Multiple choice

The firms in the modern world, use reserve capacity to:

  1. ensure greater flexibility in operations

  2. reduce costs

  3. reduce wages

  4. reduce taxes
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A Correct answer
Explanation

Modern firms maintain reserve capacity primarily to ensure operational flexibility - the ability to respond to demand fluctuations, equipment breakdowns, or sudden orders without disrupting production. While idle capacity does increase costs, the strategic value of flexibility typically outweighs these costs. Reserve capacity is NOT used to reduce wages or taxes, which are unrelated to capacity decisions.

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