While your theory is correct the fact is since shift time has changed my earnings have dropped. This appears to be because the shorter shifts have encouraged big time renters to do what must be the equivalent of pool hopping. I would be okay with that if they stayed long enough to find blocks, but that doesn't appear to be the case. Granted my 24/7 408 Ghps is not finding blocks either, but my share is hardly noticeable compared to some of these renters. Is it time for the small miners to give up? Or can someone recommend a different pool?
Big hashers jumping in and out does not affect your pay: it decreases your pay per block but increases the number of blocks found, resulting in the same net pay on average. Since the pool has been lucky as of late your pay should have been better than normal. Ever increasing difficulty definitely decreases your pay if your hash rate remains constant. I think this is where the blame lies for your decreasing pay.
The question about when to "give up" has more to do with your cost per hash than your total hash rate. If you already own the hardware it's simply a matter of comparing the cost of electricity to run it versus the income it produces. If you're really lucky and run you equipment somewhere you don't pay for the electricity then there is no reason to stop no matter how low the hash rate is.
Aaron
Am I incorrect in assuming that if a short time renter does not find a block, he has not contributed to the BTC the pool earns?