Question

Need as much details as possible. Microeconomics.

If a hair salon hires 5 hairdressers, they will do 50 haircuts a day. If the hair salon hires 10 hairdressers, they will do 80 haircuts a day. Then,

a. The hair salon has constant economies of scale.

b. The hair salon has increasing returns to scale.

c. The hair salon has constant returns to scale.

d. The hair salon has decreasing returns to scale.

Answer 1

We need to understand the concept of returns to scale before we can answer the question:

• Increasing Returns to Scale: if we increase our factors of production by let's say 10 units and our output increases by more than 10 units, we say we are experiencing increasing returns to scale
• Constant Returns to Scale: if we increase our factors of production by let's say 10 units and our output increases by exactly 10 units, we say we are experiencing constant returns to scale
• Decreasing Returns to Scale: if we increase our factors of production by let's say 10 units and our output increases by less than 10 units, we say we are experiencing decreasing returns to scale

So after knowing these definitions we can easily rule out the options of increasing and constant returns to scale because when we produce using 5 units of input, our output is 50 and when we increase the input to 10 units our out put increases to only 80 which means that initially every input unit was producing 50/5 = 10 units of output and now they are producing 80/10 = 8 units of output . So their per unit production has decreased and that clearly implies Decreasing returns to scale.

So the correct answer is option d