The name is absent



PEDRO PABLO ALVAREZ LOIS

a symmetric equilibrium in prices, avoiding in this manner price aggregation dif-
ficulties. It is worthwhile to point out that this assumption on the price behavior
of input firms should not have important implications on the manner in which the
economy responds to aggregate shocks: since prices are announced at the time
shocks are known, they are perfectly flexible in this sense.

The price decision is static and the same rule will be followed by all firms given
that,
ex-ante, all of them are identical; that is, Pt = Pjd- Consequently, each firm
chooses a price in order to maximize current period expected profits,

(2.13)            Pt ≡ arg max Eυ [PtYfit -(1 + ⅛ ) WtLdjd]

which by (2.12) is
(2.14)
where
Yjd is the level of inputs-goods produced by firm j. The particular amount of
those input-goods produced will depend on the demand shock faced by each firm.
Such a demand is derived from expression (2.2) or more specifically

Pt ≡ arg max Ev

(1 + O∏q∖

Λ¾ j't


.   . hPΛ fvt . .    - Γ

(2.15)         Ev(Yjd) = 51 Yt vdF(v) + Yt dF (t>)

1f√ √v             Jvt

Taking into account these considerations, the optimal price decision can be charac-
terized by the following result:

Lemma 2 (Intermediate-Goods Pricing). The price decision of any input firm j
at date t adopts the following expression:

(2.16)


Ft = fl _ 1 A ^1 (1 + ⅞) W*
t ∖    eπ (¾) J      AtXfi

where π (¾) represents the probability of excess capacity in the economy, that is,
π (¾) is a weight measure of the proportion of firms for which demand is smaller
than their productive capacity,

(2.17)


7Γ(¾)


Ev (Yt)


Vt

vdF(v)


Notice that π (v) depends only on v, as becomes clear from the combination of
equations (2.15) and (2.3) above,

Γ «dF (t>)
(2.18)                π ¾ =       ⅛-------=------

fvt t>dF (v) + vt f.v dF (v)

The pricing mechanism resulting from (2.16) implies that intermediate firms set
their price as a mark-up over the marginal cost.11 The mark-up rate depends
negatively on the (absolute) value of the price elasticity of expected sales, which
is defined as the elasticity of expected sales to expected demand, π
(v), times the
price elasticity of expected demand, e. This means that when
π (v), the probability
of a sales constraint, is large, that is, when more input firms are Iikelely to produce

11The derivation of this condition supposes that each monopolistic firm only considers the
direct effect of its price decision on demand and neglects all indirect effects (e.g. the effects
through
yt). This approximation is reasonable in a context where there is a continuum of firms.



More intriguing information

1. The growing importance of risk in financial regulation
2. Place of Work and Place of Residence: Informal Hiring Networks and Labor Market Outcomes
3. The name is absent
4. Technological progress, organizational change and the size of the Human Resources Department
5. The name is absent
6. Subduing High Inflation in Romania. How to Better Monetary and Exchange Rate Mechanisms?
7. STIMULATING COOPERATION AMONG FARMERS IN A POST-SOCIALIST ECONOMY: LESSONS FROM A PUBLIC-PRIVATE MARKETING PARTNERSHIP IN POLAND
8. Large-N and Large-T Properties of Panel Data Estimators and the Hausman Test
9. Smith and Rawls Share a Room
10. The Functions of Postpartum Depression
11. Can a Robot Hear Music? Can a Robot Dance? Can a Robot Tell What it Knows or Intends to Do? Can it Feel Pride or Shame in Company?
12. Inflation Targeting and Nonlinear Policy Rules: The Case of Asymmetric Preferences (new title: The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences)
13. Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules
14. The name is absent
15. The name is absent
16. The Role of State Trading Enterprises and Their Impact on Agricultural Development and Economic Growth in Developing Countries
17. The name is absent
18. Growth and Technological Leadership in US Industries: A Spatial Econometric Analysis at the State Level, 1963-1997
19. CAPACITAÇÃO GERENCIAL DE AGRICULTORES FAMILIARES: UMA PROPOSTA METODOLÓGICA DE EXTENSÃO RURAL
20. The name is absent