Review
4. Explain why a profit-maximizing firm must also minimize costs.
5. Use the principle of substitution to predict the effect in each of
the following situations.
a. During the past 30 years, technological advances in the
computer industry have led to dramatic reductions in the
price of equipment. At the same time, real wages have
increased slowly.
b. The ratio of land costs to building costs is much higher in
big cities than in small cities.
c. Wages of textile workers and shoe machinery operators
are higher in Canada than in the southern United States,
but the price of capital equipment is approximately the
same.
d. In China’s cities, wage rates for labour are rising faster
than the price of capital equipment.
6. The following diagram shows three possible SRATC curves and
an LRAC curve for a single firm producing light bulbs, where each
SRATC curve is associated with a different-sized plant.