If profit is decreasing at a faster rate than are sales, why would this reflect the "fixed-cost nature of the business" (that's the answer in the case book but for some reason I thought it'd be the opposite)? Can someone help me understand what I'm supposed to draw about economies of scale from this graph and how? Thank you so much to everyone in advance!
Hi! Thanks a lot for the explanation. I’m trying to understand this - does it make sense to think of it as: since profits are decreasing faster than are sales, the costs must be mostly fixed. Variable costs are a function of the units of sales (i.e. they change with the number of sales made), so since we’re making fewer sales, costs should also have gone down because there are fewer units sold. However, costs are increasing as we see with the decreasing profits, so they must be fixed not variable??
Almost - profits decreasing in this case does not mean costs are increasing. Fixed costs are just that - they are fixed. So costs are not decreasing as fast as sales are leading to lower than expected profits
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