ak6gRS-Lecture 18-2005

ak6gRS-Lecture 18-2005 - Cost Functions and the Estimation...

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Cost Functions and the Estimation of Flexible Functional Forms Lecture XVIII I. Flexible Functional Forms A. The crux of the dual approach is then to estimate a manifestation of behavior that economist know something about. 1. Thus, instead of estimating production functions that are purely physical forms that economist have little expertise in developing, we could estimate the cost function that represents cost minimizing behavior. 2. We then would be able to determine whether the properties of these cost functions are consistent with our hypotheses about technology. 3. However, it is often the direct implications of the cost minimizing behavior that we are interested in: a. How will farmers react to changes in agricultural prices through commodity programs? ± ² ; Cyw p p y w ³' w b. What is the impact of a change in input prices (say in an increase in fuel prices) on agricultural output? ± ² ; Cyw w p y ' w 4. Thus, the dual cost function results are usually sufficient for most question facing agricultural economists. B. Given that we are interested in estimating the cost function directly, the next question involves how to specify the cost function? 1. One approach to the estimation of cost functions would then be to hypothesize a primal production function and derive the theoretically consistent specification for the cost function based on this primal. For example, if we started with a Cobb-Douglas production function, we could specify a cost system consistent with that assumption. 2. However, this approach would appear too restrictive. Specifically, we have shown that given that the cost function obeys certain properties that a valid technology exists that would justify it. 3. Thus, economists have typically turned to flexible functional forms that allow for a wide variety of technologies.
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This note was uploaded on 02/01/2012 for the course AEB 6184 taught by Professor Staff during the Fall '09 term at University of Florida.

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ak6gRS-Lecture 18-2005 - Cost Functions and the Estimation...

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