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Paper No' TE/1996/302:
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This Paper is published under the following series: Theoretical Economics
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Abstract:A partial competitive equilibrium model is set up for the determination of profit-maximising investment in a production technique which has constant returns to scale itself, but at least one of its inputs has an increasing price schedule, so that its price is determined in equilibrium. Comparative statics analysis of the solution shows that the cross-effects of unit input costs on equilibrium investment are negative if the inputs are Wicksell technical complements. This is so in the motivating application (pumped storage, especially of energy), since this is a two-input example. For the case of just one equilibrium-priced input, a shift in its price schedule changes the scale of investment but not input proportions (with or without the complementary assumption). When applicable, this result greatly simplifies the re-optimisation of existing plants tied to particular locations.
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