     Egwald Economics: Microeconomics

Cost Functions

by

Elmer G. Wiens

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Please show your support by joining Egwald Web Services as a Facebook Fan: Follow Elmer Wiens on Twitter: 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:

εLKM = 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
cL0.3607340.001569.34
dLq5.7E-500.922
dLL0.0345330322.818
dLK-0.0138820-72.578
dLM-0.0204460-236.135
 R2 = 0.9998 R2b = 0.9998 # obs = 31

QR Least Squares
Parameter Estimates
Parameter Coefficient std error t-ratio
cK0.2725580.001499.241
dKq0.0207130387.015
dKL-0.0134440-145.858
dKK0.0305560185.399
dKM-0.017180-230.28
 R2 = 0.9999 R2b = 0.9999 # obs = 31

QR Least Squares
Parameter Estimates
Parameter Coefficient std error t-ratio
cM0.3667080.001441.874
dMq-0.020770-255.301
dML-0.0210890-150.511
dMK-0.0166740-66.553
dMM0.0376260331.772
 R2 = 0.9999 R2b = 0.9999 # obs = 31

The three estimated factor share functions are:

 sL(q;wL,wK,wM) = 0.360734 + 5.7E-5 * ln(q) + 0.034533 * ln(wL) + -0.013882 * ln(wK) + -0.020446 * ln(wM), sK(q;wL,wK,wM) = 0.272558 + 0.020713 * ln(q) + -0.013444 * ln(wL) + 0.030556 * ln(wK) + -0.01718 * ln(wM), sM(q;wL,wK,wM) = 0.366708 + -0.02077 * ln(q) + -0.021089 * ln(wL) + -0.016674 * ln(wK) + 0.037626 * 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   =   0.360734 + 0.272558 + 0.366708   =   1 0   =?   dLL + dLK + dLM   =   0.034533 + -0.013882 + -0.020446  =   0.000205 0   =?   dKL + dKK + dKM   =   -0.013444 + 0.030556 + -0.01718  =   -6.9E-5 0   =?   dML + dMK + dMM   =   -0.021089 + -0.016674 + 0.037626  =   -0.000136 0   =?   dLq + dKq + dMq   =   5.7E-5 + 0.020713 + -0.02077  =   -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
cL0.3604350.000517697.454884
dLq3.4E-57.5E-50.45259
dLL0.034540.000131264.242537
dLK-0.0135650.000114-118.96358
dLM-0.020698.2E-5-252.29479
cK0.2725660.000752362.410096
dKq0.0207197.6E-5273.704557
dKL-0.0135650.000114-118.96358
dKK0.0305750.000233130.94529
dKM-0.0170929.6E-5-177.317538
cM0.3670140.000467785.817465
dMq-0.0207647.6E-5-274.288802
dML-0.020698.2E-5-252.29479
dMK-0.0170929.6E-5-177.317538
dMM0.0376020.000105357.211511
 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) = 0.360435 + 3.4E-5 * ln(q) + 0.03454 * ln(wL) + -0.013565 * ln(wK) + -0.02069 * ln(wM), sK(q;wL,wK,wM) = 0.272566 + 0.020719 * ln(q) + -0.013565 * ln(wL) + 0.030575 * ln(wK) + -0.017092 * ln(wM), sM(q;wL,wK,wM) = 0.367014 + -0.020764 * ln(q) + -0.02069 * ln(wL) + -0.017092 * ln(wK) + 0.037602 * 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   =   0.360435 + 0.272566 + 0.367014   =   1.000016 0   =?   dLL + dLK + dLM   =   0.03454 + -0.013565 + -0.02069  =   0.000284 0   =?   dKL + dKK + dKM   =   -0.013565 + 0.030575 + -0.017092  =   -8.2E-5 0   =?   dML + dMK + dMM   =   -0.02069 + -0.017092 + 0.037602  =   -0.00018 0   =?   dLq + dKq + dMq   =   3.4E-5 + 0.020719 + -0.020764  =   -1.1E-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
cL0.3610870.0002211635.370344
dLq2.5E-56.3E-50.401544
dLL0.0343769.5E-5361.86545
dLK-0.0136748.5E-5-161.251433
dLM-0.0207026.5E-5-316.067884
cK0.2723360.0002231223.847044
dKq0.0207276.3E-5329.379022
dKL-0.0136748.5E-5-161.251433
dKK0.0306690.000109282.590128
dKM-0.0169957.1E-5-237.975155
cM0.3665770.0002191673.514845
dMq-0.0207526.3E-5-329.872545
dML-0.0207026.5E-5-316.067884
dMK-0.0169957.1E-5-237.975155
dMM0.0376977.9E-5477.170197
 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) = 0.361087 + 2.5E-5 * ln(q) + 0.034376 * ln(wL) + -0.013674 * ln(wK) + -0.020702 * ln(wM), sK(q;wL,wK,wM) = 0.272336 + 0.020727 * ln(q) + -0.013674 * ln(wL) + 0.030669 * ln(wK) + -0.016995 * ln(wM), sM(q;wL,wK,wM) = 0.366577 + -0.020752 * ln(q) + -0.020702 * ln(wL) + -0.016995 * ln(wK) + 0.037697 * 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
c1.1154770.0001477599.960575
cq101000
dqq0.0209212.4E-5868.842858
 R2 = 1 R2b = 1 # obs = 31

1 = cq

VI. The Translog cost function as estimated is:

ln(C(q;wL,wK,wM)) = 1.115477 + 1 * ln(q) + 0.361087 * ln(wL) + 0.272336 * ln(wK) + 0.366577 * log(wM)
+ .5 * [0.020921 * ln(q)^2 + 0.034376 * ln(wL)^2 + 0.030669 * ln(wK)^2 + 0.037697 * ln(wM)^2]
+ .5 * [-0.027347 * ln(wL)*ln(wK) + -0.041404 * ln(wL)*ln(wM) + -0.033991 * ln(wK)*log(wM)]
+ 2.5E-5 * ln(wL)*ln(q) + 0.020727 * ln(wK)*ln(q) + -0.020752 * ln(wM)*ln(q)           (***)

VII. Check for linear homogeneity:

 1   =?   cL + cK + cM   =   0.361087 + 0.272336 + 0.366577   =   1 0   =?   dLL + dLK + dLM   =   0.034376 + -0.013674 + -0.020702  =   0 0   =?   dKL + dKK + dKM   =   -0.013674 + 0.030669 + -0.016995  =   0 0   =?   dML + dMK + dMM   =   -0.020702 + -0.016995 + 0.037697  =   0 0   =?   dLq + dKq + dMq   =   2.5E-5 + 0.020727 + -0.020752  =   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) = 1412.92 =? 1412.92 = 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  =   0.020921,

0   =?   dLq  =   2.5E-5,     0   =?   dKq  =   0.020727,     0   =?   dMq  =   -0.020752.

For example, with wL = 7, wK = 13, wM = 6, and q = 30, try h(q) = q1/nu with nu = 1:

C(30; 7, 13, 6) = 861.04 =? 722.42 = 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 ∇2wwC 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 ∇2wwC is negative semidefinite if and only if the matrix:

H = W * ∇2wwC * 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 * ∇2wwC * W =
 -0.19486 0.11603 0.07883 0.11603 -0.20095 0.08492 0.07883 0.08492 -0.16375

The principal minors of H are H1 = -0.194859, H2 = 0.025695, 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 = -0.3143, e2 = -0.2452, 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:

 εL,wL = ∂ln(L(q;wL,wK,wM))/∂ln(wL) = -1 + sL(q;wL,wK,wM) + dLL / sL(q;wL,wK,wM), εL,wK = ∂ln(L(q;wL,wK,wM))/∂ln(wK) = sK(q;wL,wK,wM) + dLK / sL(q;wL,wK,wM), εL,wM = ∂ln(L(q;wL,wK,wM))/∂ln(wM) = sM(q;wL,wK,wM) + dLM / sL(q;wL,wK,wM), εL,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:

 εL,wL εL,wK εL,wM εL,q εK,wL εK,wK εK,wM εK,q εM,wL εM,wK εM,wM εM,q
 -0.5475 0.326 0.2215 1.0873 0.3184 -0.5514 0.233 1.1441 0.2819 0.3037 -0.5855 1.013

XI. Uzawa Partial Elasticities of Substitution:

 uLK = C(q;wL,wK,wM) * ∂L(q;wL,wK,wM)/∂wK / (L(q;wL,wK,wM) * K(q;wL,wK,wM)), uLM = C(q;wL,wK,wM) * ∂L(q;wL,wK,wM)/∂wM / (L(q;wL,wK,wM) * M(q;wL,wK,wM)), uKL = C(q;wL,wK,wM) * ∂K(q;wL,wK,wM)/∂wL / (K(q;wL,wK,wM) * L(q;wL,wK,wM)), uKM = C(q;wL,wK,wM) * ∂K(q;wL,wK,wM)/∂wM / (K(q;wL,wK,wM) * M(q;wL,wK,wM)), uML = C(q;wL,wK,wM) * ∂M(q;wL,wK,wM)/∂wL / (M(q;wL,wK,wM) * L(q;wL,wK,wM)), uMK = 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:

uLK = uKL,    uLM = uML,  and    uKM = uMK.

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, sLK, sLM, and sMK, with the Uzawa partial elasticities of substitution, uLK, uLM, and uKM.

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 SharesUzawa ElasticitiesW * ∇2wwC * W
obs #qwLwKwM LK MsLKsLMsKMεLKMcostest costest Lest Kest MsLsKsMuLKuLMuKLuKMuMLuMKe1e2e3
1187 11.965.18 23.7113.64 25.460.90.790.830.926460.94461.1223.7213.6425.470.360.3540.2860.890.80.890.830.80.83 -0.311-0.25-0
2198.3 11.185 22.2615.79 28.260.90.790.830.926502.62502.7622.2715.7928.290.3680.3510.2810.890.80.890.830.80.83 -0.313-0.247-0
3208.92 14.77.26 26.8416.05 26.50.90.790.830.927667.78667.926.8516.0526.510.3590.3530.2880.890.80.890.830.80.83 -0.31-0.2510
4218.58 11.226.36 25.7518.9 27.460.90.790.830.928607.63607.7125.7618.8927.480.3640.3490.2880.890.80.890.830.80.83 -0.31-0.251-0
5227.98 14.287.64 31.717.76 27.210.90.790.830.927714.52714.5531.7117.7627.210.3540.3550.2910.890.80.890.840.80.84 -0.309-0.253-0
6235.68 146.72 38.7116.46 27.720.90.790.830.924636.64636.6338.7116.4727.710.3450.3620.2930.890.80.890.840.80.84 -0.308-0.253-0
7245.74 13.17.92 40.9918.73 25.890.90.790.830.928685.71685.654118.7425.860.3430.3580.2990.890.80.890.840.80.84 -0.305-0.257-0
8256.12 14.887.64 42.7118.48 29.120.90.790.830.924758.84758.7842.718.4929.10.3440.3630.2930.890.790.890.840.790.84 -0.308-0.253-0
9268.08 14.225.98 35.6620.41 37.230.890.790.830.92800.92800.8235.6520.437.230.360.3620.2780.90.790.90.830.790.83 -0.315-0.244-0
10275.22 11.17.68 46.2122.63 27.510.90.790.830.929703.68703.5746.2122.6427.480.3430.3570.30.890.80.890.840.80.84 -0.305-0.257-0
11286.6 13.365.02 40.720.7 41.210.890.790.830.917752751.8840.6920.6941.210.3570.3680.2750.90.790.90.830.790.83 -0.317-0.242-0
12295.72 11.067.48 47.0925.13 30.730.90.790.830.927777.21777.0847.0925.1430.710.3470.3580.2960.890.80.890.840.80.84 -0.307-0.255-0
13307 136 43.7924.14 40.130.890.790.830.92861.17861.0443.7824.1440.130.3560.3640.280.890.790.890.830.790.83 -0.314-0.245-0
14318.54 12.985.22 39.525.91 47.640.890.790.830.917922.38922.2139.4825.9147.640.3660.3650.270.90.790.90.830.790.83 -0.319-0.239-0
15328.36 12.745.26 41.1827.01 48.410.890.790.830.917942.98942.8241.1627.0148.40.3650.3650.270.90.790.90.830.790.83 -0.319-0.239-0
16336.78 14.627.04 53.2325.94 41.350.890.790.830.9191031.311031.1853.2125.9441.360.350.3680.2820.890.790.890.840.790.84 -0.313-0.247-0
17346.78 13.345.04 49.5926.13 50.440.890.790.830.914939.08938.9449.5926.1350.430.3580.3710.2710.90.790.90.830.790.83 -0.319-0.239-0
18358.62 12.187.6 47.6933.72 42.490.890.790.830.9231144.671144.5447.6733.7142.490.3590.3590.2820.890.80.890.830.80.83 -0.313-0.247-0
19368.52 11.846.54 47.4334.03 47.170.890.790.830.921115.531115.447.4134.0347.180.3620.3610.2770.90.790.90.830.790.83 -0.316-0.244-0
20375.72 12.186.68 61.6530.61 43.20.890.790.830.921014.031013.9761.6230.6143.210.3480.3680.2850.890.790.890.840.790.84 -0.312-0.248-0
21388.9 11.967.24 50.437.38 47.670.890.790.830.9211240.721240.6350.3837.3747.690.3610.360.2780.890.790.890.830.790.83 -0.315-0.245-0
22398.46 12.447.18 53.8736.99 49.050.890.790.830.921268.141268.0853.8636.9949.070.3590.3630.2780.90.790.90.830.790.83 -0.315-0.244-0
23407.5 14.724.26 55.9829.75 69.860.890.790.830.9081155.421155.4456.0329.7669.770.3640.3790.2570.90.780.90.830.780.83 -0.326-0.23-0
24416.64 12.884.22 58.6331.56 66.720.890.790.830.9091077.411077.4358.6631.5666.680.3620.3770.2610.90.780.90.830.780.83 -0.324-0.2320
25425.86 12.85.14 67.0432.69 58.580.890.790.830.9121112.361112.3967.0532.6858.60.3530.3760.2710.90.780.90.830.780.83 -0.319-0.239-0
26435.6 12.764.08 67.1131.51 67.910.890.790.830.9081054.921054.9667.1631.4967.90.3560.3810.2630.90.780.90.830.780.83 -0.323-0.233-0
27446.8 11.74.9 62.4737.56 64.090.890.790.830.9131178.281178.3962.4837.5764.080.3610.3730.2660.90.780.90.830.780.83 -0.321-0.236-0
28457.52 14.865.1 66.2335.29 710.890.790.830.9091384.581384.7766.2835.2970.970.360.3790.2610.90.780.90.830.780.83 -0.324-0.232-0
29465.96 13.247.76 81.239.39 51.220.890.790.830.9181402.91403.281.1839.3951.270.3450.3720.2840.890.790.890.840.790.84 -0.313-0.247-0
30477.9 11.187.86 67.548.53 53.360.890.790.830.9211495.231495.5667.548.5453.390.3570.3630.2810.890.790.890.830.790.83 -0.314-0.246-0
31488.06 12.427.24 69.4446.33 59.40.890.790.830.9171565.121565.5169.4446.3459.430.3570.3680.2750.90.790.90.830.790.83 -0.317-0.242-0
AVE:337.21 12.876.27 48.5927.72 44.320.890.790.830.92966.93966.9348.5927.7244.320.3560.3650.2790.890.790.890.830.790.83-0.315-0.245-0

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
c1.0927110.0006611651.950732
cq1.0134120.0003782677.764925
cL0.3605630.0003151143.175357
cK0.2725840.000379718.508893
cM0.3668530.0002871277.202852
dqq0.0169910.000109155.417295
dLL0.0343580.000271126.900067
dKK0.0304360.0003294.970723
dMM0.0376590.000161234.513091
2*dLK-0.0271350.000496-54.75879
2*dLM-0.0415820.000271-153.460058
2*dKM-0.0337370.000354-95.260819
dLq0.0003250.0001631.990538
dKq0.0413920.000198208.898329
dMq-0.0417170.000177-236.172529
 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)) = 1.092711 + 1.013412 * ln(q) + 0.360563 * ln(wL) + 0.272584 * ln(wK) + 0.366853 * log(wM)
+ .5 * [0.016991 * ln(q)^2 + 0.034358 * ln(wL)^2 + 0.030436 * ln(wK)^2 + 0.037659 * ln(wM)^2]
+ .5 * [-0.027135 * ln(wL)*ln(wK) + -0.041582 * ln(wL)*ln(wM) + -0.033737 * ln(wK)*log(wM)]
+ 0.000325 * ln(wL)*ln(q) + 0.041392 * ln(wK)*ln(q) + -0.041717 * ln(wM)*ln(q)           (***)

XV. Its three derived factor share functions are:

 sL(q;wL,wK,wM) = 0.360563 + 0.000325 * ln(q) + 0.034358 * ln(wL) + -0.013567 * ln(wK) + -0.020791 * ln(wM), sK(q;wL,wK,wM) = 0.272584 + 0.041392 * ln(q) + -0.013567 * ln(wL) + 0.030436 * ln(wK) + -0.016868 * ln(wM), sM(q;wL,wK,wM) = 0.366853 + -0.041717 * ln(q) + -207.91 * ln(wL) + -0.016868 * ln(wK) + 0.037659 * 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   =   0.360563 + 0.272584 + 0.366853   =   1 0   =?   dLL + dLK + dLM   =   0.034358 + -0.013567 + -0.020791  =   0 0   =?   dKL + dKK + dKM   =   -0.013567 + 0.030436 + -0.016868  =   0 0   =?   dML + dMK + dMM   =   -0.020791 + -0.016868 + 0.037659  =   0 0   =?   dLq + dKq + dMq   =   0.000325 + 0.041392 + -0.041717  =   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 ∇2wwC 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 ∇2wwC is negative semidefinite if and only if the matrix:

H = W * ∇2wwC * 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 * ∇2wwC * W =
 -0.19504 0.14143 0.05361 0.14143 -0.21531 0.07388 0.05361 0.07388 -0.1275

The principal minors of H are H1 = -0.195042, H2 = 0.021993, 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 = -0.3486, e2 = -0.1893, 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) = 1487.86 =? 1487.86 = C(25; 14, 26,12).

2 * C(30; 7, 13, 6) = 1818.85 =? 1818.85 = 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   =   1.013412,     0   =?   dqq  =   0.016991,

0   =?   dLq  =   0.000325,     0   =?   dKq  =   0.041392,     0   =?   dMq  =   -0.041717.

As examples:

a. with wL = 7, wK = 13, wM = 6, and q = 25, try h(q) = q1/nu with nu = 1:

C(25; 7, 13, 6) = 743.93 =? 588.5 = 25 * 23.54 = 25^1/1 * C(1; 7, 13, 6).

b. with wL = 7, wK = 13, wM = 6, and q = 30, try h(q) = q1/nu with nu = 1:

C(30; 7, 13, 6) = 909.43 =? 706.2 = 30 * 23.54 = 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:

 εL,wL = ∂ln(L(q;wL,wK,wM))/∂ln(wL) = -1 + sL(q;wL,wK,wM) + dLL / sL(q;wL,wK,wM), εL,wK = ∂ln(L(q;wL,wK,wM))/∂ln(wK) = sK(q;wL,wK,wM) + dLK / sL(q;wL,wK,wM), εL,wM = ∂ln(L(q;wL,wK,wM))/∂ln(wM) = sM(q;wL,wK,wM) + dLM / sL(q;wL,wK,wM), εL,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:

 εL,wL εL,wK εL,wM εL,q εK,wL εK,wK εK,wM εK,q εM,wL εM,wK εM,wM εM,q
 -0.5471 0.3967 0.1504 1.1042 0.3253 -0.4952 0.1699 1.1985 0.2569 0.354 -0.6108 0.9034

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, sLK, sLM, and sMK, with the Uzawa partial elasticities of substitution, uLK, uLM, and uKM. 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.

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 SharesUzawa ElasticitiesW * ∇2wwC * W
obs #qwLwKwM LK MsLKsLMsKMεLKMcostest costest Lest Kest MsLsKsMuLKuLMuKLuKMuMLuMKe1e2e3
1187 11.965.18 23.7113.64 25.460.90.790.830.926460.94484.6724.9616.7621.140.360.4140.2260.910.740.910.820.740.82 -0.341-0.2040
2198.3 11.185 22.2615.79 28.260.90.790.830.926502.62528.0123.4119.4623.220.3680.4120.220.910.740.910.810.740.81 -0.344-0.2-0
3208.92 14.77.26 26.8416.05 26.50.90.790.830.927667.78697.7128.0819.7121.690.3590.4150.2260.910.740.910.820.740.82 -0.341-0.2040
4218.58 11.226.36 25.7518.9 27.460.90.790.830.928607.63629.8626.7323.1222.190.3640.4120.2240.910.750.910.820.750.82 -0.342-0.2030
5227.98 14.287.64 31.717.76 27.210.90.790.830.927714.52743.7133.0521.8222.040.3550.4190.2260.910.740.910.820.740.82 -0.341-0.2040
6235.68 146.72 38.7116.46 27.720.90.790.830.924636.64667.6540.6520.3622.570.3460.4270.2270.910.740.910.830.740.83 -0.34-0.2040
7245.74 13.17.92 40.9918.73 25.890.90.790.830.928685.71708.6642.4322.9320.80.3440.4240.2320.910.740.910.830.740.83 -0.338-0.2080
8256.12 14.887.64 42.7118.48 29.120.90.790.830.924758.84793.2244.7122.8823.460.3450.4290.2260.910.730.910.830.730.83 -0.34-0.2030
9268.08 14.225.98 35.6620.41 37.230.890.790.830.92800.92849.2237.8625.6629.830.360.430.210.910.730.910.810.730.81 -0.348-0.1910
10275.22 11.17.68 46.2122.63 27.510.90.790.830.929703.68721.4247.4527.6521.720.3430.4250.2310.910.740.910.830.740.83 -0.338-0.2070
11286.6 13.365.02 40.720.7 41.210.890.790.830.917752804.6343.6226.2932.960.3580.4370.2060.910.720.910.810.720.81 -0.35-0.1870
12295.72 11.067.48 47.0925.13 30.730.90.790.830.927777.21798.5748.4630.8724.060.3470.4280.2250.910.730.910.820.730.82 -0.341-0.2030
13307 136 43.7924.14 40.130.890.790.830.92861.17909.4346.3130.4231.640.3560.4350.2090.910.720.910.810.720.81 -0.349-0.1890
14318.54 12.985.22 39.525.91 47.640.890.790.830.917922.38984.3342.2133.0537.340.3660.4360.1980.910.710.910.80.710.8 -0.354-0.180
15328.36 12.745.26 41.1827.01 48.410.890.790.830.917942.981005.0143.9534.4537.780.3660.4370.1980.920.710.920.80.710.8 -0.354-0.180
16336.78 14.627.04 53.2325.94 41.350.890.790.830.9191031.311087.3156.2132.7332.350.350.440.2090.910.720.910.820.720.82 -0.348-0.1890
17346.78 13.345.04 49.5926.13 50.440.890.790.830.914939.081008.3853.3533.5739.450.3590.4440.1970.910.710.910.810.710.81 -0.354-0.1790
18358.62 12.187.6 47.6933.72 42.490.890.790.830.9231144.671185.1949.4542.0732.430.360.4320.2080.910.720.910.810.720.81 -0.349-0.1890
19368.52 11.846.54 47.4334.03 47.170.890.790.830.921115.531165.9149.6442.8735.980.3630.4350.2020.910.720.910.810.720.81 -0.352-0.1840
20375.72 12.186.68 61.6530.61 43.20.890.790.830.921014.031060.5164.5738.5233.230.3480.4420.2090.910.710.910.820.710.82 -0.348-0.1890
21388.9 11.967.24 50.437.38 47.670.890.790.830.9211240.721288.6552.4246.9436.020.3620.4360.2020.910.720.910.810.720.81 -0.352-0.1840
22398.46 12.447.18 53.8736.99 49.050.890.790.830.921268.141322.2356.2546.6337.080.360.4390.2010.910.710.910.810.710.81 -0.352-0.1830
23407.5 14.724.26 55.9829.75 69.860.890.790.830.9081155.421270.6261.7339.353.770.3640.4550.180.920.680.920.790.680.79 -0.361-0.1640
24416.64 12.884.22 58.6331.56 66.720.890.790.830.9091077.411174.2264.0541.451.110.3620.4540.1840.920.690.920.80.690.8 -0.36-0.1670
25425.86 12.85.14 67.0432.69 58.580.890.790.830.9121112.361193.7872.142.2844.780.3540.4530.1930.920.70.920.810.70.81 -0.355-0.1750
26435.6 12.764.08 67.1131.51 67.910.890.790.830.9081054.921153.0173.5441.4552.040.3570.4590.1840.920.680.920.80.680.8 -0.359-0.1670
27446.8 11.74.9 62.4737.56 64.090.890.790.830.9131178.281261.6567.0248.6648.280.3610.4510.1870.920.690.920.80.690.8 -0.358-0.170
28457.52 14.865.1 66.2335.29 710.890.790.830.9091384.581506.6672.2546.3853.750.3610.4570.1820.920.680.920.80.680.8 -0.36-0.1650
29465.96 13.247.76 81.239.39 51.220.890.790.830.9181402.91463.3584.8349.8438.40.3450.4510.2040.910.70.910.820.70.82 -0.35-0.1840
30477.9 11.187.86 67.548.53 53.360.890.790.830.9211495.231537.8169.5360.8839.170.3570.4430.20.910.710.910.810.710.81 -0.352-0.1820
31488.06 12.427.24 69.4446.33 59.40.890.790.830.9171565.121634.3972.6358.9343.80.3580.4480.1940.920.70.920.810.70.81 -0.355-0.1760
AVE:337.21 12.876.27 51.435.09 34.320.890.790.830.92966.931020.6451.435.0934.320.3570.4360.2070.910.720.910.810.720.81-0.349-0.1880

Mathematical Notes

1. The Translog Cost Function:

 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)         (**)

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).

 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),

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 εL,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 εL,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 εL,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 Copyright © Elmer G. Wiens:   Egwald Web Services All Rights Reserved.    Inquiries 