What are the common problems you encounter while attempting to derive empirical cost function from economic data?
The various problems, which need to be taken care off while determining the empirical cost functions based on the economic data, may be listed as follows:
Appropriate pairing of the cost and output data is very necessary during the process of collection of data.
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 the firm at which the firm is fully adjustable may be known.
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, 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.
With any change in the prices, the money. value cost should be reflected partly through changes in output and partly due to changes in the 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.