Final answer:
A firm should select the machine with the lowest total cost while considering the relative costs of labor and capital. Cheaper machine hours favor more capital use, while higher costs shift preference towards more labor.
Step-by-step explanation:
When a firm is choosing between machines that perform the same task in the same time and the minimum attractive return is 7%, it should opt for the machine that has the lowest total cost. It is crucial to consider how the cost of labor and capital (machine hours) influence the choice. If machine hours become cheaper, a shift towards using more machines and less labor typically follows.
However, when the cost of machines rises, firms tend to favor less capital-intensive technology, which implies a shift towards more labor. This situation echoes the manufacturing environment in the United States during the 1970s, where the market could only sustain a limited number of firms efficiently due to demand constraints, leading to competitive pressures and potential market exit for less efficient firms.