Question

Donny, of Donny's Doughnuts, bakes and sells 100 dozen doughnuts a day using one mixer and one fryer. His rival, Sunshine, of Sunshine's Doughnuts, produces 180 dozen doughnuts a day using two mixers and two fryers. Both shops use the exact same technology to make doughnuts and have the same number of workers and the same size building. Donny and Sunshine both increase their capital equipment by one mixer and one fryer.

1. Which shop will benefit the most from its expansion?
a. The shops will benefit equally because they are using the same quantity of equipment.
b. Donny, because his workers currently have less available capital to work with.
c. The local weight‑loss clinic, because the number of doughnuts consumed will increase.
d. Sunshine, because her operation was producing more doughnuts to start with.

2. How much should Donny realistically expect his production to increase with the new equipment?
a. at least 100 dozen
b. about 50 dozen
c. about 80 dozen

3. How much should Sunshine realistically expect her production to increase with the new equipment?
a. at least 100 dozen
b. at least 80 dozen
c. about 50 dozen

Answer 1

b. Donny, because his workers currently have less available capital to work with.

c. about 80 dozen

c. about 50 dozen

Step-by-step explanation:

Because the two shops are identical in every respect except the amount of capital equipment they use, you can see that diminishing returns is taking place by comparing the two firms.

Donny produces 100 dozen doughnuts using one mixer and one fryer. Sunshine has twice as much equipment but produces less than twice as many doughnuts, 180 dozen. The second set of equipment does not increase her production as much as the first set did.

So, if Sunshine adds a third set of equipment (without adding more workers to use it), that third set will increase her output even less than the second set did. So, Donny can expect the second set of equipment to increase his output by about 80 dozen, while Sunshine should expect her third set of equipment to increase her output by less than 80.