Consider the production function Q f K ; L where Q is output, K is capital, and L is labor. Suppose that the

Consider the production function Q ¼ f Kð Þ ; L where Q is output, K is capital, and L is labor. Suppose that the function fðÞis a CES or constant elasticity of substitution production function. The elasticity of substitution, which we denote by v, measures the degree to which capital and labor are substituted when the factor price ratio changes. Let P be the price of output, R be the price of capital, and W the price of labor. If the function fðÞis a CES production function, then the conditions for profit maximization, with errors attached, are ln Q L

 ¼ 1 þ v ln W P

 þ e1 where e1  N 0; s2 1

ln Q K

 ¼ 2 þ v ln R P

 þ e2 where e2  N 0; s2 2

Since these equations are linear in 1, 2, andv, some version(s) of least squares can be used to estimate these parameters. Data on 20 firms appear in the file cespro.dat.