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The rational expectations approach to adjustment cost models for factor demand is used to develop a dynamic model for US cigarette manufacturing. In the present study dynamic production modelling is extended to the case of multiple outputs. This analysis is the first to address cigarette manufacturing allowing for the possible influence of quasi-fixed factors, multiple outputs and rational expectations. Short-, intermediate-, and long-run factor demands are estimated and the presence of adjustment costs tested for in US cigarette manufacturing. The results indicate that there are significant adjustment costs associated with adjusting tobacco stock but not with adjusting the capital stock. Cigarettes produced for exports appear to differ in their marginal cost of production from cigarettes produced for sale in the US market.
This paper makes use of the adjustment cost hypothesis to develop and compare the results of two dynamic input demand models applied to the U.S. cigarette manufcturing. One of the models presented in this paper is the flexible accelerator model and the other is the rational expectation model. The results obtained from the estimation of both models support the hypothesis that tobacco stock is a quasi-fixed input but the hypothesis that capital stock is a quasi -fixed input is not supported. The results of the rational expectations model support the hypothesis that capital and tobacco stocks together are subjected to adjustment costs. Note that this hypothesis cannot be tested by the flexible accelerator model.
This paper presents a dynamic model of the industrial demands for structures, equipment, and blue- and white-collar labor. Our approach is consistent with producers holding rational expectations and optimizing dynamically in the presence of adjustment costs, yet it permits generality of functional form regarding the technology. We represent the technology by atranslog input requirement function that specifies the amount of blue-collar labor (a flexible factor) the firm must hire to produce a level of output given its quantities of three quasi-fixed factors that are subject to adjustment costs: non-production (white-collar) workers, equipment, and structures.A complete description of the production structure is obtained by simultaneously estimating the input requirement function and three stochastic Euler equations.We apply an instrumental variable technique to estimate these equations using aggregate data for U.S. manufacturing. We find that as a fraction of total expenditures, adjustment costs are small in total hut large on the margin,and that they differ considerably across quasi-fixed factors. We also present short- and long-run elasticities of factor demands.
Cigarettes are under political attack at all_levels of government in the United States. From Washington, D. C. to state capitals to local govern ments, proposals abound to increase the cigarette excise tax, to impose smoking bans, to prevent cigarette advertising, to restrict the sale of cigarettes through vending machines, to cut off the export of cigarettes, to earmark the cigarette excise tax for health programs, to divest the stock of cigarette companies, and so on. And all of these are purportedly being advocated in the name of health. Undergirding and abetting the health argument is an economic argument that claims to place a value of up to $100 billion per year on the alleged health costs of smoking to the American economy, which is more than $3 per pack of cigarettes smoked. As our title suggests, our interest lies in the economics of smoking and not in the health issues surrounding smoking. We are professional economists and not medical scientists. We will focus on what, if any, economic consequences arise for nonsmokers when smokers smoke. For purposes of our discussion, we simply accept the premise that smoking damages health and proceed with our analysis. Since we have not studied the issue ourselves, we have no way of knowing whether such a premise is true. But it really does not matter for getting the economics of smoking right. The important point resides in who pays for whatever to smoking.