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 build a plant using existing technology that is more expensive but uses less electricity per tonne of aluminum produced.This behaviour is an example of
A)short- run cost minimization.
B)innovation away from changes in factor prices.
C)the long- run principle of substitution.
D)long- run economies of scale.
E)short- run profit maximization.

Question

Quizplus · Accepted Answer

The firm's decision to use existing technology that is more expensive but uses less electricity per tonne of aluminum produced is an example of the long-run principle of substitution. This principle suggests that in the long run firms can substitute one factor of production for another to maintain their level of output at the lowest possible cost, given the prices of the factors of production. In this case, the firm is substituting capital (more expensive technology) for electricity (more expensive factor of production) in order to minimize long-run costs.

Suppose RioTintoAlcan Is Considering the Construction of a New Aluminum