Question

NECE Ege Siteke ZA? PAI Question 22 4 pts Clearly type out your answer to parts (A) and (B). 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) In the first case, where the restaurant faces decreasing output despite having more workers per shift is a phenomenon explained by ' The Law of Variable Proportion'

The law of variable proportion states that, if a producer where to increase the employment of variable inputs of production ( such as a fast food worker) yet keeping other fixed factors of production constant, initially, the producer faces increasing returns and then increasing returns at a decreasing rate and finally decreasing returns, if he were to increase the employment of variable input beyond the optimal point.

The restaurant's optimal point at a given shift is to employ 10 workers to produce 1000 meals per shift, but the restaurant decides to increase the number of workers beyond the capacity of the restaurant's optimal point and thus faces decreasing returns despite having more workers.

The reason behind this decreasing returns is that , in the short run, a producer is only able to increase his variable input keeping all other fixed input constant. If the variable input were to be increased more than the level of fixed input efficiency, then the producer faces decreasing returns as the number of variable input is out of proportion to the number of fixed factor input employed in the firm, thus leading to inefficient use of available resources.

B) In the second case, the owners of the restaurant adjusted the ratio of factor inputs in such as way to attain maximum use of all input resources in way that 12 workers now could produce 1500 meals per shift.

The owners realizing that the ratio of fixed and variable input ratio being unstable , could have decided to increase quantity of fixed factor inputs in the kitchen such as ovens, fryers, stoves Etc ( or any other machine that could increase the level of output ) , thus leading to maximum use of all the variable inputs as they have more fixed factor inputs to work with.

With the increased number of employment of fixed inputs to a level that is stable for the existing availability of variable inputs, the fixed - variable factor input ratio becomes stable and thus the producer faces increasing returns yet again.