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Production is related with costs. In fact, cost function can be derived from estimated production function. In view of empirical determination of production functions, can you think of some limitations of statistical analysis relating to cost function?

Production is related with costs. In fact, cost function can be derived from estimated production function. In view of empirical determination of production functions, can you think of some limitations of statistical analysis relating to cost function?

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1 Answer

It is a true fact that the cost factor is present where some kind of production is undertaken. As regards the determination of the production function and the process of determination of the empirical cost function attached with the same, the following issues need to be taken care of:

Appropriate pairing of the cost and output data is very necessary during the process of collection of data. As both time-series and cross-section analysis are restricted to a relatively narrow range of observed values. And any values outside this range may provide a misleading production function.

The data relating to the time period when the output has been produced at relatively even rate also needs to be carefully obtained. So that the rate at which the firm is fully adjustable may be known.

As most of today’s firms look for better and cheaper ways of producing their output thus the assumption of constant technology needs to be waived off. As with the change in the technology it gives rise to a new production function. Thus, a way of avoiding this confusion is by ‘making an independent variable.

There has always been a difference in way of recording the information from the point of view of an accountant and an economist. And as most of the cost data is collected and recorded by an accountant for their purpose thus, it but be checked that all explicit and implicit costs are also taken into account. Also that all the costs are recorded with reference to a particular time period in which they were incurred.

Relative allocation of costs should be done in case where more-than one product is produced with given productive factors, where such costs may be separated.
It is a known fact that the production function is the representation of the least cost combinations of inputs, however at times it becomes very difficult to find a time-series data, which satisfies the technical efficiency quotient.

With any change in the prices, the money value cost should 136-reflected partly through changes in output and partly due to changes in did price. Thus, for appropriate estimation of cost-output relationship, the impact of price changes on cost needs to be eliminated. In other words, it can be said that with the help of engineering data the limitations of the time series data may be reduced however not eliminated as the engineering data concentrates on manufacturing data.

Another problem in the form of choosing the appropriate functional form of equation to suit the data best needs to be taken care off As the choice of a one function is dependent on its correspondence with the economic properties of the data to the mathematical features of the total cost functions.

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November 19, 2019
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