Question

Michelle's business produces ceramic cups using​ labor, clay, and a kiln. She produces cups using a fixed proportion of labor and​ clay, but regardless of how many cups she​ produces, she uses only one kiln. She can manufacture 40 cups a day with one worker and 64 with two workers. Does her production process illustrate decreasing returns to scale or a diminishing marginal​ returns?

Answer 1

Her production process illustrate diminishing marginal returns

Step-by-step explanation:

The answer to this question cannot be decreasing returns of scale because this happens when there is an increase in all the input factor and yet it does not lead to an increase in output proportional to the increase in the inputs. In the example, it has been said that regardless of the number of cups produced, only one kiln is used. Hence several inputs are kept constant. Hence we come to the definition of Diminishing marginal returns. This law stipulates that at some point in production, employing an addition factor of production yields smaller increase in output. In this case, adding an extra worker is expected to result to the production of 80 cups. However, the law of marginal diminishing returns came into play as other factors remained constant, and hence the result of a 100% increase in personnel only brought about a 60% increase in output.