Question

Irma’s business produces ceramic bowls using labor, clay, and a kiln. She produces bowls using a fixed proportion of labor and clay, but regardless of how many bowls she produces, she uses only one kiln. She can manufacture 15 bowls a day with one worker, and 25 with two workers. Does her production process illustrate decreasing returns to scale, or a diminishing marginal product of labor? Why?

Answer 1

Labour       Number of Bowls        

1                  15                                    

2                  25                                    

Irma, is facing decreasing returns to scale. Decreasing returns to scale is said to be occurring in a production process when the the increase in output is less than proportionate increase in input. In this case, the input (labor) is doubled from 1 to 2, however, the increase in output (Number of bowls) has not doubled, which means the production processes exhibit decreasing returns to scale.