5. Costs In the short run versus In the long run tudy Tools
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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.)
IS
ss Tips
s Tips
Number of Factories
Average Total Cost
(Dollars per bike)
Q = 225
Q = 300
80
100
Q = 75
Q = 150
Q = 375
Q = 450
1
130
100
140
200
2
165
120
80
80
120
165
3
200
140
100
80
100
130
Suppose Ike's Bikes is currently producing 375 bikes per month in its only factory. Its short-run average total cost is S
per bike.
Suppose Ike's Bikes is expecting to produce 375 bikes per month for several years. In this case, in the long run, it would choose to produce bikes
using three factories