The Firm and the Plant in General Equilibrium Theory

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. *This paper was presented at the Conference on General Equilibrium and Growth: The Legacy of Lionel McKenzie, held May 5–7, 1989, at the University of Rochester. We would like especially to thank Lionel McKenzie and an anonymous referee for helpful comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.