Firm X and Firm Y compete within the same industry and have the same sales volumes and costs other than the following items: Firm X manufactures its product using large amounts of direct labour. Firm Y has replaced direct labour with investment in machinery. Projected sales for both firms are 15% less than in the previous year. What will be the projected profits for Firm X compared to Firm Y?

Question

Quizplus · Accepted Answer

Firm Y will lose less profit compared to Firm X as it has invested in machinery to replace direct labour, resulting in lower costs. Firm X, on the other hand, still relies on high direct labour costs which will lead to larger losses in profits.

Firm X and Firm Y Compete Within the Same Industry