Firms' cost functions: A reconstruction

Three empirical stylized facts characterize a firm's cost functions: AVC is generally horizontal; scale economies are often important; and capital usa ge (as well as labor usage) varies with the rate of output. In contrast our standard theory of diminishing marginal products, variable proportions, an d U-shaped unit cost curves does not adequately reflect these stylized fact s of industrial reality. Explicit distinction between capital stocks and ca pital flows allows a remodeling of a firm's cost curves to conform with the se empirical facts.