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
Related questions
Question
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
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Essentials of Economics (MindTap Course List)
Economics
ISBN:
9781337091992
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:
9781337617383
Author:
Roger A. Arnold
Publisher:
Cengage Learning