Question

Decreasing returns to scale typically occur because of which of the following reasons?

1) Larger scale equipment is less efficient than smaller scale equipment.
2) It is difficult to find good workers, so as an organization gets larger each additional worker produces less and less.
3) It costs more to operate a larger organization than it does to run a smaller organization.
4) The difficulty of coordinating tasks and maintaining communication between management and workers.

Answer 1

Decreasing returns to scale can be attributed to difficulties in coordinating tasks and communication in larger organizations, challenges in maintaining worker productivity, and increased operational costs, leading to diseconomies of scale.

Step-by-step explanation:

Decreasing returns to scale typically occur for a variety of reasons. One major reason is the difficulty of coordinating tasks and maintaining communication between management and workers as a firm grows larger. This can lead to inefficiencies and an increase in the average cost of production. Additionally, the challenge of finding and retaining efficient labor may result in each additional worker producing less output compared to their predecessors, causing a decline in productivity per worker. Moreover, the costs associated with operating a larger organization, which may include increased bureaucracy and more complex supply and distribution challenges, can also contribute to diseconomies of scale, where the cost per unit increases. These factors combined can explain why firms might not always experience cost-saving benefits when scaling up production.