Note on the CES Production Function

Author(s): F. W. McElroy
Source: Econometrica, Vol. 35, No. 1 (Jan., 1967), pp. 154-156
Published by: The Econometric Society
Stable URL: http://www.jstor.org/stable/1909390 .
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 Econometrica, Vol. 35, No. 1 (January, 1967)

NOTES AND COMMENTS

NOTE ON TIHECES PRODUCTION FUNCTION

By F. W. MCELROY

IN A RECENT issue of Econornetrica [2] T. Yasui stated the following: "Every production
function, f, in a and b with a constant elasticity of substitution a is of the form
f =F[((l - 6)a1-1I0 + 6b1-1hf)e/(6-1)I

where F is any (differentiable) function and 6 is a constant." The present note shows that
the class of functions of the above form is coextensive with the class of functions which
have linear expansion paths and constant elasticity of substitution but demonstrates the
existence of constant elasticity of substitution production functions which do not belong
to this class.
The term production function is used to denote a function f(a, b) with the properties:
(I) f(0,0)= 0;
(1I) f and its partial derivatives of the first and second order are continuous for
a>O, b>O;
(III) f, fa, fb >0 for a,b>0;
(IV) fa/fb is a strictly decreasing function of a/b along any contour f(a, b) = k
(k > 0), where subscripts denote partial differentiation.
For a general production function a relationship of the form a/b = G(f,fa/fb) holds
at all points (a, b,f) on the production surface. The elasticity of substitution at (a, b,f) is
given by
a log (a/b) a log G(fjfa!fb)
alog (falfb) 0log ( a/fb)

The condition for constant elasticity of substitution is

alog G (f, f!fb)
v log (faLfb)

for all a, b,f > 0 where t is a positive constant. This condition implies that log G = log
C(f) - (l/t) log(fa/fb) or G = C(f) (fa/fb)-1/t where C is an arbitrary function of f
alone. Therefore the general CES production function satisfies the differential equation
(1) a/b = C(f) (fa/fb)-11 t.

Yasui considered the case where C(f) is a constant. In this case, and only in this case,
is a/b a function of fa/fb alone. One consequence of this is that the elasticity of substitution
can be written - dlog(a/b)/dlog(fa/fb) and the restriction to movements along an
isoquant loses its significance. It is because in this case elasticity of substitution is constant
along each ray (a/b = constant) that requiring it to be constant along any one isoquant,
as Yasui did, ensures that it has the same value everywhere.
154

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 CES PRODUCTION FUNCTION 155

A relatedconsequenceis that the minimum-costfactor ratio, for given and constant

relativeunit factor costs Pa/Pb, will be the same for all output levels f (linearexpansion
path property),and so the changein the optimalfactorratio and hencein relativefactor
paymentsin response to a price change can be determinedeven if the corresponding
changein outputlevelcannot.All of this wouldstill hold if the definitionof the production
functionwere modifiedto allow Hicks' neutraltechnologicalchange.
The remainderof the note is concernedwith demonstratingthe existenceof solutions
to (1) whereC(f) is not constant,whichhave the propertiesof productionfunctionsand,
of course, constantelasticityof substitution.
Equation(1) is equivalentto
(2) falfb = A (f) (a/b)-t
whereA is arbitrary.
The characteristicsassociatedwith (2) are given by
da db df
1 -A( ) (a/b)-t 0
(c.f. [1]).Theyare planecurveswith planesperpendicularto the f axis. Thosein the plane
f= k satisfy
da db
1 -A(k)(a/b)t
or A(k) (a/b) tda + db = 0. On lettingu = a/b, v = b, this equationis seen to have the
solutions
[A(k)al-t + bl-t]1I(1-t) = k
if to1, or
aA(k)I[A(k)+1]b1-A(k)I[A(k)+1] = k'
if t = 1, wherek' is constant(c.f. [2]).
An integral surface of (2) is obtained by setting up any relationshipof the forrn
R(k,k') = 0. If A (k) is a constant = A, say, and the relationshipR is of the form
F(k') - k = 0, or, in terms of a, b, and f,
(3) F[(Aal-t + b1-t)1(1-t)] - f = 0
we have the case consideredby Yasui. The existenceof other cases is demonstratedb)
taking R to be of the form k' - B(k) = 0, or
(A(f)al-t + bl-t)/(l-t) - B(f) = 0 (t 0 1),
and restrictingA and B so that this relationshipdoes definea uniquefunctionf havingthe
propertiesof a productionfunction. Either of the following sets of restrictionssuffices:
(a) t > 1; B(O)= 0; A, B and their derivativesof the firstand secondorderarecontinu-
ous for all f > O; A, B, A', B'> 0 for f > 0; B(f) takes on everypositivevalue as f varies
from 0 to infinity;or
(b) the same as (a) exceptthat 0< t< 1 and A'< 0 for f >0.
In either case (A(f)al-t + b1-t)1/(1-t) is a decreasingfunction of f for all f>O and
any fixed a, b >0. Also B(f) is a strictlyincreasingfunctionwhich takes on all possible

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156 F. W. MCELROY

positive values as f varies from 0 to infinity; therefore for any fixed a, b >0, there is a
unique f > 0 such that
(A(f)al-t + bl-t)1I(1-t) = B(f)

Denoting tLis unique f by g(a, b) an application of the implicit function theorem proves
that g has the (local) properties of continuity and possession of first and second order
partial derivatives. Moreover if R(a, b,f) is defined by
R(a,b,f) = (A(f)al-t + bl-t)I(1t) - B(`)

ga= -Ra/Rf

[(A(f)a' t +b'-t)tI(I-t)A(f)a-t]
[1j(1-t) (A(f)al -t +bl-t)tl(l -t) A'(f al-t _B'(f)]

and is positive for a, b > 0 under these restrictions. Similarly it can be shown that gb > 0
for a, b >0 and that ga/gb = A (f) (a/b)-t or ga/gb = A[g(a, b)](a!b)-t which shows that
ga/gb is a decreasing function of a/b along any contour g(a, b) = constant, and that g has
elasticity of substitution l/t for all a, b > 0.
The isoquants of this production function g are indeed of the form (in Yasui's notation):
(1 - 6)a1-11G + W-11G = constant, but 6 varies from isoquant to isoquant.1

Georgetown University

REFERENCES

[11 INCE, E. L.: Ordinary Differential Equations, New York: Dover, 1956, pp. 47-52.
[21 YASUI, T.: "The C.E.S. Production Function: A Note." Econornetrica, Vol. 33, July 1965,
pp. 646-648.

1 The authoris indebtedto the refereesfor this way of looking at the matterand also for valuable
suggestionson simplifyingthe exposition.

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