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Increasing returns to scale from variable capacity utilization

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  • Susheng Wang
  • Lijing Zhu

Abstract

We propose a unique model in which the firm varies capacity utilization by a variable number of shifts when facing demand fluctuations. In the long run, the firm optimally chooses a capacity level based on expected demand conditions. In the short run, when facing excess demand, the firm can increase variable inputs and the number of shifts to intensify the use of existing capacity. By endogenizing cost, demand and variability of capacity utilization, we show that variable capacity utilization can lead to increasing returns to scale. Hence, we predict increasing returns to scale when an economy expands in a business cycle.

Suggested Citation

  • Susheng Wang & Lijing Zhu, 2007. "Increasing returns to scale from variable capacity utilization," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(3), pages 191-211, September.
    • Handle: RePEc:bla:ijethy:v:3:y:2007:i:3:p:191-211
    DOI: 10.1111/j.1742-7363.2007.00055.x
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    References listed on IDEAS

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    1. Susanto Basu & Miles S. Kimball, 1997. "Cyclical Productivity with Unobserved Input Variation," NBER Working Papers 5915, National Bureau of Economic Research, Inc.
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