On a Continuous Time Adjustment Cost Model of the Firm

The firm can adjust some of its input factors freely in response to changes in demand. The change of other inputs factors requires other costs. By this adjustment cost is meant that in addition to the direct cost of buying new capital there are also cost of installation, cost of reorganizing, cost of retraining etc. The presence of the adjustment cost means that investment decisions can play an active role in the model. The paper is concerned with the model of optimal behavior of the firm facing changes in demand of its output. In the model we consider that the marginal adjustment cost is increasing function of the level of investment and we therefore use a convex adjustment cost function of the level of investment.