Our final example involves a cross-country comparison of how firms
substitute between capital and electricity. In North America, the price of
electricity is quite low, and hotels usually do not worry about the extra
expense when customers leave lights and air conditioning on when they
leave their rooms during the day. In Europe and Central America,
however, where electricity is far more expensive, many hotels are built so
that all lights and air conditioning inside the room automatically turn off
when you leave the room. The high price of electricity leads these firms to
substitute toward a different kind of capital—one that uses less electricity.
1 The appendix to this chapter provides a graphical analysis of this condition, which is similar to
the analysis of consumer behaviour that we developed in the appendix to Chapter 6.