Final answer:
In an industry where capital costs increase and scale effect dominates, firms may shift technologies or the industry may see a shift in firm size distribution due to the increased average costs.
Step-by-step explanation:
If the price of capital increases in an industry and the scale effect dominates, this typically means that the increase in production costs due to more expensive capital will lead to increased average costs for firms within the industry. As a result, firms may react by choosing production technologies that are less capital-intensive, or they might invest in technologies which improve efficiency to offset the higher input costs.
As technology advances, such as the application of computers to manufacturing processes, the demand for high-tech capital equipment tends to rise, which the United States, having a comparative advantage, can supply, thereby boosting net exports. In the context of a constant-cost industry, firms can supply any quantity demanded at a constant price due to a perfectly elastic supply of inputs. However, in an increasing-cost industry, both old and new firms face higher costs as the industry scales up, leading to higher average costs and potentially a smaller size distribution of firms if smaller firms cannot compete.