If a firm had decreasing returns to scale at all levels of output and it

Question

divided up into two equal-size smaller firms, what would happen to its overall profits?

Answer 1

If a firm had decreasing returns to scale at all levels of output and it divided up into two equal-size smaller firms, its overall profits would likely decrease. This is because when a firm experiences decreasing returns to scale, it means that the marginal cost of production increases as output increases. Therefore, when the firm is divided into two smaller firms, the cost of production will increase due to the increased overhead costs associated with running two separate firms. This will lead to a decrease in overall profits.