Question

FDI not only brings investment in the domestic economy, it also brings new technology. How would the availability of new technology (relating to auto industry) impact the short period production function of a car manufacturer in India?

Answer 1

Short period production function of a firm is drawn on the assumption of a given technology. When new technology is available, the whole production function would shift: more output would be available from the same amount of inputs. In terms of costs, firm's AC curve would shift downward. Thus, the availability of new technology (relating to auto industry) would shift the AC curve (of a car manufacturer) downward. It would prompt him to produce more at the going/ prevailing price.