If the economy is shrinking,firms with high operating leverage will experience __________.
A)higher decreases in profits than firms with low operating leverage
B)similar decreases in profits as firms with low operating leverage
C)smaller decreases in profits than firms with low operating leverage
D)no change in profits
E)none of the above

Question

Quizplus · Accepted Answer

Firms with high operating leverage have higher fixed costs compared to variable costs. Therefore, during an economic downturn when sales decrease, the firm's profits will decrease at a higher rate compared to firms with lower operating leverage.

If the Economy Is Shrinking,firms with High Operating Leverage Will