One measure of the intensity with which labor and capital are used in producing output is the capacity utilization rate. According to some economists, when capacity utilization is low, firms can increase employment and their use of capital without incurring large increases in the costs of production. So firms will not be forced to raise prices in order to make profits on additional output. But this theory is not universally accepted. In this article, Mike Dotsey and Tom Stark investigate some of the problems with what, at first glance, seems a compelling story.

This article appeared in the Second Quarter 2005 edition of Business Review.

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