Answered: Scooter’s Scooters is a large American…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 6E

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Question

Scooter’s Scooters is a large American manufacturer of electric scooters operating out of Spokane. Currently, the company produces all of its scooters using a single manufacturing facility, its factory in town. Recently, management has been considering expanding operations to one or two additional factories. The following table presents the manufacturer’s monthly short-run average total cost (SRATC) for various levels of production if it operates out of one, two, or three factories. (Note: Q equals the total quantity of scooters produced by all factories.)

Number of Factories	Average Total Cost
(Dollars per scooter)
Q = 25	Q = 50	Q = 75	Q = 100	Q = 125	Q = 150
1	440	320	240	320	480	720
2	580	400	240	240	400	580
3	720	480	320	240	320	440

Suppose Scooter’s Scooters is currently producing 125 scooters per month in its only factory. Its short-run average total cost is

per scooter.

Suppose Scooter’s Scooters is expecting to produce 125 scooters per month for several years. In this case, in the long run, it would choose to produce scooters usingthree factories .

On the following graph, plot the three SRATC curves for Scooter’s Scooters from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Scooter’s Scooters using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC0255075100125150175800720640560480400320240160800AVERAGE TOTAL COST (Dollars per scooter)QUANTITY (Scooters)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of scooter production.

Range

Economies of Scale

Constant Returns to Scale

Diseconomies of Scale

Between 75 and 100 scooters per month

More than 100 scooters per month

Fewer than 75 scooters per month

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