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 behavior is an example of a. the long-run principle of substitution. b. short-run profit maximization. c. short-run cost minimization. d. innovation away from changes in factor prices. e. long-run economies of scale.

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 behavior is an example of
a. the long-run principle of substitution.
b.
short-run profit maximization.
c. short-run cost minimization.
d.
innovation away from changes in factor prices.
e. long-run economies of scale.

Answer

• a. the long-run principle of substitution.
  Explanation:
  This is an example of long-run principle of substitution whereby the firm decides to choose production technology that is less expensive in the future which makes all costs variable costs. Firms do this by substituting relatively inexpensive inputs for the relatively expensive inputs so as to produce at the lowest possible long-run average cost. Getting cheaper substitutes for electricity in future, saves long-run costs involved in production.