Final answer:
The scenario with the new sewing machine at the custom Halloween company demonstrates the impact of capital investments on production. Higher labor productivity resulting from the new equipment can lead to lower costs and higher profits, showing how firms respond to changes in input prices and strive for economies of scale.
Step-by-step explanation:
The scenario described in the question illustrates the impact of capital investments on production. When the Halloween company purchased a new sewing machine, which is a form of physical capital, and replaced the older machine, they were able to nearly double their production. This is a prime example of how investing in better and more efficient equipment can lead to increased labor productivity. Employers may make such capital investments as a response to higher labor costs, like when a union negotiates higher wages.
Firms then opt for production methods that use more machinery and less labor, which can sometimes result in a lower total cost of production despite the higher initial investment in machines. Therefore, it becomes evident that the firm's choice to replace the outdated machinery with a newer model demonstrates the impact of capital investments. This is because the updated technology has led to a more efficient production process and reduced the need for labor, which could potentially lead to higher profits. However, this strategy is influenced by several factors, such as the relative costs of labor and machinery and the firm's overall production technology. As the firm adopts such strategies, it takes advantage of economies of scale, where increased production leads to lower average costs per unit, ultimately enhancing the firm's competitiveness in the market.