Final answer:
When actual production is higher, the units-of-production method results in higher depreciation expense. Firms respond to an increase in input costs by seeking alternative inputs, investing in more efficient technology, or changing production processes to maintain profitability.
Step-by-step explanation:
The units-of-production depreciation method will result in higher Depreciation Expense when the actual production is higher. This method calculates depreciation based on the actual usage or production levels of an asset, rather than a fixed time period.
As production levels increase, the amount of depreciation expense recognized also increases, making it a variable cost that fluctuates with the level of production.
In choosing a production technology, firms will typically seek alternatives or adjust their production methods in response to an input becoming relatively more expensive.
This could involve substituting the costly input with a cheaper one, investing in technology that is more efficient, or altering the production process to use less of the expensive input.
The goal is to minimize costs and maintain profitability. In the context of external costs such as pollution, incorporating these costs into pricing can also lead to higher prices, reduced production, and consequently less pollution.