Question

Currently Moe’s hires 2 employees, has 1 grill (capital), and produces 20 meals per day. If Moe’s decides to double both inputs (employees and grills). If Moe’s experiences decreasing returns to scale how many meals do you expect to produce after inputs double?

Answer 1

Decreasing returns to scale imply an increase in inputs will lead to a less than proportionate Increase in output.

In the givrn case, when inputs increase by double, the output will increase by less than double.

Thus, increase in number of meals produced will be less than 2X20 = 40

Thus, after inputs double, meals will increase tothe range of 20-40 and not more than 40 .