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Dynamic efficiency and reswitching

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  • van Suntum, Ulrich

Abstract

The paper argues that, from a dynamic efficiency perspective, intersections of factor price frontiers are irrelevant to the choice of techniques. Because every change in technique involves a temporary loss or gain in both profit and per capita consumption within the transition period, its profitability should be calculated by applying the present value criterion to the entire change process. With only one transition period, there is generally a unique interest rate at which the change in technique breaks even. This critical interest rate is generally the same for a profit maximizing firm as for a central planner who seeks to maximize consumption per unit of work. This critical interest rate does not generally coincide with either of the interest rates at which the factor price frontiers intersect. Therefore, common proofs of the socalled reswitching phenomenon do not stand up well from a dynamic efficiency perspective.

Suggested Citation

  • van Suntum, Ulrich, 2008. "Dynamic efficiency and reswitching," CAWM Discussion Papers 8, University of Münster, Münster Center for Economic Policy (MEP).
    • Handle: RePEc:zbw:cawmdp:8
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D2 - Microeconomics - - Production and Organizations
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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