Read the following article from “The Economist, Buttonwood column, 17 July 2021” <

[answerhappygod]

Read the following article from “The Economist, Buttonwood
column, 17 July 2021”
<<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.>>
According to the article, answer question 11,12 and 13.
11) What does this description imply about the assumption of
profit maximization?
12) Suggest reasons why well-run firm avoid firing workers
during a recession and re-hiring them in a boom
13) According to the extract which of the following are
true
a. Inflation squeezes profits.
b. Firms raise prices to offset rising costs.
c. Firms do not raise prices for fear of losing customers to
rival firms.
d. Firms can easily change the prices of their products.