When firms grow larger,they sometimes add many additional layers of managers between the top executives and the entry-level employees.Because these managers do not actually produce any output themselves,we expect more layers of management to lead to

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When firms add many layers of managers, it can lead to diseconomies of scale because of the increased administrative costs, communication problems, and decision-making delays. As a result, the marginal cost of producing additional output may increase beyond the marginal revenue, leading to a decline in profitability. This is also known as the "principal-agent problem," where managers may pursue their own interests rather than maximizing shareholder value. Therefore, adding more layers of management may not lead to the same proportional increase in output, and may even reduce it, hence diminishing returns to scale.

When Firms Grow Larger,they Sometimes Add Many Additional Layers of Managers