Final answer:
D. there are high fixed costs.
A high DOL indicates high fixed costs, and while firms with a high percentage of union employees have higher labor costs, this does not inherently mean they are more likely to go bankrupt. Strategies existing to improve labor productivity may mitigate the costs.
Step-by-step explanation:
A high Degree of Operating Leverage (DOL) means there are high fixed costs relative to variable costs. A firm with a high DOL is more sensitive to changes in sales volumes; small percentage changes in sales can lead to larger percentage changes in operating income. This means that when sales increase, profits can surge. Conversely, if sales decrease, profits can plummet. Therefore, the correct answer to the question is D. there are high fixed costs.
Regarding firms with a high percentage of union employees, it is not necessarily that these firms are more likely to go bankrupt simply due to higher wages paid to unionized workers. While higher labor costs can impact a firm's financial flexibility, many firms employ strategies such as increasing labor productivity or investing in more physical capital to counteract these costs. Furthermore, the shift in supply and demand for high-skilled labor can influence labor costs and a firm's profitability, as higher skills can lead to improved productivity and possibly justify higher wages.