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Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter4: Extent (how Much) Decisions

Section: Chapter Questions

Problem 3MC

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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 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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