Read the following article from The Economist, Buttonwood column, 17 July 2021 < > According to the article, answer question 11,12 and 13. 11) What

Read the following article from "The Economist, Buttonwood column, 17 July 2021"

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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? (4 marks)

12) Suggest reasons why well-run firm avoid firing workers during a recession and re-hiring them in a boom (4 marks)

13) According to the extract which of the following are true (4 marks)

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.