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    Northwest Florida State College
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Category > Economics Posted 03 May 2017 My Price 9.00

Marc Nerlove has estimated the following cost function for electricity generation* :


Marc Nerlove has estimated the following cost function for electricity generation* :

 

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

 

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.

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Status NEW Posted 03 May 2017 06:05 PM My Price 9.00

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