A large firm in the 3-D printing industry employs 250 people, of which 36 are upper-level managers. As a result of this employee-to-manager ratio, the firm experiences 14.4% reduced productivity. At the same time, a small firm with 65 employees and 2 upper-level managers experiences 3.1% reduced productivity.

If everything else is constant, what can we say about the cost structure in this industry over this range of production?

Choose one:

A. The firms in this industry have economies of scale.

B. The firms in this industry have constant returns to scale.

C. The firms in this industry have diseconomies of scale.

C. The firms in this industry have diseconomies of scale.

Explanation:

The firms in this industry have diseconomies of scale. Diseconomies of scale occur when a company or a business grows very large, and with this new size, the costs per unit increase. While economies of scale see decreasing costs and increasing output as it grows, diseconomies of scale see increase in costs when output is increased.

C. The firms in this industry have diseconomies of scale.

Explanation:

Diseconomy of scale occurs when the cost with the factors of production grows more than the output resulting from the investment, resulting in an increase in the average cost per unit produced.

In the case in question, the factor of production works. Investment is the cost of the total manpower of managers and employees. If after this investment the final production decreased (-14.4% and - 3.1% respectively), this means that these firms had diseconomies of scale. Because they are firms of the same nature, it is pertinent to affirm that the sector of these firms presented diseconomies of scale.