Asset Rentals and a Theory of the Intermediate-Run Cost Function

Abstract

Despite the cautions of Alfred Marshall, modern economics depends heavily upon a sharp dichotomy between short-run and long-run cost functions.1 The highly stylized short-run curves have been particularly resistant to change, with all innovations confined to questions of asset divisibilities and the prevalence of fixed technological coefficients between productive factors.2 Yet, despite the elegance and widespread acceptance of the short-run and long-run cost functions as commonly portrayed, there are important questions upon which they shed little light. For example: the make or buy decision; to integrate vertically or horizontally; the pattern and phasing of the acquisition and disposal of assets. I submit that, to fully analyze and describe these and other phenomena, a model of the intermediate-run cost function is needed