1.

If the Marikina Corporation has increased all their production factors (labor, capital,
etc.) by 50% but only 40% of the output increases which is lower than the expected
increase in output, then the firm has experienced decreasing returns of scale. This
situation clearly shows the concept of decreasing returns of scale, where an
increase of inputs results to an increase of output but at a decreasing rate or simply
the increase of output is less than the increase of inputs. However, this concept
should not be mistaken with diminishing marginal returns because the former refers
to the changes of output only if “all” inputs are increased which happens in long-run
operations while the latter refers to the changes of output if only “one” unit of input is
changed and other factors are held constant which occurs in short-run operations.
That justifies why decreasing of returns of scale occurs in large companies because
complexity becomes evident in the management of factors of production. So
considering the operations of Marikina Corporation, where the increase of all inputs
specifically labor, may cause a poor partition and monitoring of tasks among workers
that may affect their efficiency of work in the production process resulting to
decreasing returns of scale. Therefore, increasing the factors of production do not
guarantee an equal or greater proportional increase in output because it is possible
that output may increase but at a decreasing rate which is called as decreasing
returns of scale.

2. If the market price is at P2 then we can identify that the consumer surplus is the area
above the market price which is within the letters ABD while the producer surplus is
the area in letter F, below the market price but within the supply curve. Given that,
we can conclude that the total surplus is the area within ABDF because it is just the
summation of the consumer and producer surplus. The total surplus in this given
situation is not fully maximize since the market price and quantity is less than the
equilibrium price and quantity of the market. This implies that there is an inefficient
allocation of resources because consumers enjoys higher consumer surplus at the
expense of the producers. Thus, a shortage exist in the market because a market
price below equilibrium would mean that producers are only willing to supply at a
quantity less than the demand. With this, a deadweight loss may occur which is
represented in this graph as the area within letters C and D. This is the lost benefits
or unattained consumer and producer surplus due to the shortage or the inefficient
allocation of resources. Therefore, it is evident that the total surplus is just the area
within the letters ABDF and that this is not fully maximized because the market price
and quantity is not at equilibrium.