Answer to Question #197422 in Microeconomics for Isaac

Question

A furniture manufacturer increases all his input to double the output. He finds that the total production cost increases by 120%. Explain TWO reasons why the above situation happened.

Answer 1

The total output has increased to 120% due to decreasing returns to scale. Having increased inputs by double then it ought to have increased by 200% but decreased. It occurs if a given percentage increase in all inputs results in a smaller percentage increase in output. As a result, proportional increases in output require more than proportional increases in inputs.

Firstly,  It occurs if the production process becomes less efficient as production is expanded, as when a firm becomes too large to be managed effectively as a single unit. Secondly, it occurs if there is minimal utilisation of fixed factor or its indivisibility of it.