Final answer:
Doubling all inputs in Michael's toy factory with constant returns to scale will increase production by 100%. If only the number of workers is doubled, the factory may encounter diminishing marginal returns, where each additional worker adds less to the total output.
Step-by-step explanation:
If Michael's toy factory exhibits the property of constant return to scale, doubling all inputs will result in a 100% increase in toy production. This means that if Michael doubles his inputs such as capital, labor, and materials, his output or toy production will double as well, so the production increase is 100%.
In economic terminology, constant returns to scale occur when increasing all inputs proportionally leads to an equal proportion increase in output.
However, if Michael only doubles the number of workers, the scenario changes. This no longer represents a proportional increase of all inputs; hence, it does not fall under constant returns to scale. Instead, Michael might experience diminishing marginal returns. This is because an increase in the number of workers, while holding other inputs constant, may lead to situations where there are too many workers but not enough machinery or raw materials to work with effectively.
Hence, each additional worker contributes less to the overall production than the previous one, after reaching a certain point.
This concept is highlighted when considering the production in the short run. Initially, additional workers can increase production significantly, but as you continue adding workers, the productivity per worker tends to decrease due to factors such as limited equipment or space. This results in diminishing marginal productivity.
In contrast, within a constant cost industry, such as agricultural markets, the scenario is different. When market demand increases, new firms can enter the market without affecting the input prices, as there is a perfectly elastic supply of inputs. This condition is ideal for constant returns to scale, where firms can adjust production without seeing an increase in per-unit costs.