This paper studies the relationship between fixed and variable costs in a nonlinear model with individual and time varying random coefficients.
The authors show that there is a trade-off between fixed and variable costs, such that a negative correlation exists between the two.
They also develop a method for estimating the covariance between the fixed and variable cost coefficients, which can be used to discriminate between the case of optimally and nonoptimally allocated fixed input.
Here are some questions and answers about the paper:
- What is the trade-off between fixed and variable costs?
- How can the covariance between the fixed and variable cost coefficients be estimated?
- What can the covariance be used to discriminate between?
Here are the answers to the questions:
- The trade-off between fixed and variable costs is that a higher fixed cost leads to a lower variable cost.
- The covariance between the fixed and variable cost coefficients can be estimated using a method developed by the authors.
- The covariance can be used to discriminate between the case of optimally and nonoptimally allocated fixed input. In the case of optimal allocation, the covariance will be zero. In the case of nonoptimal allocation, the covariance will be negative.