Characterising the solution of an average cost minimisation problem with returns to scale measures and a decomposition technique

Abstract

In standard microeconomic theory, the competitive firm operates to minimise average cost in long period equilibrium. Assuming the sufficient conditions for minimisation are satisfied, it is possible to show that the firm’s input demand functions exist, and to describe its responses to parametric changes in the prices of inputs (comparative statics). It has, however, not been possible to obtain definite results for own derivatives: e.g., the change in labour services, when its wage changes.