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Quick Reference Guide To Common Functional Forms PDF
Quick Reference Guide To Common Functional Forms PDF
Peter J. Wilcoxen
Departments of Economics and Public Administration
Syracuse University
1
CONTENTS 2
Contents
1 Consumption 3
1.1 Leontief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Cobb-Douglas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Constant Elasticity of Substitution . . . . . . . . . . . . . . . . . . . . . . . 5
1.4 Linear Expenditure System . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.5 Transcendental Logarithmic Indirect Utility . . . . . . . . . . . . . . . . . . 6
1.6 Generalized Leontief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2 Intertemporal Utility 8
2.1 Logarithmic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Constant Intertemporal Elasticity of Substitution . . . . . . . . . . . . . . . 8
2.3 Intertemporal Analog to the Linear Expenditure System . . . . . . . . . . . 9
3 Production 10
3.1 Leontief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Cobb-Douglas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Constant Elasticity of Substitution . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Transcendental Logarithmic Cost Function . . . . . . . . . . . . . . . . . . . 11
1 CONSUMPTION 3
1 Consumption
1.1 Leontief
Zero elasticity of substitution; own-price elasticities are less than one; cross-price elasticities
are negative; homothetic.
Utility:
xi
u = min (1)
αi
Indirect Utility:
N −1
v=m αi pi (2)
i=1
Expenditure Function:
N
e=u αi pi (3)
i=1
Price Index:
N
pu = αi pi (4)
i=1
m
xi = αi (5)
pu
Income Elasticity:
ηm = 1 (6)
Expenditure Share:
pi
si = αi (7)
pu
1 CONSUMPTION 4
1.2 Cobb-Douglas
Unitary elasticity of substitution; own-price elasticities are equal to one; cross-price elastic-
ities are zero; homothetic.
Utility:
N
αi
u= xi (8)
i=1
Indirect Utility:
N
αi
αi
v=m (9)
i=1 pi
Expenditure Function:
N
pi αi
e=u (10)
i=1 αi
Price Index:
N
pi αi
pu = (11)
i=1 αi
Typical Demand Equation:
αi m
xi = (12)
pi
Uncompensated Demand Elasticity:
ηi = 1 (13)
Income Elasticity:
ηm = 1 (14)
Expenditure Share:
si = αi (15)
1 CONSUMPTION 5
Utility:
N σ−1
σ
1 σ−1
σ σ
u= αi xi (16)
i=1
N σ−1
1
v=m αi p1−σ
i (17)
i=1
Expenditure Function:
N 1−σ
1
e=u αi pi1−σ (18)
i=1
Price Index:
N 1−σ
1
pu = αi pi1−σ (19)
i=1
Typical Demand Equation:
N
−1 σ
αi m αi m pu
xi = σ αi p1−σ
i = (20)
pi i=1 pu pi
Uncompensated Demand Elasticity:
ηi = −(1 − si )σ − si (21)
Income Elasticity:
ηm = 1 (22)
Expenditure Share:
σ−1
pu
si = αi (23)
pi
1 CONSUMPTION 6
Utility Function:
u= (xi − γi )αi (24)
i
Supernumary Income (excess of income over required expenditure):
msn = m − pi γ i (25)
i
Indirect Utility Function:
αi
αi
v = msn (26)
i pi
Expenditure Function:
pi αi
e= pi γ i + u (27)
i i αi
Typical Demand Equation:
αi msn
xi = γi + (28)
pi
Expenditure Share:
pi γ i msn
si = + αi (29)
m m
2 Intertemporal Utility
The following assume an intertemporal budget constraint of the form below, where B0 is the
initial stock of financial assets and y is total income from all other sources:
∞ ∞
−rs
p(s)c(s)e ds = B0 + y(s)e−rsds (31)
0 0
For convenience, let W be total wealth:
∞
W = B0 + y(s)e−rs ds
0
2.1 Logarithmic
Unitary intertemporal elasticity of substitution.
Utility Function:
∞
U= ln(c(s))e−ρs ds (32)
0
First-order condition for consumption at time s:
1 −ρs
e = Λp(s)e−rs (33)
c(s)
Consumption expenditure at time s in terms of expenditure at time 0:
p(0)c(0) = ρW
σ−1
c(s)−1/σ e−ρs = Λp(s)e−rs (36)
σ
Consumption expenditure at time s in terms of expenditure at time 0:
1−σ
p(s)
p(s)c(s) = p(0)c(0) eσ(r−ρ)s (37)
p(0)
Initial expenditure as a function of wealth:
∞ 1−σ
W p(s)e−rs
p(0)c(0) = , Γ= e−σρs ds (38)
Γ 0 p(0)
Utility Function:
T
(cs − γs )αs
U= s
(39)
s=0 (1 + ρ)
3 PRODUCTION 10
3 Production
In the following, wi is the price of input i and p is the price of output.
3.1 Leontief
Production Function:
xi
q = min (40)
αi
Cost Function:
C=q αi wi (41)
i
c= αi wi (42)
i
xi = αi q (43)
3.2 Cobb-Douglas
Production Function:
α
i
q=A xi (44)
i
Cost Function:
αi
1 wi
C= q (45)
A i αi
Unit Cost Function:
αi
1 wi
c= (46)
A i αi
3 PRODUCTION 11
αi qc
xi = (47)
wi
σ
1 σ−1 σ−1
σ σ
q=A δi xi (48)
i
Cost Function:
1
q 1−σ
C= δi wi1−σ (49)
A i
Unit Cost Function:
1
1 1−σ
c= δi wi1−σ (50)
A i
Factor Demand Equation:
σ
c
xi = δi Aσ−1 q (51)
wi
Cost Share:
σ−1
Ac
si = δi (52)
wj
1
ln c = α0 + αi ln wi + βij ln wi ln wj (53)
i 2 i j
Cost Share:
3 PRODUCTION 12
si = αi + βij ln wj (54)
j