Applied Econometrics with SAS: Modeling Demand, Supply, and Risk by Goodwin Barry K. Ramsey A. Ford Chvosta Jan

Author:Goodwin, Barry K.,Ramsey, A. Ford,Chvosta, Jan
Language: eng
Format: epub
Publisher: SAS Institute

4.3 The Cost Function and Derived Factor Demands

Mathematical models are often used in the social sciences as a means of approximating or describing a real world system. One advantage of formulating a model mathematically is that the model can be tailored so that it is both a realistic and manageable representation of reality. Econometric analysis usually begins by identifying relevant theory, constructing a model, and then applying the model and theory to data. It is then possible to compare the behaviors implied by theory to facts embodied in the data.

Let y be a single scalar-valued output and x an n-dimensional vector of nonnegative inputs. The cost function dual to the production function of the firm can be defined as

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