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Decreasing returns to scale set in mainly because of:
Afuller utilisation of indivisible factors
Bthe fixed factor being worked too hard
Cimprovement in production technology
Dgrowing difficulties of management and coordination
Answer & Solution
Correct answer: D. growing difficulties of management and coordination
1. As a firm expands to a very large size, returns to scale eventually decrease.
2. The chief cause is the increasing difficulty of management, coordination and control when the firm becomes too big.
3. So the answer is growing managerial difficulties.
4. Fuller use of indivisibles explains increasing returns to scale, technology is assumed given, and an over-worked fixed factor explains short-run diminishing returns, not returns to scale.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 3 Unit I "Theory of Production", p.21_
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