Final answer:
If a firm had decreasing returns to scale at all levels of output and it divided into two equal-sized smaller firms, its overall profits would likely decrease. Splitting the firm into smaller firms does not solve the problem of decreasing returns, and it may not lead to greater competition as intended.
Step-by-step explanation:
If a firm had decreasing returns to scale at all levels of output and it divided into two equal-sized smaller firms, the overall profits of the firm would likely decrease.
When a firm has decreasing returns to scale, it means that as it increases its production, the additional units produced become increasingly costly and less efficient. Splitting the firm into two smaller firms does not solve this problem. In fact, it may lead to even higher average costs of production for each of the smaller firms.
Additionally, dividing the firm into two smaller firms may not result in greater competition as initially intended. One of the two firms may grow larger than the other and have lower average costs, putting the smaller firm at a disadvantage and potentially driving it out of the market.