Nominal inerest rate
Inflation rate
If the nominal interest rate is 5% and the inflation rate is
3%, then what is the real interest rate?
ATech ZTech
Fixed costs mil Fixed costs mil
Profits mil Profits mil
Solution
ATech has fixed costs of $7 million and profits of $4 million. Its
competitor, Ztech, is roughly the same size and this year earned
the same profits, $4 million. But it operates with fixed costs of
$5 million and lower variable costs. a. Which firm has higher
operating leverage? b. Which firm will likely have higher profits
if the economy strengthens?