Efficient and Optimal Utilization

of Capital Services
By GuiLLERMO A. CALVO*
In recent times there has been renewed
interest in the factors determining capacity utilization in connection with the trade
cycle.' However, little attention has been
paid to the question of the desirability of
different rates of capacity utilization. Tn
the present paper I discuss this problem
in the context of the neoclassical one-sector model when capital depreciates as a
function of the intensity at which it is
operated.

(3)(a)

F linear homogeneous, and continuous for all S > 0, N > 0

(b) F(0, A-) ^ 0

(c)
(d)
(e)

F{S, 0) = 0
dF
dS
dF
dN

>0
> 0

for all S, N > 0

(f)

I. The Model
Let us call:
iiLt= capital services per unit of time
available at t (proportional to capital stock)
5t= capital services per unit of time
utilized at t
Li = labor services per unit of time available at t
iVt = labor services per unit of time used
at t
Ft = output at t
Ct = consumption at t
5t=rate of depreciation per unit of
available capital services per unit
of time at t

(h)

Urn

dF

= X

if iV > 0

50 dS

(4)
(5)
(6)

0 < wt < 1
0 < N, < L,
DK, = V, - Ct - 5,Ku

Ct > 0

Furthermore,
(7)

5 - g{w)

for nU 0 < m < 1

where

We assume:

(8)(a)

g{m) is twice-differentiable at every

0 < m< 1

DLt
(1)
= M, exogenously given, n>0 Lo>O

(b)

g'(m) > 0

for all 0 < m < 1

(2)

(c)

g"{m) > 0

foraUO<m< 1

Y = F{S, N)

for all 5 > 0, .V > 0

(d) lim g{m) =

* Assistant professor, Columbia University. The

present work was completed while I was visiting professor at the Centro de Investigacioiies para el Desarrollo
{C.I.D.}. Bogota, Colombia, during 1970.
See Robert Lucas, and Paul Taubman and Maurice
Wilkinson.

Restricting m to belong to the closed

unit interval is equivalent to saying that
capital services used are smaller than or
181

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THE AMERICAN ECONOMIC REVIEW

equal to its availability and that they cannot be negative; m can be given at least
two rather different economic interpretations:
a) It can be a measure of the speed
at which machines are operated per unit of
time with constant labor services used per
unit of time; or
b) it can measure the share of time
per unit of time at which machines are
operated, given a capital-labor services
ratio. In other words, it may provide a
model for the choice of the number of
shifts, when the ratio of factor services is
the same for every shift.
The latter is perhaps better understood
if we define iV(X', mK/N) as the flow of
labor services required to operate capital
at full capacity, i.e., when S=K, with
capital-labor services ratio equal to mK/N.
Clearly, then,
K
mK

MARCH 1975

The rate of depreciation 5 is by (8) a

positive strictly convex function of m;
positivity of 5 is a natural assumption to
make, whereas convexity is assumed for
the sake of analytical convenience; the
condition lim^^i g(m) = oo is innocuous
and it will be used to guarantee that
efficient m's are less than unity; however,
there may be some justification for it if
we interpret m= 1 as the case where machines are operated at a maximum speed
or without stopping for repairs (recall
interpretations (a) and (b) above).
II. Efficient and Competitive
Utilization Ratios
By (3) and (5) we can assure that it is
efficient^ to employ all the available labor
services;^ thus Nt= Z-t for every t.
Let us define
Kt

= = ratio of available capital services

* to available labor services at time t

and, hence.
mN = N

Therefore, recalling (3a), output when

total capital services are K and the factor
services ratio equals mK/N becomes

So we can write, recalling (3),

(9)

where

f{x) = F(.v, 1)

Moreover, by (3),*
(10)(a)

where in view of our previous definitions,

F(K, N) is the full capacity output when
the factor services ratio equals mK/N and
the total supply of capital services is K.
So m can be conceived as the share of the
maximum output obtained when machines
are operated m parts of a unit of time per
unit of time with a given factor services
ratio. In what follows, m will be referred
to as the utilization ratio.

yt =/(mtAt)

f(x) is continuous for all i > 0

(b)

/(O) = 0

(c)

fix) > 0

(d)

fix)

<0

for all :r > 0

* Aa usual we call efficient any feasible per capita consumption path such that there is no other feasible per
capita path yielding larger consumption (for a nonnull set of points of the real line).
' Notice that this would not necessarily be the case if
isoquants were L-shaped.
' TjaJUng Koopmans, p. 236, has shown that if equations (3a-g) hold, there is some x such that/(3:)<a: for
all Ji:>f. The latter together with (10c and d) readily
implies (lOf).

(e)

183

CALVO: CAPITAL SERVICES

VOL. 65 NO. 1

lim/'(:c) = >
I0

(f) lim \j{x) - Ka;] = -

i-O

Due to the fact that we are in an essentially one-good economy, static efficiency
suffices to determine the value of Wt.
Clearly, we will choose m so as to
(11)

max [/MO - g{m)h]

l>m>0

By (8) and (10) there exists a unique interior solution. It satisfies the following
first-order necessary condition when &i>0.
(12)

) = g'im)

In other words, efficient utilization of

capital at a given point in time t calls for
equating the marginal productivity,
f imkt), to the marginal cost of capital
services at t, g'im). Figure 1 shows how
the efficient level of mindicated by
m*{ki)is determined. Notice that since
f"<O,f
will shift to the left in Figure 1
as kt is increased; hence,
(13)

dm*ik)
dk

Moreover, it is clear that profit maximization implies mt=m*ik). Hence, by (12)

and (14), we get

By implicit differentiation of (16) we

obtain
1

lim m*ik) = 1

On the other hand, in a competitive

situation the (instantaneous) real rate of
interest r should in equilibrium be equal
to the net marginal productivity of the
capital stock, i.e.,
(15)

FIGURE 1

< 0

Thus, the efficient utilization ratio decreases as the ratio of the available capital
to labor services k is increased. To put it
differently, the richer is this idealized
economy in terms of available capital
services per capita, the smaller will be the
(efficient) share of total available capital
services utilized.
By (8) and (12) it readily follows
(14)

-m'flt.)

- g(mt) =

(17)

> 0

i.e., the larger is the rate of interest the

larger will also be the utilization ratio.
An interesting implication of our assumptions is that by (16), the utilization
ratio can be determined as soon as u is
known, and that calculations can be performed by using function g exclusively.
Finally, differentiating (12) totally with
respect to k yields
(18)

dm*ik)
--

dimk)
dk

dk

and since dm*{k)/dk<0, we get

(19)

d{mk)
dk

> 0

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THE AMERICAN ECONOMIC REVIEW

MARCH 197S

which means that the ratio of capital

services used to the labor services used, mk,
is positively correlated to the corresponding ratio of available factor services k.
Notice that this is obtained despite the
fact that the efficient utilization ratio
m*{k) is negatively correlated with k
(recall (13)).
III. Optimal Utilization Ratios
In view of (l)-(7), the notation introduced in Section II, and assuming efficiency, one can write without loss of
generality,
(20) Dkt = fim^kO - [gimt)-\-n]kt - c^
= h{kt) - Ct

where
(21) kik) ^f(m*ik)k) - [gim*ik)) + n]k
Clearly, fik)-nk>fimk)-[5-\-n]k,
hence, by (lOf),
(22)

lim k{k) = - 00

On the other hand, recalling (12), for all

we have
(23)

k'ik)=fim*ik)k)[m*'ik)k-\-m*ik)]
-g'im*ik))m*'ik)k-g{tn*ik))-n
=fim*ik)k)m*{k) - gim*ik)) - n
=

g'{m*ik))m*{k)-gim*ik))-n

hence, by (13) and (23), for all A>0,

(24) h"{k) = g"im*{k))m*ik)m*'ik) < 0
For any given 0 < m < l , (10) can be
used to show that there is some ^ > 0 such
that for all 0 < -fe < A
(25)

FiGUKE 2

and

fimk) - [gim) -f n]k > 0

while
(26) fimk) - [g(m) -j- n]k = 0 for * - 0
Hence, since m*ik) solves (11), then (22),
(24), and (25) imply the existence of
some k>0 such that

(27)

hik) > 0 if and only if 0 < k < k

Furthermore, by (8b) and (26),

(28)

hiO) = 0

Figure 2 depicts a function satisfying (24),

(27), and (28).
We are now ready to prove the first central result of this section.
PROPOSITION 1: There exists one and
only one golden rule capital-labor ratio, kg.
The corresponding unique golden rule utilization ratio mg satisfies
(29)

g'im)m. - gim) = n

PROOF:
From (20), golden rule consumption per
capita Cg satisfies
(30)

= max hik) =
*>o

By (24), (27), and (28), k exists and is

unique. Also hikg)>0 (see Figure 2).
Clearly, by (23) and (30),

CALVO: CAPITAL SERVICES

VOL. 65 NO. 1

(31)
- n
By (8), g'im)mgim) is a strictly increasing function of m, 0 < m < l ; hence, there
is a unique m for which (31) holds. Existence of Mg follows from the fact that
mg=m*ike) for which existence has been
proved above.
Remark: Equation (16) above and Proposition 1 imply that, as usual, the (instantaneous) real rate of interest in the golden
rule path equals the rate of growth of
labor. In fact, given the latter and the
depreciation function, one can use (16) to
determine m^. The golden rule value of the
utilization ratio becomes, under the present assumptions, completely independent
of the production function.
The present model can easily be suited
to study optimal utilization ratios in an
optimal growth plan. Consider the following problem:
(32)

'L'"^

>0

max

subject to Dki=hikf)
*t > 0,

Ct > 0

for every t

ko given

where is assumed to be strictly concave

and increasing, and to satisfy lim^^o uic)
= =0. P'unctions associated with the
solution of (32) will be called optimal. Let
us define k{a) as the value of k such that
(see Figure 2)

185

Optimal path of k's; kt converges monotonically to kia). The associated mt=m*(^t)

converges monotonicaUy to m*ik{(r)).
PROOF:
Existence and monotonic convergence
of k will not be proved here since it involves a trivial application of results obtained by Koopmans, for example.
Monotonicity and convergence of mt
follows directly from the properties of the
optimal path of ^'s and (13).
Remark: Since by (13) there is an inverse
relationship between m and k, we have
that if in an optimal plan ko<kia-)[ko
> k{(T)], then m.o> w*(i(ff)) [nto < m*(/^(o-))];
therefore optimal ki increases (decreases)
and optimal Wt decreases (increases) over
time. By (23) and i33) we have
(34) c = h'

= g'im*ikia))m*ikia))
- gim*iHc))) - n

But, by a similar argument as in the previous Remark, one can show that there is
one and only one m for which (34) holds
true. The asymptotic value of m is again
wholly independent of the production
function.
In view of (16) and the results of this
section it would be interesting to fmd out
about the family of functions s(m) satisfying (8) such that
(35) z'{m)m zim) = g'(m)m g(m)
for every 0 < w < 1
Tt can easily be shown that every function
belonging to that family can be expressed
as

h{<j) exists and it is unique. Existence is

(36) s(m) =g{7n)-\-bm, for some b such that
shown in the Appendix; uniqueness, on
bm<g(m),
for all 0 < w < l
the other hand, follows from (24).
PROPOSITION 2: For any initial capitallabor ratio k>k[i>0,^ there exists a unique
* Recall the definition of k in (27).

Therefore, golden rule and optimal utilization ratios are not going to be affected by
changing the depreciation function from
g to z (satisfying (8)) as long as z'im)

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MARCH 1975

THE AMERICAN ECONOMIC REVIEW

g'{m) = b-constant

for ail

0<m<l,

lim

(A8)
or equivalently,

APPENDIX

LEMMA: Let a->0; then there is some k>0

such that h'ik) = a.
PROOF:
Taking into account (22), (24), and (27),
it is sufficient to show
lim h'ik) = 00

(Al)

= 1

(A8')

^ence,

lim
m-*i

d In gim)

^
^n
for every e>0,

0<m(e)<l, such that

lim [g'im)m gim)] = oo

We will show that (A2) holds given that g

satisfies (8). First notice that
(A3)

dm

dm
for all 1 > m > m(e)

Therefore,
(AlO)

In gim) < In githit))

-{ i\-\-e)im

- 7h{t))

for all 1 > m > fhie)

lg'im)m-gim)] = g"
which is equivalent to

Suppose now that (A2) is false. Then by

(A4)

.V,

there is some

d In gim)

(A9)

By (14) and (23), the latter is equivalent to

(A2)

= 1

dm

lim [g'(m)m - gim)] = B,

B a real number

(All) g(m

exp
for all 1 > m >

Hence,
(A12) gil)<g{rh{e)) exp

Mojeover, by (A3)
(A5)

B> - g(0)

Due to C8c and d) there is some m < l such

that
(A6)(a)

gim) > 0

(b) gim) is increasing for all 1 > w > m

Thus (A4) is equivalent to

g'im)m

"I

gim)

^^7 ' 1

= B

The latter implies, recalling (8d), (A5), and

(A6),

contradicting (8d). Therefore (A2) holds

and the Lemma follows.
REFERENCES
T. C. Koopmans, "On the Concept of Optimal
Economic Growth," in The Econometric Approach to Development Planning, Amsterdam 1965.
R. E. Lucas, Jr., "Capacity, Overtime and Empirical Production Functions," Amer. Econ.
Rev. Proc, May 1970, 60, 23-27.
P. Taubman and M. Wilkinson, "User Cost,
Capital Utilization and Investment Theory,"
Int. Econ. Rev., June 1970, 11, 209-15.