Egwald Economics: Microeconomics

Production Functions

by

Elmer G. Wiens

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Cobb-Douglas | CES | Generalized CES | Translog | Diewert | Translog vs Diewert | Diewert vs Translog | Estimate Translog | Estimate Diewert | References and Links

G. Generate CES Data and Estimate a Translog Production Function

1. The three factor CES production function is:

q = A * [alpha * (L^^-rho) + beta * (K^^-rho) + gamma *(M^^-rho)]^^(-nu/rho) = f(L,K,M).

where L = labour, K = capital, M = materials and supplies, and q = product. The parameter nu is a measure of the returns to scale, while the parameter rho yields the elasticity of substitution sigma = 1/(1 + rho).

2. The three factor Translog production function is:

ln(q) = ln(A) + aL*ln(L) + aK*ln(K) + aM*ln(M) + bLL*ln(L)*ln(L)+ bKK*ln(K)*ln(K) + bMM*ln(M)*ln(M)
+ bLK*ln(L)*ln(K) + bLM*ln(L)*ln(M) + bKM*ln(K)*ln(M) = f(L,K,M).

where L = labour, K = capital, M = materials and supplies, and q = product.

3. The coefficients of the translog production function vary with sigma and nu.

The program will generate a set of 208 observations, and use ordinary least squares to estimate the Translog coefficients.

The observations are the CES function's cost-minimizing combinations of L, K, and M at the factor prices, wL, wK, wM for values of q from 15 to 40.

The factor prices are distributed about the base factor prices by adding a random number distributed uniformly in the domain [-2, 2]. The program generates the CES cost-minimizing values of L, K, and M for each combination of base prices for each value of q in the [15, 45] domain.

Set the parameters below to re-run with your own CES parameters.

Restrictions: .5 < nu < 2; .2 < sigma < 5; .1 < alpha, beta, gamma < .9
sigma = 1 → nu = alpha + beta + gamma (Cobb-Douglas)
sigma < 1 → inputs complements; sigma > 1 → inputs substitutes

The table below displays the CES function's cost-minimizing combinations of L, K, and M at the factor prices, wL, wK, wM for values of q from 15 to 40.
The column est q = f(L, K, M) (using the translog function as estimated), where L, K, and M are the CES function's cost-minimizing combinations.