Question:
When firms grow larger they sometime add many additional layers of managers between the top executives and the entry-level employees Because these managers not actually produce any output themselves, we expect more layers of management to lead to a:
A) Diminishing marginal return.
B) Increasing marginal returns.
C) Diseconomies of scale
D) Economies of scale
Answer:
The correct answer is C) Diseconomies of scale.
Explanation:
Too many layers of management, too little control, too many locations, and too many products are all recipes for a "diseconomies" of scale situation. There's a point at which average costs stop falling as production increases, which may also be the point at which costs start to rise as a result of this inefficiency.
Diseconomies of scale is a microeconomics principle which refer to the cost disadvantages that economic actors accrue due to an increase in organizational size or on output, resulting in production of goods and services at increased per-unit costs. The concept of diseconomies of scale is the opposite of economies of scale.
For example, if a product is made up of two components, solution A and Solution B, diseconomies of scale might occur if gadget B is produced at a slower rate than gadget A. This forces the company to slow the production of gadget A, increasing its per-unit cost.
Another example would be if the Human Resource Planning Unit goes on a recruitment spree without first planning the the workforce. This would result in diseconomies of scale and may also be caused by the lack of proper coordination in a business where operational waste becomes the order of the day.
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Answer: c. diseconomies of scale
Explanation: Because these added managers do not actually produce any output themselves, it is expected that more layers of management to lead to diseconomies of scale. Diseconomies of scale is occur when the expansion of output comes with increasing average unit costs i.e. they are the cost disadvantages that economic actors incur as a result of an increase in the size of a firm or on output, leading to production of goods and services at increased per-unit costs.
Diseconomies of scale can involve factors internal to an operation ( from technical issues of production or organizational issues within the structure of a firm or industry) or external conditions beyond a firm's control (due to constraints imposed by the environment).
