Question

In the short run, a restaurant can produce 1,000 meals of burgers, fries and shakes per day with 10 employees per shift. After the first year in business, they have 12 employees per shift, but output has dropped to 900 meals/day. (A) Why have they experienced a decrease in output related to the businesses production process? After recognizing what was going on, the business owners adjusted and increased output to 1,500 meals/day with 12 employees per shift in the same single kitchen. (B) What could have changed?

Answer 1

A) Hiring 2 more employees reduced 1,000 meals to 900 meals per day. It must be due to more people doing the same work which reduced the potential output which they can produce or reduces everyone's output. We can say that there must be diminishing marginal returns set in where increase in input leads is less than proportional increase in output.

B) After recognizing decrease in output, business owner adjusted which increased output to 1,500. Business owner must have organized employees in such a way that they are doing their own pre defined work and not disturb anyone else which raise productivity and raise output to 1,500. This process will show increasing marginal returns to scale.