National Evaluation Series (NES) Business Studies Practice Test

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Prepare for the NES Business Studies Test. Study with flashcards and multiple choice questions, each question has hints and explanations. Boost your exam readiness now!

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What production effect is illustrated when the number of meals served increases at a decreasing rate with each additional server?

  1. Increasing returns

  2. Diminishing returns

  3. Constant returns

  4. Negative returns

The correct answer is: Diminishing returns

The scenario described highlights the phenomenon of diminishing returns, which occurs in the context of production when adding additional resources—in this case, servers—results in a gradual decrease in the incremental output achieved. In practical terms, when the first server is added, the rate of meals served increases significantly because the workload is less intensive and tasks can be completed more efficiently. However, as more servers are brought on board, the additional number of meals served per server tends to decline. This change can occur due to factors such as overcrowding in the kitchen or reduced efficiency in coordination among the servers. Diminishing returns is characterized by the point where adding more input leads to proportionally smaller increases in output. This concept is crucial for businesses to understand, as it impacts decisions regarding resource allocation and operational efficiency. While other options such as increasing returns, constant returns, and negative returns describe different production relationships, they do not accurately represent the situation where output grows but at a decreasing rate with additional input, therefore reinforcing the correctness of identifying this effect as diminishing returns.