Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec,the operation of which requires a great deal of electricity.Suppose also that the price of electricity is predicted to rise significantly in the near future.As a result,the firm decides to embark on new research and development which leads to the development of a new production technique that uses less electricity per tonne of aluminum produced.This is an example of
A)short- run cost minimization.
B)short- run profit maximization.
C)innovation away from increases in factor prices.
D)long- run economies of scale.
E)the marginal rate of substitution between factors.

Question

Quizplus · Accepted Answer

The scenario describes the firm's decision to invest in research and development in order to innovate and reduce its reliance on a specific factor of production (electricity), due to expected increases in its price. This is an example of innovation away from increases in factor prices, which is a long-run strategy for cost minimization and survival in the face of changing market conditions. Short-run cost minimization (A) and short-run profit maximization (B) are not relevant in this scenario, as the firm is investing in R&D rather than simply adjusting its current production process. Long-run economies of scale (D) and the marginal rate of substitution between factors (E) are also not applicable as no information is given about changes in the scale of production or the substitution of factors of production.

Suppose RioTintoAlcan Is Considering the Construction of a New Aluminum