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Interrelated Factor Demand with Nonconvex Adjustment Costs: a Note

Wilko Letterie (), Øivind Nilsen () and Gerard Pfann ()

No 2, Research Memorandum from Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR)

Abstract: In this paper we develop a model to describe a firm’s demand for two production factors which is subject to the presence of nonconvex adjustment costs. In our model simultaneous adjustment of these two production factors may either increase or decrease the total costs incurred by the firm. The magnitude of this change in total costs ultimately determines the likelihood of joint adjustment. We also show that the importance of interrelation is suppressed by large fixed costs.

Keywords: Economics; (Jel:; A) (search for similar items in EconPapers)
Date: 2008
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