Egwald Economics - Cost Functions: Generalized CES-Translog Cost Function

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Egwald Economics: Microeconomics

Cost Functions

by

Elmer G. Wiens

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M. Generalized CES-Translog Cost Function

This web page replicates the procedures used to estimate the parameters of a Translog cost function to approximate a CES cost function. To determine the Translog's efficacy in estimating varying elasticities of substitution among pairs of inputs, on this web page we approximate a Generalized CES cost function with the Translog cost function.

Unlike the CES cost function, the Generalized CES cost function is not necessarily homothetic. Consequently, when we estimate the Translog cost function directly, we do not impose the homothetic conditions as we did when we approximated the CES cost function with the Translog cost function.

The three factor Translog (total) cost function is:

ln(C(q;wL,wK,wM)) = c + cq * ln(q) + cL * ln(wL) + cK * ln(wK) + cM * log(wM)
+ .5 * [dqq * ln(q)^² + dLL * ln(wL)^² + dKK * ln(wK)^² + dMM * ln(wM)^²]
+ .5 * [(dLK + dKL) * ln(wL)*ln(wK) + (dLM + dML) * ln(wL)*ln(wM) + (dKM + dMK) * ln(wK)*log(wM)]
+ dLq * ln(wL)*ln(q) + dKq * ln(wK)*ln(q) + dMq * ln(wM)*ln(q) (**)

an equation linear in its 18 parameters, c, cq, cL, cK, cM, dqq, dLL, dKK, dMM, dLK, dKL, dLM, dML, dKM, dMK, dLq, dKq, and dMq.

We shall use two methods to obtain estimates of the parameters:

À1: Estimate the parameters the cost function by way of its factor share functions — requires data relating output quantities to (cost minimizing) factor inputs, and input prices,

À2: Estimate the parameters of the cost function directly — requires data relating output quantities to total (minimum) cost and input prices.

We shall use the three factor Generalized CES production function to generate the required cost data, yielding a data set relating output, q, and factor prices, wL, wK, and wM, [randomized about the base prices (wL*, wK*, wM*)] to the Generalized CES cost minimizing factor inputs, L, K, and M. The base factor prices and the randomizing distribution are specified in the form below.

The three factor Generalized CES production function is:

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

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

The parameter nu permits one to adjust the returns to scale, while the parameter rho is the geometric mean of rhoL, rhoK, and rhoM:

rho = (rhoL * rhoK * rhoM)^^1/3.

If rho = rhoL = rhoK = rhoM, we get the standard CES production function. If also, rho = 0, ie sigma = 1/(1+rho) = 1, we get the Cobb-Douglas production function.

Generalized CES Elasticity of Scale of Production:

ε_LKM = ε(L,K,M) = (nu / rho) * (alpha * rhoL * L^^-rhoL + beta * rhoK * K^^-rhoK + gamma * rhoM * M^^-rhoM) / (alpha * L^^-rhoL + beta * K^^-rhoK + gamma * M^^-rhoM).

See the Generalized CES production function.

À1: Estimate the factor share equations separately.

Taking the partial derivative of the cost function, C(q;wL,wK,wM), with respect to an input price, we get the (nonlinear) factor demand function for that input:

∂C/∂wL = L(q; wL, wK, wM),

∂C/∂wK = K(q; wL, wK, wM),

∂C/∂wM = M(q; wL, wK, wM)

The (total) cost of producing q units of output equals the sum of the factor demand functions weighted by their input prices:

C(q;wL,wK,wM) = wL * L(q; wL, wK, wM) + wK * K(q; wL, wK, wM) + wM * M(q; wL, wK, wM),

Write the factor share functions as:

sL(q;wL,wK,wM) = wL * L(q; wL, wK, wM) / C(q;wL,wK,wM) = wL * ∂C/∂wL / C(q;wL,wK,wM) = (∂ln(C)/∂wL )/ (∂ln(wL)/∂wL) = ∂ln(C)/∂ln(wL),

sK(q;wL,wK,wM)= wK * K(q; wL, wK, wM) / C(q;wL,wK,wM) = wK * ∂C/∂wK / C(q;wL,wK,wM) = (∂ln(C)/∂wK )/ (∂ln(wK)/∂wK) = ∂ln(C)/∂ln(wK),

sM(q;wL,wK,wM)= wM * M(q; wL, wK, wM) / C(q;wL,wK,wM) = wM * ∂C/∂wM / C(q;wL,wK,wM) = (∂ln(C)/∂wM )/ (∂ln(wL)/∂wM) = ∂ln(C)/∂ln(wM).

The Translog factor share functions are:

sL(q;wL,wK,wM) = cL + dLq * ln(q) + dLL * ln(wL) + dLK * ln(wK) + dLM * ln(wM),

sK(q;wL,wK,wM) = cK + dKq * ln(q) + dKL * ln(wL) + dKK * ln(wK) + dKM * ln(wM),

sM(q;wL,wK,wM) = cM + dMq * ln(q) + dML * ln(wL) + dMK * ln(wK) + dMM * ln(wM),

three linear equations in their 15 parameters.

Since it is likely that, as measured numerically, dLK != dKL, dLM != dML, and dKM != dMK, these distinctions are maintained in the factor share equations.

Having obtained the unrestricted estimates of the coefficients of the factor share functions, we shall compute the restricted least squares estimates with dLK = dKL, dLM = dML, and dKM = dMK.

I. Stage 1. Obtain the estimates of the fifteen parameters of the three factor share equations using linear multiple regression.

Stage 2. Substitute the values of these parameters into the Translog cost function, and estimate its remaining three parameters, c, cq, and dqq, using linear multiple regression.

II. The estimated coefficients of the Translog cost function will vary with the parameters nu, rho, rhoL, rhoK, rhoM, alpha, beta and gamma of the Generalized CES production function.

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

The restrictions ensure that the least-cost problems can be solved to obtain the underlying Generalized CES cost function, using the parameters as specified.
Intermediate (and other) values of the parameters also work.

Restrictions:
.8 < nu < 1.1;
-.6 < rhoL = rho < .6;
-.6 < rho < -.2 → rhoK = .95 * rho, rhoM = rho/.95;
-.2 <= rho < -.1 → rhoK = .9 * rho, rhoM = rho / .9;
-.1 <= rho < 0 → rhoK = .87 * rho, rhoM = rho / .87;
0 <= rho < .1 → rhoK = .7 * rho, rhoM = rho / .7;
.1 <= rho < .2 → rhoK = .67 * rho, rhoM = rho / .67;
.2 <= rho < .6 → rhoK = .6 * rho, rhoM = rho / .6;
rho = 0 → nu = alpha + beta + gamma (Cobb-Douglas)
4 <= wL* <= 11, 7<= wK* <= 16, 4 <= wM* <= 10

Generalized CES Production Function Parameters

nu:

rho:

Base Factor Prices

wL*

wK*

wM*

Distribution to Randomize Factor Prices

Use [-2, 2] Uniform distribution
Use .25 * Normal (μ = 0, σ² = 1)

The Generalized CES production function as specified:

q = 1 * [0.35 * L^^{- 0.17647} + 0.4 * K^^{- 0.11823} + 0.25 *M^^{- 0.26339}]^^(-1/0.17647) = f(L,K,M).

The factor prices are distributed about the base factor prices by adding a random number distributed uniformly in the [-2, 2] domain.

III. For these coefficients of the CES Generalized production function, I generated a sequence (displayed in the "Generalized CES-Translog Cost Function" table) of factor prices, outputs, and the corresponding cost minimizing inputs. Then I used these data to estimate the coefficients of each factor share equation separately:

QR Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
cL	0.360562	0.001	539.723
dLq	-8.6E-5	0	-1.377
dLL	0.034449	0	306.922
dLK	-0.013613	0	-64.399
dLM	-0.020341	0	-244.854

R2 = 0.9998

R2b = 0.9998

# obs = 31

QR Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
cK	0.271933	0.001	366.533
dKq	0.020689	0	296.813
dKL	-0.013868	0	-111.257
dKK	0.031013	0	132.108
dKM	-0.016974	0	-183.983

R2 = 0.9998

R2b = 0.9998

# obs = 31

QR Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
cM	0.367505	0.001	486.688
dMq	-0.020603	0	-290.403
dML	-0.020581	0	-162.223
dMK	-0.0174	0	-72.823
dMM	0.037315	0	397.388

R2 = 0.9999

R2b = 0.9999

# obs = 31

The three estimated factor share functions are:

sL(q;wL,wK,wM) = 0.360562 + -8.6E-5 * ln(q) + 0.034449 * ln(wL) + -0.013613 * ln(wK) + -0.020341 * ln(wM),

sK(q;wL,wK,wM) = 0.271933 + 0.020689 * ln(q) + -0.013868 * ln(wL) + 0.031013 * ln(wK) + -0.016974 * ln(wM),

sM(q;wL,wK,wM) = 0.367505 + -0.020603 * ln(q) + -0.020581 * ln(wL) + -0.0174 * ln(wK) + 0.037315 * ln(wM)

As estimated, generally dLK != dKL, dLM != dML, and dKM != dMK: Young's Theorem doesn't hold without constraints across equations.

Note: C(q;wL,wK,wM) linear homogeneous in factor prices implies:

1 =? cL + cK + cM = 0.360562 + 0.271933 + 0.367505 = 1
0 =? dLL + dLK + dLM = 0.034449 + -0.013613 + -0.020341 = 0.000495
0 =? dKL + dKK + dKM = -0.013868 + 0.031013 + -0.016974 = 0.000171
0 =? dML + dMK + dMM = -0.020581 + -0.0174 + 0.037315 = -0.000666
0 =? dLq + dKq + dMq = -8.6E-5 + 0.020689 + -0.020603 = -0

IV. The Restricted Factor Share Equations.

Having obtained the unrestricted estimates of the coefficients of the factor share functions, we compute the restricted least squares estimates with dLK = dKL, dLM = dML, and dKM = dMK.

QR Restricted Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
cL	0.361195	0.000475	760.541095
dLq	-8.2E-5	6.7E-5	-1.238609
dLL	0.034445	0.000119	289.174167
dLK	-0.013808	0.000105	-131.042285
dLM	-0.020419	7.1E-5	-287.995078
cK	0.271834	0.000692	392.882858
dKq	0.020702	6.6E-5	313.28544
dKL	-0.013808	0.000105	-131.042285
dKK	0.031027	0.000225	138.150709
dKM	-0.017029	8.2E-5	-207.236481
cM	0.366159	0.000378	969.304891
dMq	-0.020576	6.5E-5	-316.959205
dML	-0.020419	7.1E-5	-287.995078
dMK	-0.017029	8.2E-5	-207.236481
dMM	0.037305	8.8E-5	422.904256

R2 = 1

R2b = 1

# obs = 93

dLK = dKL, dLM = dML, and dKM = dMK

The three estimated, restricted factor share functions are:

sL(q;wL,wK,wM) = 0.361195 + -8.2E-5 * ln(q) + 0.034445 * ln(wL) + -0.013808 * ln(wK) + -0.020419 * ln(wM),

sK(q;wL,wK,wM) = 0.271834 + 0.020702 * ln(q) + -0.013808 * ln(wL) + 0.031027 * ln(wK) + -0.017029 * ln(wM),

sM(q;wL,wK,wM) = 0.366159 + -0.020576 * ln(q) + -0.020419 * ln(wL) + -0.017029 * ln(wK) + 0.037305 * ln(wM)

Imposing the dLK = dKL, dLM = dML, and dKM = dM restrictions may distort five necessary C(q;wL,wK,wM) linear homogeneous in factor prices restraints:

1 =? cL + cK + cM = 0.361195 + 0.271834 + 0.366159 = 0.999188
0 =? dLL + dLK + dLM = 0.034445 + -0.013808 + -0.020419 = 0.000218
0 =? dKL + dKK + dKM = -0.013808 + 0.031027 + -0.017029 = 0.000189
0 =? dML + dMK + dMM = -0.020419 + -0.017029 + 0.037305 = -0.000143
0 =? dLq + dKq + dMq = -8.2E-5 + 0.020702 + -0.020576 = 4.4E-5

Let us impose these additional five restraints and re-estimate the Restricted Factor Share Equations:

QR Restricted Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
cL	0.361761	0.00019	1900.566231
dLq	-0.000102	5.4E-5	-1.866081
dLL	0.034331	8.2E-5	416.709195
dLK	-0.013925	7.6E-5	-183.7943
dLM	-0.020406	5.7E-5	-360.337841
cK	0.272369	0.000194	1406.189699
dKq	0.02068	5.4E-5	383.945236
dKL	-0.013925	7.6E-5	-183.7943
dKK	0.0309	9.9E-5	311.70273
dKM	-0.016975	6.4E-5	-266.335182
cM	0.36587	0.000195	1878.994632
dMq	-0.020578	5.4E-5	-383.383116
dML	-0.020406	5.7E-5	-360.337841
dMK	-0.016975	6.4E-5	-266.335182
dMM	0.037381	6.9E-5	543.797807

R2 = 1

R2b = 1

# obs = 93

dLK = dKL, dLM = dML, dKM = dMK
1 = cL + cK + cM
0 = dLL + dLK + dLM
0 = dKL + dKK + dKM
0 = dML + dMK + dMM
0 = dLq + dKq + dMq

The three re-estimated, restricted factor share functions are:

sL(q;wL,wK,wM) = 0.361761 + -0.000102 * ln(q) + 0.034331 * ln(wL) + -0.013925 * ln(wK) + -0.020406 * ln(wM),

sK(q;wL,wK,wM) = 0.272369 + 0.02068 * ln(q) + -0.013925 * ln(wL) + 0.0309 * ln(wK) + -0.016975 * ln(wM),

sM(q;wL,wK,wM) = 0.36587 + -0.020578 * ln(q) + -0.020406 * ln(wL) + -0.016975 * ln(wK) + 0.037381 * ln(wM)

V. To obtain estimates of the remaining three parameters, c, cq, and dqq, write:

ln(C(q;wL,wK,wM)) - {cL * ln(wL) + cK * ln(wK) + cM * log(wM) + .5 * [dLL * ln(wL)^² + dKK * ln(wK)^² + dMM * ln(wM)^²]
+ .5 * [(dLK + dKL) * ln(wL)*ln(wK) + (dLM + dML) * ln(wL)*ln(wM) + (dKM + dMK) * ln(wK)*log(wM)]
+ dLq * ln(wL)*ln(q) + dKq * ln(wK)*ln(q) + dMq * ln(wM)*ln(q)}
= R(q;wL,wK,wM) = c + cq * ln(q) + .5 * dqq * ln(q)^²

Estimate the linear equation:

R(q;wL,wK,wM) = c + cq * ln(q) + .5 * dqq * ln(q)^²

to obtain c, cq, and dqq.

QR Restricted Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
c	1.11536	0.00014	7975.867028
cq	1	0	1000
dqq	0.020944	2.3E-5	912.942473

R2 = 1

R2b = 1

# obs = 31

1 = cq

VI. The Translog cost function as estimated is:

ln(C(q;wL,wK,wM)) = 1.11536 + 1 * ln(q) + 0.361761 * ln(wL) + 0.272369 * ln(wK) + 0.36587 * log(wM)
+ .5 * [0.020944 * ln(q)^² + 0.034331 * ln(wL)^² + 0.0309 * ln(wK)^² + 0.037381 * ln(wM)^²]
+ .5 * [-0.027851 * ln(wL)*ln(wK) + -0.040812 * ln(wL)*ln(wM) + -0.033949 * ln(wK)*log(wM)]
+ -0.000102 * ln(wL)*ln(q) + 0.02068 * ln(wK)*ln(q) + -0.020578 * ln(wM)*ln(q) (***)

VII. Check for linear homogeneity:

1 =? cL + cK + cM = 0.361761 + 0.272369 + 0.36587 = 1
0 =? dLL + dLK + dLM = 0.034331 + -0.013925 + -0.020406 = -0
0 =? dKL + dKK + dKM = -0.013925 + 0.0309 + -0.016975 = 0
0 =? dML + dMK + dMM = -0.020406 + -0.016975 + 0.037381 = -0
0 =? dLq + dKq + dMq = -0.000102 + 0.02068 + -0.020578 = -0

C(q;wL,wK,wM) linear homogeneous in factor prices requires for any t > 0, that C(q;wL,wK,wM) obey:

C(q;t*wL,t*wK,t*wM) = t * C(q;wL,wK,wM)

For example, with wL = 7, wK = 13, wM = 6, and t = 2:

2 * C(25; 7, 13, 6) = 1412.91 =? 1412.91 = C(25; 14, 26,12).

2 * C(30; 7, 13, 6) = 1722.07 =? 1722.07 = C(30; 14, 26,12).

VIII. Check for homotheticity:

Can we write C(q;wL,wK,wM) as the product of the unit cost function C(1;wL,wK,wM) and a suitable increasing function h(q) with h(0) = 0, and h(1) = 1:

C(q;wL,wK,wM) =? h(q) * C(1;wL,wK,wM)

To do so it is necessary that:

1 =? cq = 1, 0 =? dqq = 0.020944,

0 =? dLq = -0.000102, 0 =? dKq = 0.02068, 0 =? dMq = -0.020578.

For example, with wL = 7, wK = 13, wM = 6, and q = 30, try h(q) = q^1/nu with nu = 1:

C(30; 7, 13, 6) = 861.03 =? 722.46 = 30 * 24.08 = 30^^1/1 * C(1; 7, 13, 6).

Try it with rho = 0!

IX. 1. The matrix ∇²C of second order partial derivatives of the cost function C(q;wL,wK,wM) is symmetric. To show this, write:

ln(C(q;wL,wK,wM) = C(q;wL,wK,wM), so C(q;wL,wK,wM) = exp(C(q;wL,wK,wM)).

∂²C/∂q∂wL = dLq/(q*wL) = ∂²C/∂wL∂q,

∂²C/∂q∂wK = dKq/(q*wK) = ∂²C/∂wK∂q,

∂²C/∂q∂wM = dMq/(q*wM) = ∂²C/∂wM∂q,

∂²C/∂wL∂wK = .25 * (dLK+dKL)/(wL*wK) = ∂²C/∂wK∂wL,

∂²C/∂wL∂wM = .25 * (dLM+dML)/(wL*wM) = ∂²C/∂wM∂wL,

∂²C/∂wK∂wM = .25 * (dKM+dMK)/(wL*wK) = ∂²C/∂wM∂wK.

Since the matrix ∇²C(q;wL,wK,wM) is symmetric, the matrix ∇²C(q;wL,wK,wM) is also symmetric.

2. The cost function C(q;wL,wK,wM) is a concave in factor prices if its Hessian matrix ∇²_wwC of second order partial derivatives with respect to factor prices is negative semidefinite. Following the procedure suggested by Diewert and Wales (1987), write sL = sL(q;wL,wK,wM), sK = sK(q;wL,wK,wM), and sM = sM(q;wL,wK,wM), and the matrices:

D =

dLL	dLK	dLM
dKL	dKK	dKM
dML	dMK	dMM

S =

sL	0	0
0	sK	0
0	0	sM

SS =

sL*sL	sL*sK	sL*sM
sK*sL	sK*sK	sK*sM
sM*sL	sM*sK	sM*sM

W =

wL	0	0
0	wK	0
0	0	wM

Assuming C(q;wL,wK,wM) > 0, then ∇²_wwC is negative semidefinite if and only if the matrix:

H = W * ∇²_wwC * W = D - S + SS

is negative semidefinite. See the Mathematical Notes.

The values of the second order partial derivatives depend on the amount of output, and on factor prices. As an example, consider the case where q = 30, wL = 7, wK = 13, and wM = 6:

W * ∇²_wwC * W =

-0.19492	0.1158	0.07912
0.1158	-0.20073	0.08493
0.07912	0.08493	-0.16405

The principal minors of H are H1 = -0.194916, H2 = 0.025716, and H3 = -0.

If these principal minors alternate in sign, starting with negative, with H3 <= 0, the matrix H is negative (semi)definite,
and the cost function C(q;wL,wK,wM) is a concave function in factor prices at q = 30, wL = 7, wK = 13, and wM = 6.

The eigenvalues of H are e1 = -0.314, e2 = -0.2457, and e3 = -0.
H3 = e1 * e2 * e3 = -0.

X. The three estimated factor demand functions are obtained by:

L(q;wL,wK,wM) = sL(q;wL,wK,wM) * C(q;wL,wK,wM) / wL,

K(q;wL,wK,wM) = sK(q;wL,wK,wM) * C(q;wL,wK,wM) / wK,

M(q;wL,wK,wM) = sM(q;wL,wK,wM) * C(q;wL,wK,wM) / wM.

The estimated factor demand elasticities are obtained by:

ε_L,wL = ∂ln(L(q;wL,wK,wM))/∂ln(wL) = -1 + sL(q;wL,wK,wM) + dLL / sL(q;wL,wK,wM),

ε_L,wK = ∂ln(L(q;wL,wK,wM))/∂ln(wK) = sK(q;wL,wK,wM) + dLK / sL(q;wL,wK,wM),

ε_L,wM = ∂ln(L(q;wL,wK,wM))/∂ln(wM) = sM(q;wL,wK,wM) + dLM / sL(q;wL,wK,wM),

ε_L,q = ∂ln(L(q;wL,wK,wM))/∂ln(q) = q * ∂ln(C)/∂q + dLq / sL(q;wL,wK,wM), etc.

For example, with wL = 7, wK = 13, wM = 6, and q = 30:

ε_L,wL	ε_L,wK	ε_L,wM	ε_L,q
ε_K,wL	ε_K,wK	ε_K,wM	ε_K,q
ε_M,wL	ε_M,wK	ε_M,wM	ε_M,q

-0.5476	0.3253	0.2223	1.0869
0.3177	-0.5508	0.233	1.144
0.283	0.3037	-0.5867	1.0136

XI. Uzawa Partial Elasticities of Substitution:

u_LK = C(q;wL,wK,wM) * ∂L(q;wL,wK,wM)/∂wK / (L(q;wL,wK,wM) * K(q;wL,wK,wM)),

u_LM = C(q;wL,wK,wM) * ∂L(q;wL,wK,wM)/∂wM / (L(q;wL,wK,wM) * M(q;wL,wK,wM)),

u_KL = C(q;wL,wK,wM) * ∂K(q;wL,wK,wM)/∂wL / (K(q;wL,wK,wM) * L(q;wL,wK,wM)),

u_KM = C(q;wL,wK,wM) * ∂K(q;wL,wK,wM)/∂wM / (K(q;wL,wK,wM) * M(q;wL,wK,wM)),

u_ML = C(q;wL,wK,wM) * ∂M(q;wL,wK,wM)/∂wL / (M(q;wL,wK,wM) * L(q;wL,wK,wM)),

u_MK = C(q;wL,wK,wM) * ∂M(q;wL,wK,wM)/∂wK / (M(q;wL,wK,wM) * K(q;wL,wK,wM)),

where the partial derivatives of the factor demand functions are:

∂L(q;wL,wK,wM)/∂wK = (dLK * C / wK + sL * K) * C / (wL * L * K),

∂L(q;wL,wK,wM)/∂wM = (dLM * C / wM + sL * M) * C / (wL * L * M),

∂K(q;wL,wK,wM)/∂wL = (dKL * C / wL + sK * L) * C / (wK * K * L),

∂K(q;wL,wK,wM)/∂wM = (dKM * C / wM + sK * M) * C / (wK * K * M),

∂M(q;wL,wK,wM)/∂wL = (dML * C / wL + sM * L) * C / (wM * M * K),

∂M(q;wL,wK,wM)/∂wK = (dMK * C / wK + sM * K) * C / (wM * M * L)

With the dLK = dKL, dLM = dML, and dKM = dMK restrictions in the factor share functions, we get equality of the cross partial elasticities of substitution:

u_LK = u_KL, u_LM = u_ML, and u_KM = u_MK.

as seen in the following table.

XII. Table of Results: check that the estimated Translog cost function and input amounts for a given level of output agree with the Generalized CES production function's minimized cost and inputs. Also, compare the Allen partial elasticities of substitution, s_LK, s_LM, and s_MK, with the Uzawa partial elasticities of substitution, u_LK, u_LM, and u_KM.

Generalized CES-Translog Cost Function À1: Estimate the Translog cost function using restricted factor shares Parameters: nu = 1, rho = 0.17647, rhoL = 0.17647, rhoK = 0.11823, rhoM = 0.26339
					— Generalized CES Cost Data —								— Translog Cost Data —				Factor Shares			Uzawa Elasticities						W * ∇²_wwC * W
obs #	q	wL	wK	wM	L	K	M	s_LK	s_LM	s_KM	ε_LKM	cost	est cost	est L	est K	est M	sL	sK	sM	u_LK	u_LM	u_KL	u_KM	u_ML	u_MK	e₁	e₂	e₃
1	18	8.94	12.4	5.58	21.36	14.73	26.44	0.9	0.79	0.83	0.927	521.15	521.35	21.37	14.73	26.46	0.367	0.35	0.283	0.89	0.8	0.89	0.83	0.8	0.83	-0.312	-0.248	-0
2	19	7.26	14.8	4.54	25.63	12.64	31.27	0.89	0.79	0.83	0.919	515.11	515.25	25.63	12.65	31.28	0.361	0.363	0.276	0.89	0.79	0.89	0.83	0.79	0.83	-0.316	-0.243	-0
3	20	7.02	12.62	4.76	26.48	14.64	30.24	0.89	0.79	0.83	0.922	514.69	514.78	26.49	14.65	30.25	0.361	0.359	0.28	0.89	0.8	0.89	0.83	0.8	0.83	-0.314	-0.246	-0
4	21	6.68	12.26	4.66	28.29	15.41	31.44	0.89	0.79	0.83	0.921	524.39	524.44	28.29	15.41	31.45	0.36	0.36	0.279	0.89	0.8	0.89	0.83	0.8	0.83	-0.314	-0.246	-0
5	22	6.2	13.68	4.78	32.29	15.02	32.86	0.89	0.79	0.83	0.919	562.8	562.82	32.29	15.02	32.86	0.356	0.365	0.279	0.89	0.79	0.89	0.83	0.79	0.83	-0.314	-0.245	-0
6	23	7.24	15	5.34	32.88	16.2	34.61	0.89	0.79	0.83	0.919	665.84	665.83	32.88	16.2	34.61	0.358	0.365	0.278	0.89	0.79	0.89	0.83	0.79	0.83	-0.315	-0.244	-0
7	24	7.22	12.14	7.08	34.33	20.42	28.76	0.9	0.79	0.83	0.927	699.43	699.38	34.35	20.42	28.74	0.355	0.354	0.291	0.89	0.8	0.89	0.84	0.8	0.84	-0.308	-0.253	-0
8	25	5.34	11.48	6.48	40.78	19.65	28.52	0.9	0.79	0.83	0.926	628.12	628.03	40.79	19.66	28.48	0.347	0.359	0.294	0.89	0.8	0.89	0.84	0.8	0.84	-0.307	-0.254	-0
9	26	7.66	12.72	7.1	36.81	22.22	32.08	0.9	0.79	0.83	0.925	792.44	792.34	36.82	22.22	32.07	0.356	0.357	0.287	0.89	0.8	0.89	0.83	0.8	0.83	-0.31	-0.251	-0
10	27	8.02	13.98	5.38	36.25	20.94	40.86	0.89	0.79	0.83	0.918	803.35	803.23	36.24	20.94	40.86	0.362	0.364	0.274	0.89	0.79	0.89	0.83	0.79	0.83	-0.317	-0.242	-0
11	28	8.28	13.7	4.78	35.91	21.72	45.61	0.89	0.79	0.83	0.916	812.92	812.78	35.89	21.72	45.61	0.366	0.366	0.268	0.9	0.79	0.9	0.83	0.79	0.83	-0.319	-0.238	-0
12	29	8.66	14.06	6.74	39.55	24.46	39.4	0.89	0.79	0.83	0.921	951.98	951.82	39.54	24.45	39.4	0.36	0.361	0.279	0.89	0.8	0.89	0.83	0.8	0.83	-0.314	-0.245	-0
13	30	7	13	6	43.79	24.14	40.13	0.89	0.79	0.83	0.92	861.17	861.03	43.78	24.14	40.13	0.356	0.364	0.28	0.89	0.79	0.89	0.83	0.79	0.83	-0.314	-0.246	-0
14	31	8.96	12.96	7.4	41.51	28.54	39.32	0.89	0.79	0.83	0.923	1032.79	1032.63	41.51	28.53	39.32	0.36	0.358	0.282	0.89	0.8	0.89	0.83	0.8	0.83	-0.313	-0.247	-0
15	32	8.88	11.24	6.4	39.95	30.88	42.26	0.89	0.79	0.83	0.922	972.26	972.11	39.94	30.87	42.27	0.365	0.357	0.278	0.89	0.8	0.89	0.83	0.8	0.83	-0.314	-0.245	-0
16	33	6.56	12.52	4.68	47.1	25.44	49.66	0.89	0.79	0.83	0.915	859.94	859.8	47.09	25.44	49.66	0.359	0.37	0.27	0.9	0.79	0.9	0.83	0.79	0.83	-0.319	-0.239	-0
17	34	7.5	12.44	6.06	47.74	29.25	45.57	0.89	0.79	0.83	0.919	998.06	997.92	47.73	29.24	45.57	0.359	0.365	0.277	0.89	0.79	0.89	0.83	0.79	0.83	-0.315	-0.244	-0
18	35	6.28	13.96	5.68	55.62	26.43	48.05	0.89	0.79	0.83	0.915	991.18	991.06	55.6	26.43	48.05	0.352	0.372	0.275	0.89	0.79	0.89	0.83	0.79	0.83	-0.316	-0.242	-0
19	36	7.86	14.68	7.36	54.56	30.27	45.92	0.89	0.79	0.83	0.919	1211.11	1210.99	54.55	30.27	45.92	0.354	0.367	0.279	0.89	0.79	0.89	0.83	0.79	0.83	-0.314	-0.245	-0
20	37	7.74	13.44	4.16	48.76	28.71	64.18	0.89	0.79	0.83	0.91	1030.21	1030.12	48.76	28.71	64.13	0.366	0.375	0.259	0.9	0.78	0.9	0.83	0.78	0.83	-0.324	-0.232	-0
21	38	6.22	12.54	7.66	63.09	32.94	42.32	0.89	0.79	0.83	0.921	1129.56	1129.5	63.08	32.94	42.3	0.347	0.366	0.287	0.89	0.8	0.89	0.84	0.8	0.84	-0.311	-0.25	-0
22	39	5.32	13.8	6.96	71.5	29.99	45.33	0.89	0.79	0.83	0.918	1109.75	1109.74	71.47	30	45.34	0.343	0.373	0.284	0.89	0.79	0.89	0.84	0.79	0.84	-0.313	-0.247	-0
23	40	8.4	11.98	6.06	52.93	37.32	54.87	0.89	0.79	0.83	0.917	1224.15	1224.12	52.91	37.31	54.89	0.363	0.365	0.272	0.89	0.79	0.89	0.83	0.79	0.83	-0.318	-0.241	-0
24	41	5.66	12.48	7.64	72.05	34.96	44.54	0.89	0.79	0.83	0.92	1184.37	1184.41	72.04	34.97	44.53	0.344	0.369	0.287	0.89	0.79	0.89	0.84	0.79	0.84	-0.311	-0.25	-0
25	42	5.98	13.66	7.74	74.12	34.9	47.27	0.89	0.79	0.83	0.919	1285.92	1286.01	74.11	34.91	47.28	0.345	0.371	0.285	0.89	0.79	0.89	0.84	0.79	0.84	-0.312	-0.248	-0
26	43	7.06	14.66	6.9	69.23	35.38	55.41	0.89	0.79	0.83	0.915	1389.71	1389.82	69.23	35.37	55.43	0.352	0.373	0.275	0.89	0.79	0.89	0.83	0.79	0.83	-0.317	-0.242	-0
27	44	6.24	14.9	6.48	75.39	34.15	57.17	0.89	0.79	0.83	0.913	1349.65	1349.8	75.38	34.14	57.21	0.348	0.377	0.275	0.89	0.79	0.89	0.84	0.79	0.84	-0.317	-0.241	-0
28	45	8.76	11.66	4.14	53.89	40.45	77.99	0.89	0.79	0.83	0.91	1266.63	1266.82	53.9	40.49	77.93	0.373	0.373	0.255	0.9	0.78	0.9	0.82	0.78	0.82	-0.326	-0.229	-0
29	46	6.86	12.2	4.76	65.79	38.51	69.3	0.89	0.79	0.83	0.911	1251.02	1251.23	65.81	38.52	69.3	0.361	0.376	0.264	0.9	0.79	0.9	0.83	0.79	0.83	-0.322	-0.235	-0
30	47	5.24	11.9	4.18	75.32	35.68	70.39	0.89	0.79	0.83	0.909	1113.54	1113.75	75.36	35.67	70.41	0.355	0.381	0.264	0.9	0.78	0.9	0.83	0.78	0.83	-0.322	-0.235	-0
31	48	5.76	14.22	4.04	77.25	34.01	79.79	0.89	0.79	0.83	0.905	1250.9	1251.16	77.33	34	79.78	0.356	0.386	0.258	0.9	0.78	0.9	0.83	0.78	0.83	-0.325	-0.23	-0
AVE:	33	7.12	13.13	5.86	49.04	26.77	45.86	0.89	0.79	0.83	0.918	951.75	951.74	49.04	26.77	45.86	0.357	0.367	0.277	0.89	0.79	0.89	0.83	0.79	0.83	-0.316	-0.243	-0

À2: Estimating the Translog cost function directly.

XIII. If we have a data set relating the input (factor) prices, wL, wK, and wM, to the total (minimum) cost of producing output for varying levels output, but we do not have data on the required levels of inputs, we can estimate the Translog cost function directly. We will use the same sequence (displayed in the "Generalized CES-Translog Cost Function" table) of factor prices, outputs, and total (minimum) cost as used in À1. The estimated coefficients of the cost function will vary with the parameters nu, rho, rhoL, rhoK, rhoM, alpha, beta and gamma of the Generalized CES production function used to generate these data. We impose 5 restrictions on the estimates of the parameters as specified:

SVD Restricted Least Squares
Parameter Estimates
Parameter	Coefficient	std error	t-ratio
c	1.093176	0.000489	2236.612556
cq	1.013218	0.000287	3528.075463
cL	0.36123	0.000222	1629.983829
cK	0.272073	0.000228	1195.589443
cM	0.366697	0.000183	2004.159185
dqq	0.01704	8.6E-5	198.522971
dLL	0.034059	0.000157	216.756778
dKK	0.030935	0.000196	158.035313
dMM	0.037453	0.000122	308.045589
2*dLK	-0.027541	0.000313	-88.053553
2*dLM	-0.040577	0.000141	-287.737405
2*dKM	-0.03433	0.000245	-140.001979
dLq	4.5E-5	0.000122	0.369201
dKq	0.041513	0.000124	333.638638
dMq	-0.041557	9.7E-5	-428.127172

R2 = 1	R2b = 1	# obs = 31
Observation Matrix Rank: 15

1 = cL + cK + cM
0 = dLL + dLK + dLM
0 = dKL + dKK + dKM
0 = dML + dMK + dMM
0 = dLq + dKq + dMq

XIV. The Translog cost function estimated directly is:

ln(C(q;wL,wK,wM)) = 1.093176 + 1.013218 * ln(q) + 0.36123 * ln(wL) + 0.272073 * ln(wK) + 0.366697 * log(wM)
+ .5 * [0.01704 * ln(q)^² + 0.034059 * ln(wL)^² + 0.030935 * ln(wK)^² + 0.037453 * ln(wM)^²]
+ .5 * [-0.027541 * ln(wL)*ln(wK) + -0.040577 * ln(wL)*ln(wM) + -0.03433 * ln(wK)*log(wM)]
+ 4.5E-5 * ln(wL)*ln(q) + 0.041513 * ln(wK)*ln(q) + -0.041557 * ln(wM)*ln(q) (***)

XV. Its three derived factor share functions are:

sL(q;wL,wK,wM) = 0.36123 + 4.5E-5 * ln(q) + 0.034059 * ln(wL) + -0.01377 * ln(wK) + -0.020289 * ln(wM),

sK(q;wL,wK,wM) = 0.272073 + 0.041513 * ln(q) + -0.01377 * ln(wL) + 0.030935 * ln(wK) + -0.017165 * ln(wM),

sM(q;wL,wK,wM) = 0.366697 + -0.041557 * ln(q) + -202.89 * ln(wL) + -0.017165 * ln(wK) + 0.037453 * ln(wM)

XVI. Notes:
1. As derived, dLK = dKL, dLM = dML, and dKM = dMK: Young's Theorem holds by construction.

2. C(q;wL,wK,wM) linear homogeneous in factor prices implies:

1 =? cL + cK + cM = 0.36123 + 0.272073 + 0.366697 = 1
0 =? dLL + dLK + dLM = 0.034059 + -0.01377 + -0.020289 = 0
0 =? dKL + dKK + dKM = -0.01377 + 0.030935 + -0.017165 = 0
0 =? dML + dMK + dMM = -0.020289 + -0.017165 + 0.037453 = 0
0 =? dLq + dKq + dMq = 4.5E-5 + 0.041513 + -0.041557 = 0

3. The matrix ∇²C of second order partial derivatives of the cost function C(q;wL,wK,wM) is symmetric.

4. The cost function C(q;wL,wK,wM) is a concave in factor prices if its Hessian matrix ∇²_wwC of second order partial derivatives with respect to factor prices is negative semidefinite. Following the procedure suggested by Diewert and Wales (1987), write sL = sL(q;wL,wK,wM), sK = sK(q;wL,wK,wM), and sM = sM(q;wL,wK,wM), and the matrices:

D =

dLL	dLK	dLM
dKL	dKK	dKM
dML	dMK	dMM

S =

sL	0	0
0	sK	0
0	0	sM

SS =

sL*sL	sL*sK	sL*sM
sK*sL	sK*sK	sK*sM
sM*sL	sM*sK	sM*sM

W =

wL	0	0
0	wK	0
0	0	wM

Assuming C(q;wL,wK,wM) > 0, then ∇²_wwC is negative semidefinite if and only if the matrix:

H = W * ∇²_wwC * W = D - S + SS

is negative semidefinite. See the Mathematical Notes.

The values of the second order partial derivatives depend on the amount of output, and on factor prices. As an example, consider the case where q = 30, wL = 7, wK = 13, and wM = 6:

W * ∇²_wwC * W =

-0.1952	0.14111	0.0541
0.14111	-0.21485	0.07374
0.0541	0.07374	-0.12784

The principal minors of H are H1 = -0.195201, H2 = 0.022028, and H3 = 0.

If these principal minors alternate in sign, starting with negative, with H3 <= 0, the matrix H is negative (semi)definite,
and the cost function C(q;wL,wK,wM) is a concave function in factor prices at q = 30, wL = 7, wK = 13, and wM = 6.

The eigenvalues of H are e1 = -0.348, e2 = -0.1899, and e3 = 0.
H3 = e1 * e2 * e3 = 0.

XVII. Check for linear homogeneity:

C(q;wL,wK,wM) linear homogeneous in factor prices requires for any t > 0, that C(q;wL,wK,wM) obey:

C(q;t*wL,t*wK,t*wM) = t * C(q;wL,wK,wM)

For example, with wL = 7, wK = 13, wM = 6, and t = 2:

2 * C(25; 7, 13, 6) = 1487.99 =? 1487.99 = C(25; 14, 26,12).

2 * C(30; 7, 13, 6) = 1819.01 =? 1819.01 = C(30; 14, 26,12).

XVIII. Check for homotheticity:

Can we write C(q;wL,wK,wM) as the product of the unit cost function C(1;wL,wK,wM) and a suitable increasing function h(q) with h(0) = 0, and h(1) = 1:

C(q;wL,wK,wM) =? h(q) * C(1;wL,wK,wM)

To do so it is necessary that:

1 =? cq = 1.013218, 0 =? dqq = 0.01704,

0 =? dLq = 4.5E-5, 0 =? dKq = 0.041513, 0 =? dMq = -0.041557.

As examples:

a. with wL = 7, wK = 13, wM = 6, and q = 25, try h(q) = q^1/nu with nu = 1:

C(25; 7, 13, 6) = 743.99 =? 588.67 = 25 * 23.55 = 25^^1/1 * C(1; 7, 13, 6).

b. with wL = 7, wK = 13, wM = 6, and q = 30, try h(q) = q^1/nu with nu = 1:

C(30; 7, 13, 6) = 909.5 =? 706.41 = 30 * 23.55 = 30^^1/1 * C(1; 7, 13, 6).

Try it with rho = 0!

XIX. The three derived factor demand functions are obtained by:

L(q;wL,wK,wM) = sL(q;wL,wK,wM) * C(q;wL,wK,wM) / wL,

K(q;wL,wK,wM) = sK(q;wL,wK,wM) * C(q;wL,wK,wM) / wK,

M(q;wL,wK,wM) = sM(q;wL,wK,wM) * C(q;wL,wK,wM) / wM.

The factor demand elasticities are obtained by:

For example, with wL = 7, wK = 13, wM = 6, and q = 30:

ε_L,wL	ε_L,wK	ε_L,wM	ε_L,q
ε_K,wL	ε_K,wK	ε_K,wM	ε_K,q
ε_M,wL	ε_M,wK	ε_M,wM	ε_M,q

-0.5483	0.3964	0.152	1.1034
0.3243	-0.4938	0.1695	1.1987
0.2589	0.3529	-0.6118	0.9044

XX. Table of Results: check that the estimated Translog cost function and input amounts for a given level of output agree with the Generalized CES production function's minimized cost and inputs. Also, compare the Allen partial elasticities of substitution, s_LK, s_LM, and s_MK, with the Uzawa partial elasticities of substitution, u_LK, u_LM, and u_KM. Comparing the estimated cost and input amounts obtained from the Translog cost function with the Generalized CES data, one can conclude that method À1 obtains more accurate results than method À2 for rho > 0 and rho < 0. Try it with rho = 0.

Generalized CES-Translog Cost Function À2: Estimate the Translog cost function directly Parameters: nu = 1, rho = 0.17647, rhoL = 0.17647, rhoK = 0.11823, rhoM = 0.26339
				— Generalized CES Cost Data —								— Translog Cost Data —				Factor Shares			Uzawa Elasticities						W * ∇²_wwC * W
obs #	q	wL	wK	wM	L	K	M	s_LK	s_LM	s_KM	ε_LKM	cost	est cost	est L	est K	est M	sL	sK	sM	u_LK	u_LM	u_KL	u_KM	u_ML	u_MK	e₁	e₂	e₃
1	18	8.94	12.4	5.58	21.36	14.73	26.44	0.9	0.79	0.83	0.927	521.15	546.74	22.41	18.09	21.88	0.366	0.41	0.223	0.91	0.75	0.91	0.81	0.75	0.81	-0.342	-0.203	0
2	19	7.26	14.8	4.54	25.63	12.64	31.27	0.89	0.79	0.83	0.919	515.11	553.7	27.54	15.88	26.16	0.361	0.424	0.215	0.91	0.74	0.91	0.81	0.74	0.81	-0.346	-0.195	0
3	20	7.02	12.62	4.76	26.48	14.64	30.24	0.89	0.79	0.83	0.922	514.69	546.87	28.14	18.25	25	0.361	0.421	0.218	0.91	0.74	0.91	0.81	0.74	0.81	-0.344	-0.198	0
4	21	6.68	12.26	4.66	28.29	15.41	31.44	0.89	0.79	0.83	0.921	524.39	557.46	30.07	19.25	25.87	0.36	0.423	0.216	0.91	0.74	0.91	0.81	0.74	0.81	-0.345	-0.197	0
5	22	6.2	13.68	4.78	32.29	15.02	32.86	0.89	0.79	0.83	0.919	562.8	602.09	34.55	18.9	27.07	0.356	0.429	0.215	0.91	0.73	0.91	0.81	0.73	0.81	-0.345	-0.195	0
6	23	7.24	15	5.34	32.88	16.2	34.61	0.89	0.79	0.83	0.919	665.84	712.15	35.17	20.41	28.34	0.358	0.43	0.212	0.91	0.73	0.91	0.81	0.73	0.81	-0.347	-0.193	0
7	24	7.22	12.14	7.08	34.33	20.42	28.76	0.9	0.79	0.83	0.927	699.43	724.77	35.6	25.1	23.03	0.355	0.42	0.225	0.91	0.75	0.91	0.82	0.75	0.82	-0.341	-0.204	0
8	25	5.34	11.48	6.48	40.78	19.65	28.52	0.9	0.79	0.83	0.926	628.12	652.56	42.39	24.22	22.86	0.347	0.426	0.227	0.91	0.74	0.91	0.82	0.74	0.82	-0.34	-0.205	0
9	26	7.66	12.72	7.1	36.81	22.22	32.08	0.9	0.79	0.83	0.925	792.44	824.32	38.3	27.5	25.51	0.356	0.424	0.22	0.91	0.74	0.91	0.82	0.74	0.82	-0.343	-0.199	-0
10	27	8.02	13.98	5.38	36.25	20.94	40.86	0.89	0.79	0.83	0.918	803.35	857.59	38.69	26.56	32.72	0.362	0.433	0.205	0.91	0.73	0.91	0.81	0.73	0.81	-0.35	-0.187	0
11	28	8.28	13.7	4.78	35.91	21.72	45.61	0.89	0.79	0.83	0.916	812.92	874.34	38.61	27.79	36.4	0.366	0.435	0.199	0.91	0.72	0.91	0.8	0.72	0.8	-0.353	-0.182	0
12	29	8.66	14.06	6.74	39.55	24.46	39.4	0.89	0.79	0.83	0.921	951.98	1002.2	41.64	30.73	31.09	0.36	0.431	0.209	0.91	0.73	0.91	0.81	0.73	0.81	-0.348	-0.19	0
13	30	7	13	6	43.79	24.14	40.13	0.89	0.79	0.83	0.92	861.17	909.5	46.25	30.44	31.67	0.356	0.435	0.209	0.91	0.73	0.91	0.81	0.73	0.81	-0.348	-0.19	0
14	31	8.96	12.96	7.4	41.51	28.54	39.32	0.89	0.79	0.83	0.923	1032.79	1074.91	43.21	35.61	30.58	0.36	0.429	0.21	0.91	0.73	0.91	0.81	0.73	0.81	-0.348	-0.192	0
15	32	8.88	11.24	6.4	39.95	30.88	42.26	0.89	0.79	0.83	0.922	972.26	1012.48	41.59	38.63	32.65	0.365	0.429	0.206	0.91	0.73	0.91	0.81	0.73	0.81	-0.35	-0.188	0
16	33	6.56	12.52	4.68	47.1	25.44	49.66	0.89	0.79	0.83	0.915	859.94	923.62	50.59	32.68	39.01	0.359	0.443	0.198	0.91	0.71	0.91	0.8	0.71	0.8	-0.353	-0.18	0
17	34	7.5	12.44	6.06	47.74	29.25	45.57	0.89	0.79	0.83	0.919	998.06	1052.03	50.32	37.02	35.32	0.359	0.438	0.203	0.91	0.72	0.91	0.81	0.72	0.81	-0.351	-0.185	0
18	35	6.28	13.96	5.68	55.62	26.43	48.05	0.89	0.79	0.83	0.915	991.18	1059.21	59.44	33.85	37.57	0.352	0.446	0.201	0.91	0.71	0.91	0.81	0.71	0.81	-0.351	-0.183	0
19	36	7.86	14.68	7.36	54.56	30.27	45.92	0.89	0.79	0.83	0.919	1211.11	1274.95	57.44	38.33	35.44	0.354	0.441	0.205	0.91	0.72	0.91	0.81	0.72	0.81	-0.35	-0.186	0
20	37	7.74	13.44	4.16	48.76	28.71	64.18	0.89	0.79	0.83	0.91	1030.21	1124.93	53.25	37.64	49.73	0.366	0.45	0.184	0.92	0.7	0.92	0.79	0.7	0.79	-0.36	-0.168	0
21	38	6.22	12.54	7.66	63.09	32.94	42.32	0.89	0.79	0.83	0.921	1129.56	1172.37	65.5	41.25	32.34	0.348	0.441	0.211	0.91	0.72	0.91	0.82	0.72	0.82	-0.346	-0.191	0
22	39	5.32	13.8	6.96	71.5	29.99	45.33	0.89	0.79	0.83	0.918	1109.75	1169.03	75.33	38.04	34.96	0.343	0.449	0.208	0.91	0.72	0.91	0.82	0.72	0.82	-0.347	-0.188	0
23	40	8.4	11.98	6.06	52.93	37.32	54.87	0.89	0.79	0.83	0.917	1224.15	1289.74	55.76	47.56	41.52	0.363	0.442	0.195	0.91	0.71	0.91	0.8	0.71	0.8	-0.355	-0.178	0
24	41	5.66	12.48	7.64	72.05	34.96	44.54	0.89	0.79	0.83	0.92	1184.37	1230	74.85	43.91	33.81	0.344	0.446	0.21	0.91	0.72	0.91	0.82	0.72	0.82	-0.346	-0.19	0
25	42	5.98	13.66	7.74	74.12	34.9	47.27	0.89	0.79	0.83	0.919	1285.92	1343.84	77.48	44.11	35.91	0.345	0.448	0.207	0.91	0.72	0.91	0.81	0.72	0.81	-0.348	-0.187	0
26	43	7.06	14.66	6.9	69.23	35.38	55.41	0.89	0.79	0.83	0.915	1389.71	1473.92	73.45	45.36	42.08	0.352	0.451	0.197	0.91	0.71	0.91	0.81	0.71	0.81	-0.353	-0.179	0
27	44	6.24	14.9	6.48	75.39	34.15	57.17	0.89	0.79	0.83	0.913	1349.65	1440.86	80.51	44.04	43.56	0.349	0.455	0.196	0.91	0.7	0.91	0.81	0.7	0.81	-0.353	-0.178	0
28	45	8.76	11.66	4.14	53.89	40.45	77.99	0.89	0.79	0.83	0.91	1266.63	1374.71	58.48	53.27	58.28	0.373	0.452	0.176	0.92	0.69	0.92	0.78	0.69	0.78	-0.364	-0.16	0
29	46	6.86	12.2	4.76	65.79	38.51	69.3	0.89	0.79	0.83	0.911	1251.02	1348.22	70.93	50.29	52.12	0.361	0.455	0.184	0.92	0.69	0.92	0.8	0.69	0.8	-0.359	-0.167	0
30	47	5.24	11.9	4.18	75.32	35.68	70.39	0.89	0.79	0.83	0.909	1113.54	1210.65	81.95	46.92	53.34	0.355	0.461	0.184	0.92	0.69	0.92	0.8	0.69	0.8	-0.358	-0.167	0
31	48	5.76	14.22	4.04	77.25	34.01	79.79	0.89	0.79	0.83	0.905	1250.9	1384.04	85.58	45.44	60.65	0.356	0.467	0.177	0.92	0.68	0.92	0.79	0.68	0.79	-0.361	-0.16	0
AVE:	33	7.12	13.13	5.86	52.1	34.1	35.69	0.89	0.79	0.83	0.918	951.75	1010.44	52.1	34.1	35.69	0.357	0.438	0.205	0.91	0.72	0.91	0.81	0.72	0.81	-0.35	-0.186	0

Mathematical Notes

1. The Translog Cost Function:

2. The Factor Share Functions:

∂ln(C)/∂ln(wL) = (∂ln(C)/∂wL )/ (∂ln(wL)/∂wL) = (1 / C(q;wL,wK,wM)) * ∂ln(C)/∂wL * wL = wL * L(q; wL, wK, wM) / C(q;wL,wK,wM) = sL(q;wL,wK,wM),

∂ln(C)/∂ln(wK) = (∂ln(C)/∂wK )/ (∂ln(wK)/∂wK) = (1 / C(q;wL,wK,wM)) * ∂ln(C)/∂wK * wK = wK * K(q; wL, wK, wM) / C(q;wL,wK,wM) = sK(q;wL,wK,wM),

∂ln(C)/∂ln(wM) = (∂ln(C)/∂wM )/ (∂ln(wM)/∂wM) = (1 / C(q;wL,wK,wM)) * ∂ln(C)/∂wM * wM = wM * M(q; wL, wK, wM) / C(q;wL,wK,wM) = sM(q;wL,wK,wM).

3. The Factor Demand Functions:

L(q;wL,wK,wM) = sL(q;wL,wK,wM) * C(q;wL,wK,wM) / wL,

K(q;wL,wK,wM) = sK(q;wL,wK,wM) * C(q;wL,wK,wM) / wK,

M(q;wL,wK,wM) = sM(q;wL,wK,wM) * C(q;wL,wK,wM) / wM.

4. The Factor Demand Elasticities:

C = wL * L / sL = wK * K / sK = wM * M / sM, → sL = (wL * L) * sK / (wK * K) = wL * L / C,

∂L/∂wL = [(∂sL/∂wL * C + sL * ∂C/∂wL) * wL - (sL * C)(1)] / wL^{^2} = [(dLL/wL * wL*L/sL + sL * L) * wL - (sL * wL * L/sL)] / wL^{^2} = (L /wL) * (dLL/sL + sL - 1), so
ε_L,L = ∂ln(L)/∂ln(wL) = ∂ln(L)/∂wL * ∂wL/∂ln(wL) = ∂L/∂wL * wL/L = (- 1 + sL + dLL/sL).

∂L/∂wK = [(∂sL/∂wK * C + sL * ∂C/∂wK] / wL = [dLK/wK * (wL *L / sL) + ((wL * L) * sK / (wK * K))*K] / wL = [dLK*L/(wK*sL) + L*sK/wK], so
ε_L,K = ∂ln(L)/∂ln(wK) = ∂ln(L)/∂wK * ∂wK/∂ln(wK) = ∂L/∂wK * wK/L = (sK + dLK/sL).

∂L/∂q = [(∂sL/∂q * C + sL * ∂C/∂q] / wL = [(dLq/q)*(wL*L/sL) + (wL*L/C)*C*(∂ln(C)/∂q)]/wL, so
ε_L,q = ∂ln(L)/∂ln(q) = ∂ln(L)/∂q * ∂q/∂ln(q) = (∂L/∂q)*(q/L) = q * ∂ln(C)/∂q + dLq / sL,

5. Cost Function C(q;wL,wK,wM) Concave in Factor Prices:

∂ln(C)/∂ln(wL) = sL = wL * L / C = wL * ∂C/∂wL / C → ∂C/∂wL = sL * C / wL,

∂²ln(C)/∂ln(wL)∂ln(wL) = [(∂wL/∂ln(wL) * ∂C/∂wL + wL * ∂²C/∂wL∂ln(wL)) * C - wL * ∂C/∂wL * ∂C/∂ln(wL)] / C²
= [(wL * ∂C/∂wL + wL * ∂²C/∂wL∂wL * wL) * C - wL * ∂C/∂wL * ∂C/∂wL * wL] / C²
= wL * ∂C/∂wL / C - wL * ∂C/∂wL * wL * ∂C/∂wL / C² + wL * wL * ∂²C/∂wL∂wL / C
= sL - sL * sL + wL * wL * ∂²C/∂wL∂wL / C = dLL, so

wL * wL * ∂²C/∂wL∂wL / C = dLL - sL + sL * sL

∂²ln(C)/∂ln(wL)∂ln(wK) = [(∂wL/∂ln(wK) * L + wL * ∂L/∂ln(wK)) * C - wL * L * ∂C/∂ln(wK)] / C²
= [(0 + wL * ∂²C/∂wL∂wK * wK) * C - wL * L * ∂C/∂wK * wK] / C²
= - wL * L * wK * K / C² + wL * wK * ∂²C/∂wL∂wK / C
= - sL * sK + wL * wK * ∂²C/∂wL∂wK / C = dLK, so

wL * wK * ∂²C/∂wL∂wK / C = dLK + sL * sK