Jim Nast is an owner and trainer who runs an exercise studio in a major city, with many, many other competitors. Following the summer Olympics, demand has risen enormously for people wanting training. He has been thinking over his years of experience and knows that he can expand both gym space and trainers, but gym space takes time to acquire, while trainers can be found immediately.
He notices an interesting phenomenon. If he adds trainers to an existing gym, output from each additional worker actually declines. However, if he expands both gym space and trainers together, output per additional trainer actually grows. What might explain this puzzling observation?
a. diseconomies of scale (or decreasing returns to scale) Answer_____
b. the law of diminishing marginal returns applies when gym space is fixed, but he faces increasing returns to scale when gym space is not fixed.
c. the law of diminishing marginal returns applies when gym space is fixed, but he faces decreasing returns to scale when gym space is not fixed.
d. neither diseconomies of scale nor diminishing marginal returns applies in this case
e. the law of diminishing marginal returns