Lecture 23-2005 - Measuring Technical Efficiency Lecture...

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Measuring Technical Efficiency Lecture XXIII I. Basic Concepts of Production Efficiency Lovell, C. A. Knox. “Production Frontiers and Productive Efficiency.” In Harold O. Fried, C. A. Knox Lovell and Shelton S. Schmitz (eds.) The Measurement of Productive Efficiency (New York: Oxford University Press, 1993): 3-67. A. The most basic concept of the production function is that they represent some kind of frontier. 1. For example, in our discussion of Diewert, we defined the production function as: ( ) ( ) max : belongs to fx x L μ = Thus, was the largest output possible for a given set of inputs. () yfx = 2. In the univariate case: x y = the production function maps out some kind of a frontier. In level set space 1
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AEB 6184 – Production Economics Lecture XXIII Professor Charles Moss Fall 2005 1 x 2 x () Ly 3. These formulations appear to acknowledge that some firms may be performing sub-optimally. That they could obtain a higher amount of output for the same bundle of inputs. 4. This concept underlies the notion of technical inefficiency. B. However, even if the firm is operating on the frontier, we also must recognize that they may be using inputs non-optimally.
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Lecture 23-2005 - Measuring Technical Efficiency Lecture...

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