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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.

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