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Oxford Economic Papers Advance Access published online on October 16, 2007
Oxford Economic Papers, doi:10.1093/oep/gpm037
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© Oxford University Press 2007 All rights reserved

Intrinsic comparative statics of a general class of profit-maximizing rate-of-return regulated firms

Michael R. Caputo* and M. Hossein Partovi{dagger}

*Department of Economics, University of Central Florida, Orlando, FL 32816–1400, USA; e-mail: mcaputo{at}bus.ucf.edu (corresponding author)
{dagger}Department of Physics and Astronomy, California State University, Sacramento CA 95819–6041, USA; e-mail: hpartovi{at}csus.edu


  Abstract

An exhaustive comparative statics analysis of a general rate-of-return regulated, profit-maximizing model of the firm is carried out under a minimal set of assumptions. The resulting intrinsic comparative statics are contained in a positive semi-definite matrix. Each element of this matrix consists of a product of the A-J effect term and a Slutsky-like expression, thereby permitting the familiar interpretation of a compensated price change. The minimal set of assumptions allows a range of anomalous behavior that includes, inter alia, a reversal of the sign of the A-J effect and an increase in the use of an unregulated factor as a result of a compensated own-price increase. The implications of additional assumptions for the mathematical structure of the model and its economic consequences are discussed, and the equivalency relations among those assumptions are delineated. Throughout, mathematical results of the analysis are interpreted with a view to elucidating their intuitive economic significance.

Key Words: JEL classifications: • C60 • D21 • L51


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