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Adjustment Costs, Uncertainty, and the Level of Activity
Author(s) -
Eeckhoudt Louis,
Treich Nicolas
Publication year - 2003
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2003.tb00545.x
Subject(s) - newsvendor model , economics , microeconomics , simple (philosophy) , econometrics , business , supply chain , marketing , philosophy , epistemology
What is the effect of adjustment costs on economic activity? This is an important question that is still debated either at the political or the academic level. We consider a simple model where basically two effects come into play: Adjustment costs decrease current activity but may help maintain future activity. We examine their relative strength, first in a model with uncertain prices and then in a model with demand uncertainty (newsboy problem).