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 each month for various levels of production if it uses one, two, or three factories. (Note: QQ equals the total quantity of bikes produced by all factories.) Number of Factories Average Total Cost (Dollars per bike) QQ = 100 QQ = 200 QQ = 300 QQ = 400 QQ = 500 QQ = 600 1 440 320 240 320 480 720 2 580 400 240 240 400 580 3 720 480 320 240 320 440 Suppose Ike’s Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is Blank 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 usingthree factories . On the following graph, plot the three short-run average total cost curves (SRATC) for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its short-run average total cost if it operates one factory (SRATC1); use the purple points (diamond symbol) to plot its short-run average total cost if it operates two factories (SRATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (SRATC3). Finally, plot the long-run average total cost (LRATC) for Ike’s Bikes using the blue points (circle symbol). In the long run, over which range of output levels does Ike’s Bikes experience constant returns to scale? a)More than 400 bikes per month b)Fewer than 300 bikes per month c)Between 300 and 400 bikes per month

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: The Cost Of Production

Section: Chapter Questions

Problem 1PA

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Costs in the short run versus in the long run

What I really need help is to calculate the LRACT. I don't know how to do it.

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 each month for various levels of production if it uses one, two, or three factories. (Note: QQ equals the total quantity of bikes produced by all factories.)

Number of Factories	Average Total Cost
(Dollars per bike)
QQ = 100	QQ = 200	QQ = 300	QQ = 400	QQ = 500	QQ = 600
1	440	320	240	320	480	720
2	580	400	240	240	400	580
3	720	480	320	240	320	440

Suppose Ike’s Bikes is currently producing 600 bikes per month in its only factory. Its short-run average total cost is Blank 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 usingthree factories .

On the following graph, plot the three short-run average total cost curves (SRATC) for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its short-run average total cost if it operates one factory (SRATC1); use the purple points (diamond symbol) to plot its short-run average total cost if it operates two factories (SRATC2); and use the orange points (square symbol) to plot its short-run average total cost if it operates three factories (SRATC3). Finally, plot the long-run average total cost (LRATC) for Ike’s Bikes using the blue points (circle symbol).

In the long run, over which range of output levels does Ike’s Bikes experience constant returns to scale?

a)More than 400 bikes per month

b)Fewer than 300 bikes per month

c)Between 300 and 400 bikes per month

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