Staff Report 126

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The Firm and the Plant in General Equilibrium Theory

Andreas Hornstein
Edward C. Prescott - Senior Monetary Advisor

Published November 1, 1989

The general equilibrium formulations are developed for two important economic environments. The first environment is the Lucas managerial span-of-control theory of the firm. It is shown that, in the spirit of McKenzie, the aggregate production set can be characterized by a convex cone. The second environment permits both the number of hours plants are operated and the number of workers operating them to be varied. For empirically reasonable elasticities of substitution, equilibrium is characterized by employment-consumption lotteries.

Published In: General Equilibrium, Growth, and Trade (Vol 2, 1993, pp. 393-410)

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