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 profit maximization.
B)short-run cost minimization.
C)the long-run principle of substitution.
D)innovation away from changes in factor prices.
E)long-run economies of scale.

Question

Quizplus · Accepted Answer

The firm's decision to build a plant using existing technology that uses less electricity per tonne of aluminum produced is an example of the long-run principle of substitution. This principle involves shifting production to a more cost-efficient input when the relative prices of inputs change over the longer-term. In this case, the increase in the price of electricity has made it relatively more expensive, prompting the firm to substitute it with a more cost-efficient technology.

Suppose RioTintoAlcan Is Considering the Construction of a New Aluminum