Question

If production technology shows us a decreasing return to scale, then multiple smaller firms will become more cost effective than larger firms?

Answer 1

If production technology would show decreasing returns to scale then surely smaller firms wil become more cost effective as they will still be working on the traditional ways of production. Though production is carried out by them at a slower pace but there is surely an increasing returns to scale as there always lies a scope for more employment of labour or basic machinery to enhance production.

Therefore the advanced production technique if failed would surely get the producers back to their traditional ways with the smaller firms.