A column on barrons.com discussing General Motors (GM) made the following observation: “Even the seemingly ‘variable’ costs of hourly workers were made burdensome by union agreements whereby 95% of hourly workers’ salaries were paid when they were laid off, turning variable labor compensation into a fixed cost.”
a. Aren’t workers’ salaries always a variable cost and not a fixed cost? Briefly explain the author’s reasoning.
b. Suppose that GM reduces its production of cars. Compare what happens to GM’s average total cost production in a situation where (i) the company doesn’t have this union agreement, and (ii) the company does have this agreement. Use a graph to illustrate your answer.