Final answer:
Option B, back orders, becomes more attractive when the opportunity cost of lost revenue is high. Layoffs can lead to losing valuable employees and future hiring costs, so businesses may avoid them by using back orders to manage temporary downturns in demand.
Step-by-step explanation:
When the opportunity cost of lost revenue is relatively high, option B, back orders, becomes relatively more attractive. During a recession or downturn, businesses face difficult decisions regarding their workforce and production strategies. If the cost of foregoing revenue due to not meeting demand is high, companies may find it preferable to have customers wait for their orders (back orders), rather than resorting to layoffs or maintaining excess capacity. Layoffs can result in losing experienced workers and incurring future hiring and training costs if the downturn is temporary.
The adverse selection of wage cuts argument also supports the idea of avoiding layoffs because reducing wages across the board could lead to a loss of the best employees, leaving the company with less desirable workers. As a result, companies often wait for clear signs of economic recovery before hiring new employees or expanding capacity, sometimes choosing instead to temporarily increase overtime work for existing staff.