Intertemporal production and intertemporal substitution in output supply and input demand |
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Authors: | H. Youn Kim Junsoo Lee |
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Affiliation: | 1. Department of Economics, Western Kentucky University, Bowling Green, KY, USA;2. Department of Economics, Finance &3. Legal Studies, University of Alabama, Tuscaloosa, AL, USA |
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Abstract: | This article presents an intertemporal model of production with multiple inputs to investigate substitution opportunities facing firms over time. The firm’s intertemporal profit maximization problem is characterized with the familiar cost function, and various intertemporal substitution elasticities are delineated for output supply and input demand. The absence of intertemporal substitution in production can imply production smoothing, and allowance for intertemporal substitution in labour demand reinforces the prediction of the real business cycle model. For aggregate US manufacturing, we find substantial substitution in output supply and labour demand over time due to intertemporal changes in output price and wage rates. |
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Keywords: | Intertemporal equilibrium conditions the cost function intertemporal substitution production smoothing real business cycles |
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