Since 1970, the nations of the European Union (EU) have increased their total annual output of goods and services relatively steadily. But over this same time period, the EU has dramatically increased the amount of capital relative to the amount of labor it uses in its production processes. Business managers in the EU have substituted capital for labor much more than in the United States because the cost of labor (wages corrected for inflation) has increased by almost four times as fast in the EU as it has in the United States.

How does a firm decide when to buy more machines?