Increasing Returns to Scale from Variable Capacity Utilization

Download or read book Increasing Returns to Scale from Variable Capacity Utilization written by Susheng Wang and published by . This book was released on 2009 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a unique model of capacity utilization 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 (IRS). Hence, we predict IRS when an economy expands in a business cycle.