Marc Nerlove has estimated the following cost function for electricity generation: Y = AX β P α1
Question:
Y = AXβ Pα1 Pα2 Pα3u €¦€¦€¦€¦€¦.. (1)
Where
Y = total cost of production
X = output in kilowatt hours
P1 = price of labor input
P2 = price of capital input
P3 = price of fuel
u = disturbance term
Theoretically, the sum of the price elasticities is expected to be unity, i.e., (α1 + α2 + α3) = 1. By imposing this restriction, the preceding cost function can be written as
(Y/P3) = AXβ(P1/P3)α1 (P2/P3)α2u €¦€¦€¦. (2)
In other words, (1) is an unrestricted and (2) is the restricted cost function.
On the basis of a sample of 29 medium-sized firms, and after logarithmic transformation, Nerlove obtained the following regression results:
a. Interpret Eqs. (3) and (4).
b. How would you find out if the restriction (α1 + α2 + α3) = 1 is valid? Show your calculations.
Step by Step Answer:
a Since both models are loglinear the estimated slope coefficients represent the part...View the full answer
