Resource Allocation and the Regulated Firm: A Reply to Bailey and Malone

In their recent article, Elizabeth Bailey and John Malone deduce the optimal capital-labor ratios for firms with four different management objectives (maximum profit, return on investment, sales, and output), given that these firms are subject to four types of regulatory constraint (profit no greater than a fair return on investment, on cost, on output, and profit no greater than some absolute upper bound). This note points out some flaws in their analysis, and derives the correct results by more elementary methods.