Optimism about company earnings has driven share prices higher in the past year. But financial markets are relentlessly

[answerhappygod]

Optimism about company earnings has driven share prices higher
in the past year. But financial markets are relentlessly
forward-looking. And with bumper earnings already in the bag, they
now have less to look forward to. A rally in bond prices since
March and a sell-off in some cyclical stocks point to concerns
about slower GDP growth. A plausible case can be made that the
earnings outlook might worsen as quickly as it improved. Profits
swing around a lot. For big businesses, a lot of costs are either
fixed or do not vary much with production. Firms could in principle
fire workers in a recession and hire them back in a boom so that
costs go up and down with revenues. But this is not a great way to
run a business. A consequence of a mostly stable cost base is that,
when sales rise or fall, profits rise and fall by a lot more. This
“operating leverage” is especially powerful for companies in
cyclical businesses, such as oil, mining and heavy industry.
Indeed, changes in earnings forecasts are largely driven by
cyclical stocks. Slower economic growth is one part of a classic
profit squeeze. The other is rising costs. [Over the recent past],
A variety of bottlenecks have pushed up the prices of key inputs,
such as semiconductors. Too much is made of this, says Robert
Buckland of Citigroup, a bank. Input prices typically go up a lot
in the early stages of a global recovery. Big listed companies
usually absorb them without much damage to profits. Rapid sales
growth trumps the input-cost effect. The real swing factor is
wages, which are the bulk of firms’ costs. An obvious remedy for
rising costs would be to raise prices. Though inflation is surging
in America, that reflects price rises for a small number of items.
Many businesses tend not to raise prices straight away. They are
mindful of losing customers to rivals who don’t raise prices. And
there are administrative costs to changing prices frequently. A
study published in 2008 by Emi Nakamura and Jon Steinsson, two
academics, found that the median duration of prices is between
eight and 11 months. Prices of food and petrol change monthly but
those of a lot of services only change once a year.>>
Answer the following questions
What does this description imply about the assumption of profit
maximization? [4%]
Suggest reasons why well-run firm avoid firing workers during a
recession and re-hiring them in a boom [4%]
According to the extract which of the following are true
[4%]
Inflation squeezes profits.
Firms raise prices to offset rising costs.
Firms do not raise prices for fear of losing customers to rival
firms.
Firms can easily change the prices of their products.