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IAI Actuarial Core Principles · Business Economics · Production, costs, revenue and profit in price and output decisions

Which of the following is most likely to be a cause of decreasing returns to scale as a large Indian bank expands its branch network?

Co-ordination and communication problems in a larger management structure cause decreasing returns to scale, because output grows less than proportionately as all inputs expand. Bulk buying, specialisation, spreading fixed costs and indivisible equipment are all sources of economies of scale, not diseconomies.

  1. ABulk purchasing discounts on stationery
  2. BSpecialisation of staff into narrow roles
  3. CSpreading of fixed technology costs over more customers
  4. DCo-ordination and communication problems within a larger management structureCorrect
  5. Use of indivisible, high-capacity equipment

Explanation

Managerial and co-ordination difficulties in very large organisations make output rise less than proportionately when all inputs rise, which is decreasing returns to scale (a diseconomy of scale). The other options are sources of increasing returns or economies of scale.

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