AGEC 923

Economics of Agricultural Production

Homework 1
Emrah Er

A. One Variable Input

1.
max AX qX
{X}

(1)

AX 1 q = 0

(2)

AX 1 = q

(3)

q
A
1
( q ) 1
X =
A

X 1 =

(4)
(5)

2.
Y = AX
[(
1 ]
q ) 1
Y =A
A
)
(

1 1

1
Y = Aq
A

Y = q 1 () 1 (A)

Y = q 1 1 A 1

1+ 1

(6)
(7)
(8)
(9)
(10)

3.
= AX qX

1
( q ) 1
( q ) 1
= A
q
A
A

1
( ) 1
( ) 1

1
( q ) 1
( q ) 1
1
1
q
=
A

= q 1 1 AA 1 qq 1 1 A 1

= q 1 1 A 1 q 1 1 A 1
[
]
1
1

= q 1 A 1 1 1
[
]
1

= q 1 A 1 1 (1 )

( q ) 1
1
= A 1 (1 )

(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)

4.
( )
1
A 1 (1 ) q 1

=
q
q

( q ) 1
1 1
1

=
A 1 (1 )
1

( q ) 1
1
1

1 1
=
(1 ) A
1

( q ) 1
1
1
= 1A 1

1
1
( q ) 1
( q ) 1
1
= A 1
=

(19)
(20)
(21)
(22)
(23)
(24)

= X
q

(See Equation [5])

(25)

Dividing both sides with P .

(26)

B. Introducing a Fixed Input

5.
= P Y QX = Y qX

Plugging in the production function Y = X Z yields,

= X Z qX = AX qX

Since A = Z .

(27)

6. From Equation [18] we have,

1

= A 1 (1 )

( q ) 1

(28)

Since A = Z ,

( q ) 1
( ) 1
= Z 1 (1 )

( q ) 1

= Z 1 (1 )

(29)
(30)

7.
Y
X Z
=
Z
Z
= X Z 1
((
1 )
q ) 1
=
Z 1
A
((
1 )
q ) 1
=
Z 1
Z

( q ) 1

=
Z 1 Z 1

( q ) 1

=
Z 1 +1

( q ) 1
1
=
Z 1

( )

Z 1 (1 ) q 1

=
Z
Z

( q ) 1

=
Z 1 1 (1 )
1

( q ) 1

=
(1 )
Z 1 1
1

( q ) 1

Z 1 1
=

( q ) 1
1
=
Z 1

When we compare Equation [37] & Equation [42] we can see that they are equal.

(31)
(32)
(33)
(34)
(35)
(36)
(37)

(38)
(39)
(40)
(41)
(42)

C. The Cost Function

8. Q1 X1 + Q2 X2 can be written as q1 X1 + X2 where q1 = Q1 /Q2 . Minimization problem for firm is,
min q1 X1 + X2

{X1 ,X2 }

s.t.

Y = X1 X21

(43)

which can be written as a maximization problem (Since negative of a minimization problem gives
the maximization problem.)
max = q1 X1 X2

{X1 ,X2 }

s.t.

Y = X1 X21

(44)

or

max = q1 X1 X2 + (X1 X21 Y )

(45)

[
]
q1 X1 X2 + (X1 X21 Y )

=
X1
X1

(46)

{X1 ,X2 }

9.

= q1 + X11 X21 = 0

(47)

X11 X21 = q1

(48)

]
[
q1 X1 X2 + (X1 X21 Y )

=
X2
X2

(49)

= 1 + (1 )X1 X2 = 0

(50)

(1 )X1 X2 = 1

(51)

[
]
q1 X1 X2 + (X1 X21 Y )

(52)

= (X1 X21 Y ) = 0

(53)

Y = X1 X21

(54)

From Equation [48] & Equation [51] we have,

X11 X21
q1
=

1
(1 )X1 X2

(55)

Rearranging this gives,

X1 =

X2
(1 )q1

(56)

Plugging this into Equation [54] gives the optimal input level.
[

[
]
X21 (X2 ) X21 ((1 )q1 )
[
]
(1 )q1
Y = X2 ((1 )q1 ) X2 = Y

Y =

X2
(1 )q1

(57)
(58)

Since we know X1 in terms of X2 we can also find its optimal level.

[
X1 =

=Y
=Y
=Y
X1 = Y

(1)q1

(1 )q1
[
]
(1 )q1

(1 )q1
[
] [
]

(1 )q1
(1 )q1
]1
[

(1 )q1
[
]1
(1 )q1

(59)
(60)
(61)
(62)
(63)

10.
= q1 X1 X2
{ [
]1 }
[
]
(1 )q1
(1 )q1
= q1 Y
Y

}
{
[
]
[
]1
(1 )q1
(1 )q1
= Y
+1
q1

[
] {
}
(1 )q1

= Y
q1
+1

(1 )q1
[
] {
}
(1 )q1
1
= Y

(1 )
[ q ] { (1 ) }
1
= Y

(1 )
[ q ] { 1 }1
1
= Y

(1 )

(64)
(65)
(66)
(67)
(68)
(69)
(70)
(71)

11.

=
q1

[
]
[ ] { 1 }1
Y q1
(1)
{

= Y
{
= Y
{
= Y
{

q1
}1

1
(1 )
1
(1 )
(1 )
1

[ q ]1 1
1

}1 [ ]
q 1

(74)

q1 ]1

(75)

}1
(1 )q1

{
}1

(1 )q1

=Y
q1

= Y

Equation [77] & Equation [63] are same, so Hotellings Lemma applies to this case.

(73)

}1 [

(72)

(76)
(77)

12.

= Y

[ q ] {
1

Q2 = Q2

1
(1 )
[ q ] {

}1

1
(1 )
}1

(78)
}1

{
[ q ]
1
1
= Y Q2

(1 )
[ Q1 ] {
}1
1
Q2
= Y Q2

(1 )
[ ] [ ] {
}1
Q1
1
1
= Y Q2
Q2

(1 )
[ ] {
}1
1
1
= Y Q2 Q
Q
1
2

(1 )
[ ] {
}1
1
1 Q1
= Y Q2

(1 )
[ ] {
}1
Q1
Q2
=Y

(1 )
(
)
2
Qi ai
=Y
where a1 = and a2 = (1 )
ai
i=1

So, in general, we have C = Y

n
i=1

Qi
ai

)ai

(79)
(80)
(81)
(82)
(83)
(84)
(85)
(86)

13. As seen from Equation [86], Y enters into equation as multiplicative. So when you double the
output the cost will also be doubled. This is related with the specifics of the production technology.
Cobb-Douglas production function given in the question has constant returns to scale ( + (1
) = 1). The cost function is homogenous of degree one in output if the production function is
CRS. This means that we can write the cost function as C(Q, Y ) = Y C(Q, 1) which shows us the
proportionality of cost to output.

D. One to One Correspondence

E. Econometric Application
14. Production functions express output in terms of inputs which implicitly assumes inputs are exogenous. Whereas in profit function the prices are the only exogenous variables. Profit function
estimation gives the direct estimates of substitution elasticities which is more complicated to calculate in production function estimation and more error prone. Profit function estimation also has
the advantage of increased degrees of freedom.1 In production function estimation there might be
some measurement errors. With profit function estimation we also have the increased freedom of
using flexible functional forms which in turn places less restrictions on the technology.
15. As we discussed in class, Cobb-Douglas is a simple and restrictive functional form. The elasticity of
substitution is one. Similarly CES also has constant elasticity of substitution whereas the translog
production function allows for more flexibility in specification. It puts less restrictions on production and substitution elasticities. The problem with translog function is that it has no closed form
solutions.

1 Nadiri,

M. Ishaq. Infrastructure Capital and Productivity Analysis Cost-and Profit-Function Approaches. Infrastructure in the

21st Century Economy (1993): 107.