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Supply Elasticities in the Presence of Adjustment Costs

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  • Wilcoxen, Peter

Abstract

The adjustment-cost model of investment provides a rigorous basis for deriving a firm's price elasticity of output over various lengths of run. Moreover, parameters of the adjustment cost function itself play a prominent role in determining the size of the elasticity over the medium and long run. In this paper, we demonstrate how to derive supply elasticities from the optimization problem of a firm with a Cobb-Douglas production function (the CES case is treated in an appendix). We then compute elasticities for interesting values of the model's parameters, and argue that correct treatment of adjustment costs is essential to obtaining realistic behaviour from exporting sectors in general equilibrium models.

Suggested Citation

  • Wilcoxen, Peter, 1990. "Supply Elasticities in the Presence of Adjustment Costs," Impact Project Archive 295062, Impact Research Centre, University of Melbourne.
    • Handle: RePEc:ags:ircipa:295062
    DOI: 10.22004/ag.econ.295062
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    1. Wilcoxen, Peter, 1989. "Intertemporal Optimization in General Equilibrium: A Practical Introduction," Impact Project Archive 295061, Impact Research Centre, University of Melbourne.
    2. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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    1. McLaren, Keith, 1991. "The USe of Adjustment Cost Investment Models in Intertemporal Computable General Equilibrium Models," Impact Project Archive 295064, Impact Research Centre, University of Melbourne.
    2. Horridge, Mark & Powell, Alan & Wilcoxen, Peter, 1990. "Constraining Output Responses in Long-run Closures of ORANI: Some Suggestions," Impact Project Archive 295210, Impact Research Centre, University of Melbourne.
    3. Goyal, Ashima, 1994. "Growth dynamics in a general equilibrium macroeconomic model for India," Journal of Policy Modeling, Elsevier, vol. 16(3), pages 265-289, June.

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