Firm X and Firm Y compete within the same industry.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?
A)Firm X will lose more profit than Firm Y.
B)Firm Y will lose more profit than Firm X.
C)Firm X and Firm Y will lose the same amount of profit.
D)Neither Firm X nor Firm Y will lose profit.

Question

Quizplus · Accepted Answer

Since both firms will experience a 15% decrease in sales, Firm X will suffer a greater loss in profit because it uses more direct labour, which is more expensive than investment in machinery. Firm Y, on the other hand, will lose less profit due to its investment in machinery. Therefore, the projected profits for Firm Y will be higher than for Firm X.

Firm X and Firm Y Compete Within the Same Industry