Answered: Average Total Cost (Dollars per bike)…

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter8: Production And Costs

Section8.4: Costs Of Production: Total, Average, Marginal

Problem 1ST

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

IMG 1

Suppose Ike’s Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is _________ per 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 ___________. (One, two, or three factories)

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.

IMG 2

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
Fewer than 300 bikes per month
Between 300 and 400 bikes per month
More than 400 bikes per month

Average Total Cost
(Dollars per bike)
Number of Factories
= 100
= 200
= 300
= 400
= 500
= 600
440
280
240
320
480
800
2
620
380
240
240
380
620
3
800
480
320
240
280
440

800
720
SRATC,
640
560
480
SRATC,
400
320
SRATC3
240
160
LRATC
80
100
200
300
400
500
600
700
QUANTITY (Bikes)
AVERAGE TOTAL COST (Dollars per bike)
~)

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