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An Axiomatic Approach to the Allocation of a Fixed Cost Through Prices

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  • Leonard J. Mirman

Abstract

We study the allocation of fixed costs to the outputs of a multiproduct firm. First we allocate short-run fixed costs through A-S prices which allocate the long-run costs. Long-run cost functions do not generally contain a fixed cost component. We show what part of the A-S prices associated with the long-run cost is allocated to the fixed cost and what part is allocated to the variable cost of the short-run costs. Second, in those cases in which the fixed costs must be allocated directly, we alter the axioms characterizing A-S prices slightly to accommodate cost functions which have a fixed cost component and derive an allocation mechanism characterized by these axioms for cost functions including those with a fixed cost component

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 468.

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Date of creation: Apr 1981
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Handle: RePEc:nwu:cmsems:468

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Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
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Web page: http://www.kellogg.northwestern.edu/research/math/
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  1. Dov Samet & Yair Tauman, 1981. "The Determination of Marginal-Cost Prices Under a Set of Axioms," Discussion Papers 476, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. James R. Hines, Jr., 1990. "The Transfer Pricing Problem: Where the Profits Are," NBER Working Papers 3538, National Bureau of Economic Research, Inc.

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