Question

An article in Business Week warned of the dangers of deflation as the collapse of numerous Asian economies was creating worries that Asia might try to "export its way out of trouble" by oversupplying everything from automobiles to semiconductors. Evidence that deflation had become a genuine concern for managers was provided by a statement in the article by John Smith, chairman and CEO of General Motors Corporation: "Fundamentally, something has changed in the economy. In today's age, you cannot get price increases." The article offers advice to managers: "Productivity growth lets companies boost profits even as prices fall." Using short-run production and cost theory comment on this advice.

Answer 1

Step-by-step explanation:

This advice is supported by short-run production and cost theory, which states that firms can increase their profits even when prices are falling by increasing productivity. This can be achieved through cost-cutting measures, such as reducing labor and capital costs, and by increasing efficiency in production processes. By reducing their costs, firms can be more competitive and still realize a profit. Additionally, productivity growth can help firms to produce more goods at a lower cost, thereby increasing the firm's profitability. Thus, the advice given in the Business Week article is in line with short-run production and cost theory.