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
Chapter22: Supply: The Costs Of Doing Business
Section: Chapter Questions
Problem 11E
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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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