curve
if it operates three factories (SRATC3SRATC3). 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.
SRATC1SRATC2SRATC3LRATC0100200300400500600700800720640560480400320240160800AVERAGE
TOTAL COST (Dollars per bike)QUANTITY (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