Homothetic and Non-homothetic Scale Economies in Applied General Equilibrium Analysis

Lawrence C. McDonough

Canadian Journal of Economics, 1992, vol. 25, issue 1, 196-210

Abstract: Oligopolists in the Harris general equilibrium trade model employ a homothetic or nonhomothetic constant elasticity of substitution decreasing cost function. The properties of the function are discussed and its empirical relevance is analyzed in the context of a multilateral free trade simulation. Results suggest that scale economies that do not rapidly diminish with increases in production-run lengths (as occurs in the fixed-cost paradigm) generate relatively large welfare and output changes under the simulation. Also, factor bias, as a departure from a homothetic technology, affects in an empirically significant manner both the optimal input ratios and the productive efficiency.

Date: 1992
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