Production Functions

The major goal of production economics is to increase the efficiency of agricultural

production. This esssentially entails to answer the following questions :
1]
2]
3]
4]
5]
6]

How agricultural production can be managed efficiently ? i.e. Sustained growth

of agricultural production.
How do the inputs combinations minimize the cost on sustained basis ?
How will output respond to change in input output prices ? e.g. Whether the
withdrawal of fertilizer subsidy would affect the output ?
What is the combination of enterprises that will maximize our profit ? e.g. Different
crops + Dairy + Poultry, etc.
How will agricultural production be affected by various levels of technology ?
How do you plan under uncertain situations ? e.g. Drought, flood, etc.

The production economics includes intra and inter farm allocation of agricultural
resources during a given period as well as over a period of time. It treats general
principles for allocation of land, labour, capital and management inputs, which have
scarced amount and alternative uses, so as to achieve a predefined objective such as
profit maximization, etc.
Production Function :
The relationship between inputs and outputs can be characterized as a production
function. Production function is thus a technical and mathematical relationship
describing the manner and extent to which a particular product depends upon the
magnitude of inputs used. In production function, output is "dependent upon" or "related
to" or "determined by" or is the "function of" inputs.
Now a days, inputs, factors and resources are inter-changeably used. But there
exists subtle distinction among them, e.g. the word 'input' is used for seed, fertilizer,
etc. the word "resources" is used for natural resources i.e. land, while the "factor"
includes both input as well as resource.
Wicksteed used the production function for the first time in 1894, but Wicksell
became one of the first economists to treat the production function explicitly in the
year 1901. The production function for multi-product, multi-factor form was developed
by Hicks in 1939. Relatively more recent works were done by the economists like
Carlson, Dano, Frisch, Monger and Samuelson.

Assumptions for Estimating Production Function :

1.

Perfect Knowledge : We should have perfect knowledge of prices of input and

output, availability of resources, markets, etc. for maximizing profit.

2.

The values of inputs and output should be non-negative i.e. Y 0 and Xi 0

(i = 1, 2, ...., k)

3.

Homogeneity of product and input : The production function is defined only

for the same group i.e. observation should not be taken from different groups.
e.g. few observations of groundnut crop and few observations of bajra crop should
not be merged together for estimating a production function. Similarly, the
production functions for crossbred cow, desi cow and buffalo should be estimated
separately.

4.

All the factors and products are perfectly divisible.

5.

Length of time : The length of time should be sufficiently short that we are (i)
unable to alter the fixed resources and (ii) unable to change the technology, but it
should be large enough that the process of transformation is completed.

6.

Technology : The technology (biological or mechanical) is assumed to remain

same for the group under study.

7.

The production function presupposes technical efficiency. This means that every
possible combination of input is assumed to result in maximum level of output.

8.

The production function / input-output relationship is single valued and

continuous. i.e. values should not be in range.

9.

Fixed factors are held constant.

10. Consumers' tastes and preferences and other factors influencing consumers'
demand are given.
11. There are no institutional constraints for using the resources.
12. Returns to scale is assumed to be decreasing.

13.

The production function is characterized by declining marginal

product for all factor-product combinations.

14.

Rate of product transformation between any two products is assumed

to be increasing.

The production function can be expressed in the following ways :

(i)
Arithmetically
(ii)
Geometrically or graphically and
(iii) Algebraically
The graphical presentation of classical / cubic / transcendental
production function is explained below :
Y

EP = 0
F

Output

First Zone
Irrational
Zone

EP = 1
D
II nd Zone
Rational
Zone
1 > EP > 0

EP > 1
A
B

T. P. Curve

III rd Zone
Irrational
Zone
EP < 0

A. P. Curve

E
M. P. Curve

Input
Fig. 1 : Three stages of production function
This production function describes three stages of production, hence,
it is called three zones / stages of production.
Zone - I (Stage - I) :
The first zone starts from the origin and ends where the marginal
product (MP) = Average product (A.P.). In the diagram, at the point 'C',

M.P. = A.P. and hence the elasticity

of production (EP) = 1 (
EP = M.P. /
A.P.). Thus 'ON' portion is called first zone. The point 'A' in the total

It means it is the point where the T.P. curve changes its curvature and the M.P. will be
the highest i.e. point 'B' on M.P. curve. In the first zone, T.P. is increasing at an increasing
rate upto the point of inflection, because M.P. is increassing upto that point. Beyond
the inflection point, T.P. is increasing at decreasing rate. M.P. curve lies above the A.P.
curve throughout the first zone, indicating that M.P. > A.P. The marginal product and
average product will be equal at the end of first zone i.e. point 'C' in the diagram. The
A.P. is maximum at point 'C'. This implies the unit elasticity of production. The first
zone is called irrational zone because the production is increasing at increasing rate in
this zone. The elasticity of production is greater than one indicating that, one percent
increase in the level of input, results into more than one per cent increase in the output.
This suggests that the resources are under utilized and, if more resources are used, the
production / output will increase. It can thus be inferred that the optimum level of
output is not achieved in the first zone. The probable reasons for under utilization of
resources could be the lack of knowledge about optimum level of output, nonavailability of inputs, indivisibility of resources e.g. labour upto optimum level,
inadequate capital, inefficient techniques of farming, uncertainty of future yield and
price, lack of alternative, laziness, etc. to overcome such promblems at marco level,
the extension agencies and government policies will play vital role.
Zone - II (Stage - II) :
'NE' portion in the diagram is called second zone of production. The second zone
starts from the point where MP = AP or AP is maximum i.e. point 'C' and ends at the
point where MP becomes zero i.e. point 'E'. The range of elasticity is zero to one in this
zone, indicating that the total production is increasing but at decreasing rate. The TP
reaches at maximum, when MP becomes zero, i.e. EP also becomes zero. The AP starts
declining but the AP curve lies above the MP curve throughout the zone. This zone is
called rational zone, because the resources are utilized rationally / optimumly in this
zone and the producer gets maximum output in this zone only. After this zone, the total
production starts declining because MP and EP become negative.
Zone - III (Stage - III) :
The third zone starts after the end of second zone. Total production starts declining
in this zone. Both MP and EP become negative. This region is called irrational because
resources are over utilized here. It means the withdrawal of certain quantum of input
will not adversely affect the output, or the same output can be produced with less
magnitude of input. This over utilization of resources could be attributed mainly to the
ignorance of producers, lack of technical know-how, very low prices of inputs, etc.
Problem Exercise :
Q.1. What does the inflection point indicate ?

Ans.

It indicates the maximum marginal product and TP curve changes its curvature
from that point.

Q.2.
Ans.

In which zone, the EP is greater than one ?

In the first zone of production.

Q.3.

If the MP = 3 units at the end of first zone, what will be the values of AP and
EP?
AP will also be 3 units and EP = 1, because at the end of first zone, MP and AP
will be same.

Ans.

Q.4.
Ans.

In which zone, negative value of MP is found ?

In the third zone.

Q.5.
Ans.

Why is the first zone called irrational ?

Because of under utilization of resources in the first zone.

Q.6.
Ans.

Why do some of the farmers operate in the first zone ?

Some of the farmers operate in the first zone due to lack of knowledge,
inadequate capital, non-availability of inputs, etc.

Q.7.
Ans.

Why is the second zone called rational ?

Because resources are efficiently utilized in this zone and the maximum output
can also be achieved in this zone.

Q.8.
Ans.

What happens to TP ? (i) When MP is zero and MP becomes negative ?

When MP is zero, TP will be maximum and when MP becomes negative, TP
starts declining.

Q.9.
Ans.

Give the range of elasticity of production in the second zone.

0 to 1.

Q.10.
Ans.

In which zone AP starts declining ?

From the second zone, it declines continuously.

Q.11.
Ans.

In which zone, both AP and MP are rising ?

In the first zone.

Q.12.

Name the zone of production function, when the values of AP and MP are 2 and
-3 units, respectively.

Ans.

Third zone, because negative MP is found in the third zone only.

Q.13.
Ans.

What is fabrication coefficient ?

It means inverse relationship of AP i.e. X/Y; this shows that how much input is
required to produce one unit of output e.g. 500 kg paddy is required to produce
50 quintals of paddy, then 500/50 = 10. This is the fabrication coefficient.

Q.14.
Ans.

Why is the third zone called irrational ?

Because of over utilization of resources, i.e. more quantities of resources are
used than actually needed.

Q.15.
Ans.

If the maximum value of AP is 15 units. Find out the values of MP and EP.
The value of MP will also be 15 units because at maximum AP, both MP and AP
will be equal (at the end of first zone), hence EP will be one ( EP = MP/AP).

Q.16.
Ans.

In which zones, the AP curve lies above the MP curve ?

In the second and third zone.

Q.17.
Ans.

What happens to AP, EP and MP, when TP declines ?

When TP declines, the AP also declines and both MP as well as EP become
negative.

Q.18.
Ans.

In which zone, the maximum MP is found ?

In the first zone.

Q.19.
Ans.

What will be the value of EP at the point of inflection ?

Greater than one.

Q.20.

If MP = 3 units, AP = 4 units, what will be the value of EP ? What is its

interpretation?
EP = MP/AP = 3/4 = 0.75. This implies that one per cent increase in the level
of input will result into 0.75 percent increase in the output.

Ans.

Q.21.
Ans.

What happens to AP and EP, when MP is zero ?

EP will also be zero, but AP will be positive.

Q.22.
Ans.

In which zone, TP first increases at increasing rate and then at decreasing rate?
In the first zone, upto the point of inflection, TP increases at increasing rate
and then increases at declining rate.

Q.23.

In the beginning of second zone, if TP of 20 units is obtained by using 5 units

of input, find out the values of MP and EP.

Ans.

AP =

Total production (Y)

20
=
= 4 units.
Quantity of input (X)
5

In the beginning of second zone, both AP and MP will be same, hence MP = 4

units, and therefore EP = 1 unit.
Q.24.
Ans.

In which zone, the declining trend of MP but increasing trend of AP is observed?

In the first zone, after the point of inflection, MP starts declining, but AP goes
on increasing.

Q.25.
Ans.

If TP is zero, what will be the value of AP ?

AP will also be zero.

Q.26.
Ans.

When MP is increasing, how does AP behave ?

When MP is increasing, the AP is also increasing, but its value will be less than
MP. (In the first zone.)

Q.27.

If 25 kg of fertilizer dose is applied, the farmer will obtain maximum groundnut

production of 1500 kg per hectare. What will be the elasticity of production at
that point ?
The elasticity of production will be zero, because 1500 kg output is the
maximum production of groundnut, hence, MP at that point will be zero, and
EP = MP/AP = 0/AP = 0.

Ans.

A Summary of Relationship :
Question
A]

i)
ii)

Answer

What happens to TP ?

When MP is increasing
When MP is decreasing but it is
greater than zero
iii) When MP = 0
iv) When MP is negative
v) When AP is increasing

TP is increasing at increasing rate.

TP increases at decreasing rate.
TP is maximum.
TP is decreasing.
TP first increases at increasing rate
(i.e. upto the point of inflection) and
then at decreasing rate.

Question
B]
i)
ii)
iii)
iv)
v)

Answer

What happens to AP ?

When MP > AP
When MP = AP
When MP < AP
When MP increases
When TP is zero

AP is increasing.
AP is maximum.
AP is decreasing.
AP also increases.
AP is zero.
Summary of Zone Comparison :

Variable
Total production

Marginal product
Average product

Elasticity of
production

Zone I
It increases first
at increasing rate
then at decreasing
rate
First increases
then decreases
Increases continuously but
remains less than
marginal product
More than unity

Zone II
Zone III
Increases at decreasing Decreases
rate

Decreases but
remains positive
Decreases but
it is more than
marginal product
Less than one but
greater than zero

Negative
Decreases but
positive

Negative

Terminologies used in Production Economics :

1. Product : It is the result of the use of resources or services of resources, e.g.
wheat, milk, maize, etc.
2. Production : It is the process of transformation of resources / inputs, like seed,
fertilizers, etc. into products.
3. Average product : It is ratio of total product to the quantity of input used in
producing that amount of product.
AP =

4.

T.P. (Y)
Quantity of input (X)

Average marginal product :

It refers to the quantity which additional unit of factor / input adds to the
y
total product. MP =
i.e. it is the rate of change in total product as the quantity
x
of input changes.

5.

Exact marginal product :

It means marginal product at a point, indicated as a derivative.
e.g. For function
Y = a + bx,
MP =

y
=b
x

6.

Choice indicator :
It is a yardstick or an index or a criterion indicating which of the two or
more alternatives is optimum or will maximize a given end, e.g. price ratio &
substitution ratio, MR = MC, etc.

7.

Slope of curve :
It is the rate of change in one quantity in response to the change in the other.
Solpe of curve =

Output

15
10
5

10

20

y
x
5
= 0.5
10

It means one unit of input will add 0.5

unit of output.

Input
8.

Elasticity of production :
It refers to the percentage change in output in response to the percentage
change in input.
i.e. EP =
=
EP =

9.

y
x
%y
= (
* 100) (
* 100)
y
x
%x
y
x
x
y
MP
( y/x = MP, and 1/AP = x/y)
AP

Isoquant or Iso-product curve : (Iso = same, Quant = production)

It represents the various input combinations that can be used to produce a
given output.

e.g.

X1 Input (units)
9
6
5
4
3

X1
9
6
5
4

Isoquant

3
0

2 3

10

X2

X2 Input (units)
2
3
4
7
10

* Any of this combination produces

same level of output e.g. 120 kg.

10. Iso quant map :

It means several iso-quants are shown in one diagram which show different
levels of output with different combinations of inputs, i.e. every output level has
an iso-quant.
X1

I3, y = 180 kg.

I2, y = 150 kg.
I1, y = 120 kg.

X2

11. Iso-cost line :

It indicates all possible combinations of two inputs which can be purchased
with a given outlay of funds.
e.g. A farmer has Rs.36 to spend on two inputs X1 and X2 . The cost (price)
per unit of X1 is Rs.3 and Rs.4 for X2 . Hence, he may either purchase maximum
12 units of X1 or 9 units of X2, joining both these points, it becomes iso-cost line.
X1

Point 'P' is the least cost combination point

where the iso-cost line is tangent to the
isoquant

12
P

isoquant
isocost line
0

X2

12. Isocline : (Iso = Same and Cline = slope)

The line or curve connecting the same slope (Marginal rate of substitution)
for all output levels is known as isocline. It means isocline passes through all the
isoquant at points where they have same slope.
X1
Isoquant
Isocline

X2
13. Scale line :
An isocline passing through the origin is called scale line.
X1
Isocline

X2
14.

Expansion path :
It is the line / curve joining all the least cost combinations on successively
higher isoquants, i.e. the points where MRS = Price ratio. Thus, it shows the path of
expandingoutput.

15.

Ridge lines / Boundary lines / Envelope lines :

It represents the points of maximum output from each input. It is a special
kind of isocline on which MRS is zero or infinite. There will be two ridgelines, one
where MRS of X1 for X2 is zero and another where it is . Since it shows the boundary
of the output, it is called boundary lines. Similarly their shape is like an envelope,
therefore, it is also called "envelope lines". The production must take place within
the area of ridgelines, i.e. it is rational zone.
All ridgelines are isoclines but all isoclines are not ridgelines. Since isoclines
have same slope / MRS, it may be zero, positive etc. So, isoclines can be termed as
ridgelines only when MRS is either zero or infinite. But all ridgelines are called
isoclines, because they have same slope i.e. MRS = 0 or as per the definition of
isoclines.
The diagramatic presentation of isoquants, isoclines, ridgelines, expansion
path and scale line is given below :

Ridgeline for X1

Von Leibig point

<

<

X1

Isoquant
<

y = 120 kg.
y = 105 kg.

<

<

0
Scale line /
Expansion path
N.B.:

Isocline

<

y = 80 kg.
y = 50 kg.
X2
Ridgeline for X2

Any isocline joining least cost combination points is called expansion path.
It may or may not pass through origin.

16. Asymptotic curve :

The curve which does not touch to 'X' axis is called asymptotic curve, e.g.
Isoquant.
17. Marginal rate of substitution :
It is the rate at which one input is substituted for another.
e.g. MRS of X1 for X2 =

X2
X1

18. Elasticity of substitution (ES) :

The concept was first given by Robinson and H.R. Hicks in 1930.
Proportionate change in the input ratio due to proportionate change in the rate of
technical substitution, keeping the output level at constant, is called elasticity of
substitution.
% (x1 / x2)
% (Rate of Technical substitution)
d (x1 / x2)
(dx1/dx2)
=
*
d (dx1/dx2)
(x1 / x2)

ES of x2 for x1 =

19. Marginal rate of product substitution (MRPS) :

It is the substitution ratio for two products, while MRS or MRTS is for factor
substitution.

y1
dy1
=
y2
dy2
MPP of y2
MRPS of y2 for y1 =
MPP of y1
dy
Because MPP of y1 =
dy1
dy
MPP of y2 =
dy2
MRPS of y2 for y1

= (MPP of y2) MPP of y1

Now MRPS of y2 for y1

dy
dy

dy2
dy1
dy1
=
dy2
=

MRPS of y2 for y1

Types of Production Functions :

1.

Linear function :
The form of the function is :
Y = a + bx
The values of 'a' and 'b' may be positive or negative. Here 'a' =
constant, i.e. if the value of 'x' = 0, then y = 'a' i.e. some constant
or fixed production, which may be due to some other factors not
included in the function.
Y
y

+
=a

a
0
Minimum requirement >
of resources
-a

bx

bx
+
a
=-

In case of y = -a + bx, if x = 0, then y = -a, i.e. at least 'k' resources are required for
even negligible production, e.g. minimum moisture in the soil is required to produce at
least some production. We are interested to get at least some output and not interested
in zero output, thus, some resources are required.

Y
e.g. Here, to get 1 kg. of output, at least 6
kg. of X is required.

1
kg.

-a

General form of the function :

y = a + b1x1 + b2x2 + ............................. + bnxn,
Here 'b' indicates that the output increases by this rate by changing one unit of
resource.
Characteristics :
1. Marginal physical product (MPP) :
MPP =

dy
dxi

= bi 0,

Output

Y
We do not get maximum output in linear
function, because MPP i.e. 'b' never tends
to zero, but it is constant.

a
O

Input

2.

At each stage, EP is different. This is the benefit of the linear function.

EP = MP / AP = (b) (x/y). Here 'b' i.e. MP is constant, but APP is changing and
thus, EP will also be changed.
3.

MRTS :
For y = a + bx1 + cx2
MRTS of x1 for x2

OR =

(dy/dx1)
(dy/dx2)
d x2
dx1

b
c

MP x1
=
MPx2

b
c

= constant = k,

because 'b' and 'c' are constnat. So, at each level of output, MRTS would be same.

e.g. y = 10.50 + 3x1 + 7.5x2

MRTS = b/c = 3/7.5 = 1/2.5 = 0.40
Thus, for every stage of production, MRTS will be 0.40 => MRTS is a linear function
without intercept in linear production function.
4.
Isoquant :
y = a + bx1 + cx2
For isoquant, we have to get the values of x1 or x2.

bx1 = y - a - cx2, 'y' is constant because isoquant is always for a given level

of output.

Solve for x1 :

x1 =

y - a
b

( ( bc ( x ,
2

since 'y' and 'a' have some fixed values, they are written together.
Putting

y - a
b

and c/b = ,

x1 = - x2. This implies that an isoquant is a linear function.

Assumptions of Isoquant:
1) If you add one input, you have to reduce
Properties of isoquant :
other input, to maintain same level of output.
2) If addition and substraction of input is one,
X1
i)
Linear :
the MRS=-1, i.e. constant. It is observed in
linear production function.
3) The rational isoquant is one with decreasing
O
X2 MRS.
4) If MRS=0, the production function is y=a.
ii)
Negatively sloped
iii) Decreasing, but two isoquants
do not intersect each other.

X1
y = 80 kg.
y = 50 kg.

O
X2
iv) Constant slope :
i.e. change in input level is same in every stage.
X1
Here AB = BC = CO,
F.Y.M.

A
B
C
O

Urea

X2

x1 = - x2, if
x2 = 0 then x1 = , This shows the perfect
substitution. It means by withdrawing
urea(x2) completely, the yield will be
constant, by increasing another input (x1)
i.e. F.Y.M.

v)

Convex to the origin and decreasing MRTS.

vi) If one isoquant lies above and to the right of another isoquant, the former will
show higher output than the latter.
X1

O
5.

6.

Isocline :

y2 = 125 kg
y2 = 80 kg

X2
dy/dx1
dy/dx2

dx2
dx1

MP of x1
MP of x2

b1
b2

= k,

This is possible only if b1 and b2 i.e. Marginal products are constant and
which is practically not possible. This shows that we do not get isocline in a linear
function.
Ridgelines :
i.e. the slope of isoquant should be zero. It is important to determine the
zones of production.
b1
b1
dx1
=
= 0;
But
0,
b2
b2
dx2
Thus, in a linear function, we can not identify the ridgelines, hence rational
zone is also not possible; i.e. we cannot estimate the maximum profit or optimum
level of input.
Y
Y
No rational zone

Rational zone

O
X
X
Linear function gives directly marginal product or marginal value product.
Elasticity of substitution is infinity.
Economic optima under a budget constraint can be defined as
Px1 i.e. Ratio of MPs is quated to the ratio of input prices.
b1
=
Px2
b2
O

7.
8.
9.

Example 1 : Fit a linear production function assuming production as y, and x1 and

x2 as inputs using the data given in Table 1.
y = a + b1x1
y = a + b1x1 + b2x2.

Sr.No.
1
2
3
4
5
6
7
8
9
10
11
12

(1)
(2)
(3)

Y
3.16
5.49
9.60
6.50
3.68
1.24
3.44
6.70
3.86
10.33
5.03
1.89
60.92

X1

X2

2.96
5.19
8.12
3.82
3.55
3.0
2.47
7.43
2.91
6.31
5.01
3.59
54.36

2.29
2.34
1.96
2.14
0.90
1.68
1.42
1.51
1.02
2.27
1.53
1.05
20.11

y=Y-Y

-1.904
0.4259
4.536
1.436
-1.384
-3.824
-1.624
1.666
-1.204
5.266
-0.034
-3.174

x1=X1-X

x2=X2-X2

-1.636
0.594
4.324
-0.776
-1.046
-1.596
-2.126
3.834
-1.686
1.714
.414
-1.006

0.615
0.665
0.285
0.465
-0.775
.005
-.255
-0.165
0.655
0.595
-0.145
-0.625

x12 = 39.15
x22 = 3.005
y = 5.0767

x1y = 48.12
x1 = 4.53
x2y = 8.18
x2 = 1.675
x1x2 = 3.60
Estimate the values of a & b1 and b2
Estimate the Standard Error (S.E.) of b1 & b2
Work out the coefficient of multiple determination (R2)
For the single variable
y = a + b1x1,
b1 =

x1y
x12

48.12
39.15

= 1.229

a = y - b1x1
= (5.0767) - (1.239 * 4.53)
a = - 0.491
R2 =

b1x1y
y2

(1.239) x (51.826)
87.651

= 0.67

ThiS shows that about 67 per cent variation is explained by x1 input only.
2 = e2 / (n - k - 1)
where
k = total no. of independent variables
n = total no. of observations

e2

S.E.

= y2 - b1 x1y
= 87.651 - 1.139 x 51.826
= 28.621
= 28.621 / (11)
= 2.60
1
x2

2x

2.60
45.485

= 0.239
= - 0.08297 + 1.139x1

S.E.

=
2x

x2
nx2

y = a + b1x1 + b2x2
2
^ b = x1y x2 - x2y x1x2
1
x12 x22 - (x1x2)2
(51.826 x 3.005) - (6.598 x 1.62178)
=
(45.485 x 3.005) - (1.62178)2

1.0819

This shows that one unit increase in the level of x1 will result into 1.099 units
increase in output.
t

b1
^)
SE (b

= (1.0189) / (0.2284) = 4.74 i.e. highly significant.

^
b2

^
b2

x2y x12 - x1y x1x2

=
x12 x22 - (x1x2)2
(6.598 x 45.485) - (51.826 x 1.6217)
=
134.0525
=

1.6117

t
a

e2

y2 - b1 x1y - b2 x2y

=
=

87.651 - 66.7045
20.9465

=e2 / (n - k - 1)
=

^
SE(b1 )

1.6117
0.8886

= 1.81
i.e. non- significant
^)
SE (b
_2
_
_
=
Y - b1x1 - b2x2
=
5.0641 - 1.0819 * 4.596 - 1.6117 * 3.005
=
- 4.7514

^
b2

20.9465
(12 - 2 - 1)

x12

2.3273

2 x22
x22- (x1x2)2

2.3273 x 3.005
(134.0525)

= 0.2284
^
SE(b2)

=
x12

2 x12
x22- (x1x2)2

= 2.3273 x 45.485
134.0525

R2

b1 x1y + b2 x2y
=
y2
=

R2

(1.0819 x 51.826) + (1.6117 x 6.598)

87.651

0.76

This value of R2 indicates that nearly 76 per cent of the total variation is explained
by the variables selected in the function, i.e. x1 and x2 .

Ex.2.

The input output data for 12 farmers are given in the following table.
Sr. No.
1
2
3
4
5
6
7
8
9
10
11
12

X1

X2

2.96
5.19
8.92
3.82
3.55
3.00
2.47
7.43
2.91
6.31
5.01
3.59
55.16

2.29
2.34
1.96
2.14
0.90
1.68
1.42
1.51
1.02
2.27
1.53
1.05
20.11

3.16
5.19
9.60
6.50
3.68
1.24
3.44
6.73
3.86
10.33
5.03
1.89
60.65

From the above data, estimate the followings :

1. Linear
Y = a + b1 x1 + b2 x2
^ ) and 't' values.
2. Standard errors of the regression coefficients, SE(b
i
3. Coefficient of multiple determination (R2).
4. Correlation coefficients.
5. MP.
6. RTS.
7. Isoquant.
Step I
Step II

: Formulate the normal equations.

: Work out the summations, sum of square, and sum of products from the raw
data
Step III : Work out the corrected values.
Step IV : Work out the regression parameters.
Step V
: Estimate the standard errors of regression coefficient.
Step VI : Estimate the 't' value of regression coefficients.
Step VII : Estimate the coefficient of multiple determination.
Step VIII : Work out the marginal products.
Step IX : Work out the R.T.S.
Step X
: Work out the Isoquant equation.
Interpret the results

STEPS :
A.
Formulate normal equations :
y
= na + b1 x1 + b2 x2
x1y = ax1 + b1 x12 + b2 x1x2
x2y = ax2 + b1 x1x2 + b2 x22
B.

Work out the following values :

i]
x1 = 55.16
vii] x12 = 299.04
ii]
x2 = 20.11
viii] x22 = 36.71
iii]
y
= 60.65
ix]
Y2 = 405.8533

iv]
X1 = 4.5967
x]
x1x2 = 96.2694

v]
X2
= 1.6758
xi]
x1y = 330.4367

vi]
Y
= 5.0542
xii] x2y = 109.616
(These values are to be worked out with the help of raw data)

C.

Worked out the following corrected values :

i]
ii]
iii]
iv]
v]
vi]

(2x1 ) 2
x
=
x1 n
(2x2 ) 2
2
x2 =
x2 n
( y) 2
2
2
y
=
y n
x1 y
x1y= x1y n
x2 y
X2Y=
x2y n
x x
X1X2 =
x1x2 - 1 2
n
2
1

= 45.48787
= 3.00899
= 99.3181
= 51.64887
= 7.97671
= 3.8304

Where n = no. of observations.

D.

Work out the regression parameters :

i]
ii]
iii]
iv]

D
b1
b2
a

=
=
=
=

x12 x22
- (x1x2)2 = 122.19675
(x1y x22 - x2y x1x2) / D = 1.0217
(x2y x12 - x1y x1x2) / D = 1.3501
y - b x - b x = - 1.9047
1 1
2 2

E.

The standard error estimation :

i]
e2 = y2 - b1 x1y - b2 x2y = 35.778994
ii]
2
= e2 /(n - k - 1) = 3.9754
Where k = No. of independent variables
iii]
iv]

F.

Variance (b1) = 0.31287

vi]

SE (b2)

Variance (b2) = 1.21647

Estimate 't' values :

b
i]
't' ratio for a) b1 = 1
SE(b1)
b
b) b2 = 2
SE(b2)

= 3.2655
= 1.1098

Compare calculated 't' values with theoretical values at (n - k - 1) d.f. at 5

per cent probability level.
i) b1 is significant
ii) b2 is non significant

Calculate coefficient of multiple determination :

b x y + b x y
= 1 1 22 2
y

= 0.63975

Correlation coefficient between independent variables :

rx1x2 =

I.

= 1.47984

SE (b1)

R2
H.

= 0.09789

v]

ii]

G.

2 x22
Variance (b1) =
D
2
x21
Variance (b2) =
D

x1x2
x12 x22

= 0.327457

Interpretation of results :
dy
dy
i]
MP of x1
=
= 1.0217, Similarly, MP of x2 =
= 1.3501
dx1
dx2
MP of x1
1.0217
ii]
RTS =
=
= 0.7568
1.3501
MP of x2
iii]

Isoquant equations :
e.g. for x1 :- Y = a + b1x1 + b2x2
b1x1= y - a - b2x2
1.0217 x1 = (5.0542 + 1.9047) - 1.3501 x2
1.0217x1 = 6.9589 - 1.3501 x2 , x1= 6.8111 - 1.3214x2

 x1 =

2)

6.9589
1.0217

1.3501
x
1.0217 2

= 6.8111 - 1.3214x2

Cobb. Douglas Production Function :

Cobb and Douglas first applied this function for empirical estimation using the
time series data pertaining to the American manufacturing industries over the period
1899 to 1922. This function is also known as Power function, log linear function, log
log function or double log function. The algebraic forms of the function with one, and
more than one variables are given below :
Original form
Log form
Y = axb
Log y = log a + b log x
b1
b2
Y = ax1 x2
Log y = log a + b1 log x1 + b2 log x2
Y = ax1b1 x2b2.......... xnbn
Log y = log a + b1 log x1 + b2 log x2 + .... + bn log xn
General form is :
n
n
Y=a
Xibi
Log Y = log a+
bi log xi

i=1

i=1

The graphic form is as under :

Y

b>1

Y
y = f (x1)

Y
when b < 1
b=1
O

Fig. : Graphic illustrations of power function with one input variable.

Characteristics :
1. Marginal product :
y = ax1b1. x2b2
dy
= b1 ax1b1-1. x2b2
dx1
x1b1
ax1b1
b2
b1-1
.
x
)
=
( x1 =
2
x1
x1

MP of x1 =

But the encircled portion i.e. ax1b1 . x2b2 = Y,

 MP of x1

i]

dy
b .y
= 1
dx1
x1

Now, for single variable function (y = axb) :

If b = 1, then,
dy/dx = b . axb-1 , Since b = 1, x1-1 = x0 = 1
MP of x = dy/dx = a

Y
b=1

MP
O

If b > 1
MP = dy/dx = a.bxb/x => MP increases
e.g. if b = 2,
2
dy/dx = 2a x / x = 2ax,
Here if x = 2, then MP
becomes 4a, and if x = 4, it becomes 8a. i.e. MP increases because
of greater than one value of b.

ii]

b>1

MP
X

iii] If b < 1
dy/dx = (ab . xb)/x => MP declines, e.g. b = 0.5 and x = 4, i.e. Y = axb = ax0.5
then dy/dx = 0.5 a . x-0.5 = 0.5a = 0.5a
x
4
Y
1 a
MP < 1
dy/dx = 2 . 4 = a
MP
4
Now if x = 9, and b = 0.5,
dy/dx = 0.5a = a/6
X
9
2. When b = 1, this function becomes a linear function. Y = axb, if b = 1, it
becomes y = ax.
3. In Cobb Douglas function, we get either constant, increasing or decreasing returns/
MP, but not all the three of even any two at a time.
4.

Elasticity of production (EP) is constant :

EP = MP/AP, or MP =(EP) (AP).
e.g. Y = axb,
dy/dx = b . axb / x = b.y/x, here y/x = AP.
Now, EP = MP/AP, but MP = b.y/x, and AP = y/x
x
b.y
EP =
.
=b
y
x
Thus, the EP is constant in Cobb Douglas function, or this function directly gives

us the elasticity of production.

5.

Elasticity of Substitution (ES or ) is one

ES or

Proportionate in Input ratio

Proportionate in Rate of Technical
Substitution (RTS)

d (x2/x1) / (x2/x1)
d (dx2/dx1) / (dx2/dx1)
d (x2/x1)
(dx2/dx1)
=
*
(x2/x1)
d (dx2/dx1)

of x1 for x2 =

Now in C.D. function :

y = ax1b1 - x2b2
This is 'Y'
dy/dx = b1 . a x1b1 x2b2
x1
MP of x1 = dy/dx1 = b1 . y / x1
Similarly, MP of x2 = dy/dx2 = b2 y / x2
dividing MP of x1 by MP of x2 :
(dy/dx1)
(dy/dx2)
dx
2
dx1

(b1y/x1)
(b2y/x2)
b1y
.
x1

=
=

x2
=
b2y

b1. x2
b2 . x1

Now, take derivative w.r.t. x2/x1,

d (dx2/dx1)
d (x2 / x1)
d (x2/x1)
ES or
=
(x2/x1)

=b1/b2
*

(dx2/dx1)
d (dx2/dx1)

By reversing b1/ b2 :
b1/ b2 =

d (x2/x1)
d (dx2/dx1)

Now substitute this value in the formula of '', i.e. the encircled portion of '' formula
=b2/b1,
ES = =

(b1/ b2)
(x2 / x1)

* (dx2 / dx1)

But, dx2 / dx1 = (b1 / b2) . (x2 / x1) as mentioned earlier. Again, putting this value in
the function of ES :
ES = =

(b2/ b1)
(x2 / x1)

b1
b2

.* x2
x1

= (b2/ b1) (x1 / x2) (b1/ b2) (x2 / x1) = 1

Example :
Y = 0.7 x10.3 . x20.7
dy/dx1 = 0.21 x1-0.7 . x20.7
dy/dx2 = 0.49 x10.3 . x2-0.3

(dy/dx1)
dx2
0.21 x20.7
x20.3
=
=
* 0.49 x 0.3
(dy/dx2)
x10.7
dx1
1
dx2
0.21 x2
3x2
=
=
dx1
0.49 x1
7x1

Take derivative of dx2/dx1 w.r.t. x2/x1 ,

d (dx2/dx1)
d (x2/x1)

= 3/7

Reversing it :

d (x2/x1)
d (dx2/dx1)

= 7/3

Now,
d (x2/x1)
dx2/dx1
ES = =
*
(x2/x1)
d (dx2/dx1)

The value of this marked part is 7/3

Putting value 7/3 for marked portion, and also put the value of dx2/dx1 = 3x2/7x1
as given earlier :
(7/3)
3x2
ES = =
*
(x2/x1)
7x1
ES = (7/3) (x1/x2) (3x2/7x1) = 1
Thus, it is proved that ES is one in C.D. function.
Similarly, one can try for :
Y = 2.9x10.5 x20.7 ,
Y = 1.5x10.8 x20.2 ,
Y = 3.2x1 . x20.5 ,
Y = 0.8x10.4 . x2 ,
Y = 0.5x10.7 x20.3 ,
Y = 0.8x10.4 . x20.8 ,
Y = 0.6x10.80 x20.6 ,
5.

It starts from origin only, which sometime gives wrong estimate, e.g. in case of
fertilizer / irrigation experiments, if we do not use fertilizer / irrigation, eventhough
yield will not be zero. Thus, in such cases, this function is not useful.

6.

Isoquant are negatively sloped, convex to the origin and asymptotic to the input
axes :

Y = ax1b1 x2b2
x1b1 = [y/ax2b2]
x1
= [y/ax2b2] 1/b1

Solve this:
x1 =

y
a

1
b1

This is the isoquant equation.

b2
b1

x2 .

Here 'a' is constant and 'y' is also fixed, because isoquant is for given level of output.
Thus, the first bracketed part of the right hand side is constant and the coefficient of x2 is
negative which implies the negative slope.

X1

Isoquant
O

7.

X2

The isoquant will never touch to the 'x' axis

i.e. it is asymptotic to 'x' axis.
Any one isoquant can be derived from the
other. It implies that the resources serve as
limitational inputs, i.e. the output becomes zero
when any one of the inputs assumes a zero value, or
minimum resources are needed to produce atleast
some output.

Maxima is not defined :

Y = axb , For maxima, equate first derivative with zero,
dy/dx = abxb-1 = 0
xb-1 = 0/ab = 0
xb / x = 0, i.e. xb = 0, x = 0 i.e. not defined.

OR
dy/dx = (b . axb )/ x = (b . y) / x , (axb = Y)
equating this with zero ;
dy/dx = (b . y) / x = 0,
by = 0 or Y = 0,
i.e. the value of y at any known level of x is not at all defined by this equation.
8.

Degrees of freedom (DF) : i.e. n - k - 1,

Y = ax1b1 x2b2 . x3b3 ,
Here
k=3
D.F. = n - 3 - 1 = n - 4

While in quadratic function :

Y = a+b1x1 - c1x12 + b2x2 - c2x22 + b3x3 - c3x32 dx1x2x3 ,
Here
k = 7,
Degree of freedom is n - 7 - 1 = n - 8

This shows that the decline in D.F. with the increase in number of variables is
relatively less in Cobb-Douglas function as compared to quadratic function. Hence, CobbDouglas production function is very much useful when less number of observations are
there.
9.

Slope of the MP is negative :

MP = dy/dx = abxb-1 = b . yx-1, Now, the derivative of this will be the slope of MP;
2 y
i.e.
x2

= - byx- 2

i.e. negative slope.

The negative slope of MPP in C.D. function implies that the MP increases at declining
rate.
10.

and

Marginal Rate of Technical Substitution (MRTS) :

Y = ax1b1 x2b2

dy/dx = ab1x1b1-1 . x2b2 = (b1 . y) / x1

dy/dx2 = ab2x1b1 . x2b2-1 = (b2 . y) / x2
x1

x2

(dy/dx1)
=
(dy/dx2)

dx2
=
dx1

ax2b2 . b1x1b1-1
ax1b1 . b2x2b2-1

= b2-1 . b1x2b2 . x1b1-1 . x1-b1 . x2-(b2-1)

= b1 . b2-1 . x1b1 - 1 - b1 . x2b2 - b2 + 1
dx2
dx
1

b1x1
=
b2x1

Here b1 and b2 are fixed, thus, MRTS is a linear function of the ratio (x2/x1).
11.

Isoclines :
By equating MRTS to a constant, say 'k', the isocline equation can be derived as:
b1x2
b2x1

= k

x1
= (1/k) (b1/ b2) . x2
b1
Since k b is constant, substitute ' ' for it.
2

x1 = x2.
Thus, the isoclines in C.D. function, is a linear equation with
zero intercept. Hence the isoclines are straight lines passing through the origin i.e. Every
isoclines in C.D. function is scale lines. ( If x2 = 0, then x1 = 0). This shows the fixed
proportion of mix between the two input variables at different levels of output.

X1

<

Isoclines
<

<

<

<

O
12.

<

Isoquants
X2

Ridgelines :
When MRTS is equated with zero, it is called ridgelines.
bx
12
b2x1

X1

=0

Ridgelines
<

<

X2
b1x2 = 0<-- Here b1 0, therefore, if x2 = 0; then only b1x2 becomes zero. For
this reason, the ridgelines in C.D. function will lie only on the axes.
13.

Conveniency :
This function is practically more convenient since it is linear in log and it
directly gives returnss to scale and elasticity of production. The returns sto scale
indicates the percentage change in output due to one per cent change in all the inputs
simultaneously.

14.

Maximum profit is obtainable :

i.e. maxima is not defined for output, but the maximum profit will be obtained,
MP = dy/dx1 = ab1 . x1b1 - 1
Now, MR = MC, will give maximum profit and MR = (MP) * price of output i.e. Py
similarly, marginal cost = price of input i.e. Px1,

(MP) . (Py) = Px1

(ab1 . x1b1-1) . Py = Px1

x1b1-1 =

Px1
ab1 . Py

x1 = Px1
ab1 . Py

( (
1
b1-1

This point gives maximum profit in C.D.

function and, from isoquant, minimum cost is
derived.

* Maxi. profit is possible only when bi<1, and under competitive market conditions where
price of output is constant.
15. Optimum input combination :
Px2
MPx1
dy
b1.y
=

=
= Px1
Px1
MPx2
dx1
x1

Similarly,
dy
=
dx1

b1.y
= Px1
x1

b1 =

Px1 . x1
y

and

Px2 . x2
= b2
y

Now, taking ratio of both the MPs and equating with price ratio :
Px1
(b1.y/x1)
MPx1
=
=
Px2
(b2.y/x2)
MPx2

b1x2
b2x1

Px1
Px2

Px1
. b2x1
Px2
b2
Px1
.
x1
b1
Px2

( (
x = (
(( (
b1x2 =
2

x2 = Px1 . b2
b1
x1
Px1

This is expansion path equation, which is a

linear function and starts from origin, hence it is
called scale line.
This is optimum ratio of the two inputs.

16. Shape of the function :

It flattens out as input increases, i.e. a small change in price ratio will shift the
optimum level of input very much, which is ridiculous.
b
Y
c
Here, change in the
d
slope of priceline from 'ab' to
'cd', has tremendously shifted
a
the fertilizer requirement from
Ox1 to Ox2.
O
x1
x2
Fertilizer
17. Returns to scale :
The returns to scale can be easily estimated from the C.D. production function.
xi
dy
Returns to scale
=
, i = 1, 2, ......, n
y
dx

(( (

Applying this equation in Cobb-Douglas function,

Returns to scale = b1 + b2 + ................ + bn
n

= bi

i=1
i.e. the summation of the powers of all the input variables (i.e. the summation of all the elasticities)
provides us directly the returns to scale. The returns to scale are decreasing, constant or increasing,
depending on whether bi is less than, equal to or greater than one.
18A. C.D. function allows for only complementary inputs. However, it may be a good approximation for production
processes for which factors are imperfect substitutes over the entire range of X1, X2 values.

18B. C.D. function is a linearly homogeneous function :

A production function denoting constant returns to scale is said to be
homogeneous of degree one, indicating that if input is multiplied by constnat amount,
the production will be increased in a same ratio. Hence, it is useful to indicate Euler's
Theorem => MP of factor multiplied by the factor quantity for all the factors total
upto the total product.
dy
dy
i.e. y =
. x1 +
.x
dx1
dx1 2
19. The response function of a Cobb-Douglas production function remains the same
as the original production function since there is no output at x = 0.
Ex.1:
Find out fertilizer dose for maximum and optimum output for the following
Cobb-Douglas production function :
y = 1.025 x0.525
Price of fertilizer (Px) = 50 paise per kg.
Price of output (Py) = Rs.4 per kg.
= 10 kg., x = 20 kg.
y
Conditions for maximum output :
(i)

dy
dx1

=0

(ii)

dy
<0
dx1

Now first we shall try for the maximum output :

dy
First condition is
=0
dx

y = 1.025 x0.525

dy
= (1.025) (0.525) x0.525 - 1 = 0
dx
= 0.538 x- 0.475 = 0

B.

x=0

i.e. No maximum output is possible

because zero level of input means
zero output, moreover, no second
derivative is possible

Fertilizer dose for optimum production level :

Condition for optimum dose is dy/dx = Px/Py,
(1.025) * (0.525)- 0.475 = 0.5/4
= 0.538 / x0.475 = 0.125
= 0.538 / 0.125 = x0.475
1/0.475
x = [0.538 / 0.125]
= 21.65 kg.dose of fertilizer for optimum production.
Substituting this value of x in the condition of optimality :
i.e. MR = MC
OR
(MP) (Py) = Px
- 0.475
= {(1.025) (0.525) x
} (4) = 0.50
= {(0.538) (21.65)- 0.475} (4) = 0.50
= 0.4996 ~ 0.50

9.60

6.50

3.68

1.24

5.44

6.73

3.86

10.33

5.03

1.89

3.60

6.21

5.82

10

11

12

13

14

15

Total 78.28

5.19

2.57

2.86

1.18

1.05

1.53

2.27

1.02

1.51

1.42

1.68

0.90

2.14

1.96

2.34

67.52 26.72

4.02

3.66

4.27

3.99

5.01

6.31

2.91

7.43

2.47

3.00

3.55

3.83

8.92

5.19

Sr.
y
x1
x2
No. (output (unit) (unit)
in unit)
1
3.16
2.96 2.29

21.5843 7.7625 22.8554 32.9031

1.3913 0.9439 1.7613 1.9357

1.2975 1.0508 1.8262 1.6835

1.4516 0.1655 1.2809 2.1071

1.3838 0.0488 0.6366 1.9149

1.6114 0.4253 1.6154 2.5966

1.8421 0.8198 2.3351 3.3933

1.0682 0.0198 1.3507 1.1410

2.0055 0.4121 1.9066 4.0200

0.9042 0.3507 1.6938 0.8176

1.0986 0.5188 0.2151 1.2069

1.2669 -0.1054 1.3029 1.6050

1.3429 0.7608 1.8718 1.8034

2.1883 0.6729 2.2618 4.7887

1.6467 0.8502 1.6467 2.7116

3.1022 1.3132

3.3350 1.3634

1.6407 0.2402

0.4052 0.0675

2.6095 0.6853

5.4527 1.5102

1.8244 0.0212

3.6351 0.8265

2.8690 0.3171

0.0463 0.5700

1.6975 -0.1353

3.5036 1.0217

5.1157 1.4725

2.7116 1.4000

1.3239 0.8992

34.5731 13.1059

2.4505 1.6625

2.3695 1.9190

1.8594 0.2120

0.8809 0.0310

2.6031 0.6870

4.3015 1.9143

1.4428 0.0267

3.8237 0.7857

1.5315 0.5940

0.2363 0.1116

1.6506 -0.1373

2.5136 1.4241

4.9495 1.5220

2.7116 1.4000

1.2486 0.9533

Log y 2 (Log x1)* (Log x 1)* (Log x2)*

(Log x2) (Log y) (Log y)

5.8924 39.2724 11.5745

0.8909

1.1042

0.0274

0.0024

0.1809

0.6721

0.0004

0.1698

0.1230

0.2692

0.0111

0.5788

0.4528

0.7228

0.6866

1.0852 0.8286 1.1506 1.1777

Log y

Log x22

Log x 2

Log x12

Log x1

Ex.2:
Table

Corrected Values :
log x

2
1

( log x1)2
= log x n
2
1

(21.5843)2
= 32.9031 15
log x22 = log x22 = 5.8924 -

log y

(7.7625) 2
15

log x22

= 1.8753

log y2

= 4.4478

( log y)2
= log y n
2

log x1 log y = log x1 log y -= 34.5731 -

= 13.1059 -

log x1 log x2

log x2 log y
n

(7.7625) (22.8554)
15

log x1 log x2 = log x1 log x2 = 11.5745 -

log x1 log y
n

(21.5843) (22.8554)
= 1.6852
15

log x2 log y = log x2 log y --

= 1.8443

( log x2)2
n

(22.8554)2
= 39.2724 15

^
b1

log x12

= 1.2782

log x1 log x2
n

(21.5843) (7.7625)
15

= 11.5745 - 11.1699

= 0.4046

( log x1 log y . log x22) - ( log x2 log y . log x1 log x2)

[{ log x12 * log x22} - ( log x1 log x2)2 ] = D

{(1.6852) (1.8753)} - {(1.2782) (0.4046)}

{(1.8443) * (1.8753)} - {0.4046)2}
2.6431
=
3.2949
=

^
b1

= 0.8022

Similarly,
^
b2

( log x2 log y . log x12) - ( log x1 log y) . ( log x1 log x2)

=
D
{(1.2782) (1.8443)} - {(1.6852) (0.4046)}
3.2949
1.6756
^ = 0.5085
=
,
b2
3.2949
=

For Standard Errors (S.E.) :

e2 = log y2 - b1 log x1 . log y - b2 . log x2 . log y
= (4.4478) - {(0.880) (1.6852)} - {0.6468) (1.2782)}
= 4.4478 - 1.4965 - 0.8267
2
e = 2.1246
2 = e2/(n - k - 1)
= (2.1246) / (15 - 2 - 1)
2

= 0.1771
2
2
^ = log x2
b1
D
(0.1771) (1.8443)
=
3.2949

Variance of

^ = 0.1008
Variance of b
1

2
2
^ = log x1
b2
D
(0.1771) (1.8773)
=
3.2949

Variance of

=
^)
S.E. ( b
1

^)
S.E. ( b
1

0.3266
3.2949

^
Variance of b2 = 0.0991

^
= Var.
b1

^
^ ) = Var. b
S.E. ( b
2

= 0.1008

0.0991

= 0.3175

^) =
S.E. ( b

0.3148

Cal 't' ratios :

For

^
b1

^
b1

For

^
S.E. of b
1
0.8022
=
0.3175
= 3.1496

R2 = 0.45

^
b2

^
b2

^
S.E. of b
2
0.5085
=
0.3184
= 1.6153

^
^
b1 log x1 . log y + b2 log x2 . log x2 log y
=
log y2

= {(0.8022) (1.6852)} + {(0.5058) (1.2782)}

4.4478
= 2.0018
= 0.4500
R2 = 0.45 = 45 %
4.4478
This shows that about 45 per cent variation has been explained by the selected
explanatory variables.
3.

Quadratic function :
The word quardratic is originally derived from the Latin word 'Quadratus'
which means squared it.
The function is :
This last term indicates
Y = a + b1x1 + b2x2 + b3x12 + b4x22 + b5x1x2
interaction effect.
2
Increasing rate i.e. a - b1x1 + b3x1
Decreasing rate i.e. a + b1x1 - b3x12

For meaningful
interpretaion, the
conditions
b1, b2>0, and
b3, b4<0 should be
satisfied.

Characteristics :
1) MP is a linear function :
e.g. Y = a + b1x1 b2x12 Here the output first increases and then declines,
MP = dy/dx1 = b1 2b2x1 = 0, i.e. Linear function.
2)

Maxima is defined :
Y = a + b1x1 - b2x12
dy/dx1 = b1 - 2b2x1 = 0
b1 = 2b2x1
x1 = b1 /2b2 = 0.5 b1b2- 1

This is the level of 'x' at total product is maximum.

3)

Slope of MP is constant :
e.g. MP = dy/dx1 = b1 - 2b2x1

slope of MP =

4)

Maximum profit :
Condition is MP = Px1/ Py

dy2
- 2b2 i.e. b2 is constant,
x2

OR

Here, the negative sign

of the slope of MP implies
continuous decline of MP or
constant decline of MP.

(MP) (Py) = Px1

(b1 2b2x1) (Py) = Px1

b1 . Py 2b2x1 . Py = Px1
b1 . Py - Px1 = 2b2x1 . Py

5)

Elasticity of production : (EP) :

x
dy
.
y
dx

EP =

This level of x1 gives us maximum profit.

or

= b1 2b2x

a + b1x1 - b2x12
=
x1

(b1 - 2b2x1) (x1)

EP = MP =
(a + b1x1 - b2x12)
AP

b1x1 - 2b2x12
EP =
a + b1x1 - b2x12

6)

b1Py - Px1
2b2Py

= MP
AP

and MP = dy/dx = b1 2b2x1

y
AP =
x

x1 =

Thus, when x1 increases, EP declines i.e.

EP is not constant as it is in case of C.D.
function.

Isoquant :

Y = a + b1x1 + b2x2 b3x12 b4x22 + b5x1x2

B
D

Here, for each level of output, there will

be two values of input x1, e.g. A & B, as well
as C & D.
e.g. For single variable, the function
may be written as:
Ax2 - Bx - C = 0,

Where 'C' is constant in respect to X, 'A' is coefficient of X2 and 'B' is coefficient of X.

The following formula is used for computing the value of X :
b2 - 4ac
2a
Similarly, for two variables also it can be calculated as under :
-b

X=

X1 =
e.g.

OR

-b

b2 - 4ac
2a

Y = a + b1x1 + b2x2 + b3x12 + b4x22 + b5x1x2

Y - a - b2x2 - b4x22 - b1x1 - b5x1x2 - b3x12 = 0

This terms is constant

i.e. 'C' in relation to x1

Simplifying it:
- (b1+b5x2)x1
This breaketed
part is coefficient 'b'

This 'b3' is the

coeffi-cient 'a'

Now, substituting these values in the algebraic equation :

b2 - 4ac
2a
- (b1 + b5x2) (b1 + b5x2)2 - 4b3 (Y - a - b2x2 - b4x22)
X1 =
2b3
X1 =

-b

This is an isoquant equation. Here, if we put either any of its as zero, eventhough,
some value will be there for x1 i.e. The factors are independent. Moreover, it is not a linear
function. In this way, the value of x2 can be computed.
N.B.: Here two roots will be obtained, so, minimum value root should be selected.
7)

8)

MRTS :
Y = a + b1x1 + b2x2 - b3x12 - b4x22 + b5x1x2
dy
= b1 - 2b3x1 + b5x2
dx1
dy
= b2 - 2b4x2 + b5x1
dx2
MP of x1
dy/dx1
dx2
MRTS =
=
=
MP of x2
dy/dx2
dx1

x1 =

x 1 = + x 2 , Thus,
isocline is a linear function, but
isoquant does not.

)
.x
{
{ (b(bk-+kb2b)) { + { (b(b k++2kb
2b )
1

b1 - 2b3x1 + b5x2
b2 - 2b4x2 + b5x1

Isoclines :
i.e. equating MRTS with some constant value,
dx2
MRTS =
= k
dx1
dx2
b1 - 2b3x1 + b5x2
=
=k
dx1
b2 - 2b4x2 + b5x1
b1 - 2b3x1 + b5x2 = k b2 - 2kb4x2 + b5kx1
b1 + b5x2 - kb2 - 2kb4x2 = b5kx1 + 2b3x1
x1 (b5k + 2b3) = (b1 - kb2) + (b5 + 2kb4) x2

9)

Y
O

Ridgelines :
i.e. Equate MRTS with zero.
b1 + b5x2
2b3

b1- 2b3x1 + b5x2

= 0
b2 - 2b4x2 + b5x1

x1 =

b1 - 2b3x1 + b5x2 = 0

x1 = + x2

b
(
( ( 2b ( . x
b1
2b3

Since both are constant

This shows that the ridgelines are linear function in a quadratic production function.
If x2 = 0, then x1 = , i.e. intercept.
The sign of the last term of the production function i.e. b5 indicates the interaction
between x1 & x2 ;
If b5 > 0, x1
=>
Positive slope of ridgelines, it means positive
interaction.
x2
If b5 = 0 x1
x2
If b5 < 0 x1

=>
=>
=>

Ridgeline has zero slope i.e. parallel to axes.

No interaction.
Negative slope => Negative interaction.
Competitiveness of inputs

x2 =>
Thus, the ridgelines are rectangular in nature and intersect at the maximum output level.
10) This function is not homogenous.
Ex.1 : Y = 2500 + 12x - 0.03x2

WhereY = Output of bajra in kg/ha.

x = Fertilizer in kg/ha.

Find out :
(i)
AP when x = 50 kg. and x = 140 kg.
(ii) MP when x = 80 kg. and x = 120 kg.
(iii) EP of x at x = 120.
Ans. (i)
AP = Y/x, and Y = 2500 + 12x - 0.03x2
Now when x = 50, Y = 2500 + 12(50) - 0.03(50)2
Y = 2500 + 600 - 75 = 3025 kg.

AP = Y/x = 3025/50 = 60.50 kg.

When x = 140 kg, Y = 2500 + 12(140) - 0.03(140)2

Ans. (ii)

Y = 2500 + 1680 - 588 = 3592 kg.

AP = Y/x = 3592/140 = 25.66 kg.

MP = 12 - 0.06x
when x = 80, MP = 12 - 0.06(80) = 7.2 kg.
similarly, if x = 120, MP = 12 - 0.06(120) = 4.8 kg.

Ans. (iii)

EP = MP/AP , At x = 120, MP = 4.8 kg.

AP at x = 120 kg, Y = 2500 + 12(120) - 0.03(120)2

Y = 2500 + 1440 - 432 = 3508 kg.

AP = Y/x = 3508/120 = 29.23 kg.

EP = MP/AP = 4.80/29.23 = 0.1642%

Ex. 2 :

The phosphorus response function for groundnut on per hectare basis is :

Y = 1800 + 12x - 0.10x2
(i) Work out the level of x where Y is maximum. What is the maximum attainable
level of yield ?
(ii) How much quantity of phosphorus should be used if it is free of cost and
output (y) has some positive price ?
(iii) What are the levels of phosphorus and output at the inflection point ?

Ans.
(i)

Y = 1800 + 12x - 0.1x2

For maximum 'Y', MP = 0
dy/dx = 12 - 0.2x = 0
0.2x = 12,
x = 60 kg.
This shows that by using 60 kg of phosphorus, maximum output is achieved.
Maximum output (Y)
= 1800 + 12 (60) - 0.1 (60)2
= 1800 + 720 - 360 = 2160 kg.

(ii) If the phosphorus is supplied at free of cost, the aim of the farumers is to get
maximum production, (which automatically will give maximum profit too).
Hence, to achieve maximum yield of 2160 kg, the quantity of fertilizer needed
is 60 kg => The answer is 60 kg of phosphorus should be used even if it is
provided free of cost.
(iii) At the point of inflection, MP is maximum and for that,
dy/dx = 12 - 0.2x = 0 and
2y / x2 = - 0.2, i.e. < 0, putting this value of
- 0.2 in the original equation.
Y = (1800) + 12 (- 0.20) - 0.10 (0.04)
Y = 1800 - 2.40 - 0.004 = 1797.596 kg. when MP is maximum.
Allocation of resources among different crops :
Problem :
A farmer has got 360 kg. of nitrogen N which he wants to allocate between three
crops Y1, Y2 and Y3 . The area under Y1 = 3 hectares, Y2 = 2 hectares and Y3 = 2 hectares.
Allocate the N among three crops given the following response functions :
Y1 = 15 N1 - 0.05 N12
Y2 = 15 N2 - 0.075 N22
Y3 = 15 N3 - 0.1 N32
Assume that the price of Y1, Y2, Y3 and N are same i.e. Re 1 / unit.
Solution :
First we have to find out whether this is limited resource case or unlimited resource
case. For this first we will find the marginal productivities by taking partial derivatives
with respect to N1, N2 and N3 and setting equal to zero.

Y
MPP N1 = 1
N1
Y
MPP N2 = 2
N2
Y
MPP N3 = 3
N3

= 15 - 0.1 N1 = 0

............... (I)

= 20 - 0.15 N2 = 0 ............... (II)

= 25 - 0.2 N3 = 0

............... (III)

From equations (i), (ii), (iii) we get

0.1 N1 = 15
0.15 N2 = 20
N1 = 150
N2 = 133.33
0.2 N3 = 25
........>
N3 = 125
It is given that 3 N1 + 2 N2 + 2 N3 = 360
..................... (IV)
We will substitute the values of N1, N2 and N3 in equation (IV) or multiplying by the
hectarage under each crop, we will get the total quantity of nitrogen required.
3 N1 + 2 N2 + 2 N3
= (150 x 3) + (133.33 x 2) + (125 x 2)
= 450 + 266.66 + 250
= 966.66 kg.

As the total requirement exceeds the

input availability i.e. 966.66 > 360 and
hence this is the case of limited resource
availability.

For allocating the limited resource among three crops, we have to equate the ratio
of marginal value product and price of nitrogen in each of the crops.
MVPY1
P N1

MVPY2
P N2

MVPY3
P N3

or

MP =

MVP = (MP) . PY

MVP
=
P N1

MP.PY
P N1

PN
PY

As the prices of Y1, Y2, Y3 and N are the same i.e. Re 1 / unit, we can equate the
marginal product of N1, N2 and N3.
MPP N1 = MPP N2 = MPP N3
15 - 0.1 N1 = 20 - 0.15 N2 = 25 - 0.2 N3
15 - 0.1 N1 = 20 - 0.15 N2
0.1 N1 = 0.15 N2 - 5
N1 = 1.5 N2 - 50
20 - 0.15 N2 = 25 - 0.2 N3
0.2 N3 = 5 + 0.15 N2
N3 = 25 + 0.75 N2
We have given

3 N1 + 2 N2 + 2 N3 = 360

Substituting the values of N1 and N3 in terms of N2 we get

3(1.5 N2 - 50) + 2 N2 + 2 (25 + 0.75 N2) = 360
4.5 N2 - 150 + 2 N2 + 50 + 1.5 N2 = 360
8 N2 - 100 = 360
8 N2 = 360 + 100 = 460
N2 = 57.5 kg.
N1 = 1.5 N2 - 50
N3 = 25 + 0.75 N2
= 1.5 (57.5) - 50
= 25 + 0.75 (57.5)
= 86.25 - 50
= 25 + 43.125
N1 = 36.25 kg.
N3 = 68.125 kg.
Total N1 = 36.25 x 3 = 108.75 kg.
" N2 = 57.5 x 2 = 115.00 kg.
" N3 = 68.125 x 2 = 136.25 kg.
3 N1 + 2 N2 + 3 N3 = 360
108.75 + 115.00 + 136.25 = 360 kg.
Thus, the limited quantity of 360 kg. of nitrogen is allocated among 3 crops.
Y1 crop = 108.75 kg.
Y3 crop = 136.25 kg.
Y2 crop = 115.00 kg.
4)

Square root function :

This function represents a compromise between Cobb-Douglas function and the
quadratic functions. It is sometimes used in response function. The response function
means the function is used in deviation form, i.e. without intercept.
Y
Y = f (x1)
O

The form is
Y = a + b1x10.5 + b2x1 for single input
Y = a + b1x1 + b2x2 + b3x10.5 + b4x20.5 + b5x10.5 x20.5
i, j = 1, 2, ........, n (i < j)
Characteristics :
1)
Average product (AP) :
a + b1x10.5 + b2x1
AP with respect to x1 input can be found out as: AP =
x1

 AP = b2 + a/x1 + b1x1- 0.5

But in response function i.e. Y = b1x10.5 + b2x1,
AP =

b1x10.5 + b2x1
x1

= b2 + b1x1- 0.5

Generally, b2 < 0 and b1 > 0

2)

Marginal product (MP) :

In a single variable function : MP = dy/dx1 = b2 + 0.5 b1x1-0.5
Thus, MP may be very large at low levels of input i.e. x1, and it declines at slower
rate as the input level is increased, e.g. fertilizer => MP is changing over time.
if x1 = 4, b1 = 0.8, b2 = 1.9
e.g. MP = b2 + 0.5 b1x1-0.5
then,
MP = (1.9) + (0.5) (0.8) (4)-0.5
= (1.9) + {(0.5) (0.8) / 4 }
MP = (1.9) + {0.4 / 2} = 2.10
Now, if x1 = 64,
MP = (1.9) + {(0.5) (0.8) (64)-0.5}
= (1.9) + {(0.5) (0.8) / 64 }
MP = (1.9) + {0.4 / 8} = 1.9 + 0.05 = 1.95
This shows that with the increase in the value of X, MP declines.

3)

Maxima is defined :
i.e. When MP = 0, TP is maximum.
MP = b2 + 0.5 b1x1-0.5 = 0
0.5 b1x1-0.5 = - b2

x1-0.5 =

- b2
0.5 b1

1
-0.5

- b2
0.5 b1

- b2
0.5 b1

-2

0.5 b1
- b2

+2

x1 =

x1 =

4)

Isoquant :
Y = a - b1x1 - b2x2 + b3x10.5 + b4x20.5 + b5x10.5 x20.5
Y - a + b1x1 + b2x2 - b3x10.5 - b4x20.5 - b5x10.5 x20.5 = 0
Y - a + b2x2 - b4x20.5 - b3x10.5 - b5x10.5 x20.5 + b1x1 = 0

0.25 b1
= 0.25 b12 b2- 2
b12

This is the level of input which

yields maximum level of output.

Here, the coefficient of 'X' i.e. b = (- b3 - b5x20.5) X10.5 taking X10.5 outside.

- b b2 - 4ac
x=
2a
+ b3 + b5x20.5 (b3 + b5x20.5)2 - 4b1 (Y-a+b2x2 - b4x20.5)
x1 =
2b1
Thus, the isoquant equation is not a linear function
5)

Elasticity of production (EP) :

EP =

dy
x
. 1
dx1
y

dy/dx1 = b1 + 0.5b2x1-0.5
EP = [b1 + 0.5b2x1-0.5] . x1/y

Thus, EP is not a constant, but it is a function of x => with the change in

value of x, EP will also be changed.
6)

R.T.S. :
Y = a - b1x1 - b2x2 + b3x10.5 + b4x20.5 + b5x10.5 x20.5
MP of x1 = dy/dx1 = - b1 + 0.5b3 x1- 0.5 + 0.5b5x1- 0.5x20.5
MP of x2 = dy/dx2 = - b2 + 0.5b4x2- 0.5 + 0.5b5x10.5x2- 0.5
(dy/dx1)
dx2
=
(dy/dx2)
dx1
- b1 + 0.5b3 x1- 0.5 + 0.5b5x1- 0.5x20.5
RTS =
- b2 + 0.5b4x2- 0.5 + 0.5b5x10.5x2- 0.5
RTS =

7)

Isoclines :
Equate RTS with 'k' i.e. constant.

8)

- b1 + 0.5b3 x1-0.5 + 0.5b5x1-0.5x20.5

- b2 + 0.5b4x2-0.5 + 0.5b5x10.5x2-0.5

Ridgelines :

i.e. It is not constant.

Here the isoclines pass

through the origin, it is non= k linear and converge to a single
point in the input plane.

The R.T.S. is equated with zero.

- b1 + 0.5b3 x1- 0.5 + 0.5b5x1- 0.5x20.5

- b2 + 0.5b4x2- 0.5 + 0.5b5x10.5x2- 0.5

=0

- b1 + 0.5b3 x1- 0.5 + 0.5b5x1- 0.5x20.5 = 0

0.5x1- 0.5 (b3 + b5x20.5) = b1
0.5x1- 0.5 =
x1- 0.5 =

b1
b3 + b5x20.5
2b1
b3 + b5x20.5

x1 =

2b1
b3 + b5x20.5

x1 =

2b1
b3 + b5x20.5

x1 =

b3 + b5x20.5
2b1

1
0.5

-2

Exercise :
A]
A square root polynomial function is given as below :
Y = 1500 + 60 N 0.5 + 400 P 0.5 - 4 N - 30 P + 7 N 0.5 P 0.5
Where,
Y = Yield in kg per hectare
N = Nitrogen in kg per hectare
P = Phosphorus in kg per hectare
Price of output is Re 1 / unit
Price of nitrogen is Rs. 24 per kg
Price of phosphorus is Rs. 35 per kg
Find out the marginal product for N and P and check the second order condition for
profit maximization. Find out the optimum levels of N and P and also the ridge line and
expansion path equations.
Answer :
Y = 1500 + 60 N0.5 + 400 P0.5 - 4 N - 30 P + 7 N0.5 P0.5
MP of N = Y / N = 30 N- 0.5 - 4 + 3.5 N- 0.5 P0.5
MP of P = Y / P = 200 P- 0.5 - 30 + 3.5 N0.5 P-0.5
Profit maximizaation :
TR = PY
C = r1x1 + r2x2
= TR - C = PY - r1 N - r2 P, since x1 = N and x2 = P
= 1 (1500 + 60 N0.5 + 400 P0.5 - 4 N - 30 P + 7 N0.5 P0.5) - 24 N - 35 P
= 1500 + 60 N0.5 + 400 P0.5 - 4 N - 30 P + 7 N0.5 P0.5 - 24 N - 35 P
First order condition for maximization.
/ N = 30 N-0.5 - 4 + 3.5 N-0.5 P0.5 - 24 = 0 .............. (1)
/ P = 200 P-0.5 - 30 + 3.5 N0.5 P-0.5 - 35 = 0 .............. (2)
F1 = r1,
F2 = r2
For finding the values of N and P
solve equation (1) and (2)
30
-4+
N

3.5 P
N

- 24 = 0

200
3.5 N
- 30 +
- 35 = 0
P
P
By L.C.M.
30 - 28 N + 3.5 P = 0 ............. (1)
200 - 65 P + 3.5 N = 0 ............. (2)
Multiplying equation 2 by 8 and adding both the equations :
30 - 28 N + 3.5 P = 0
1600 + 28 N - 520 P = 0

1630 - 516.5 P = 0
516.5 P = 1630
P = 1630 / 516.5 = 3.1559

P = 9.95943

Now putting the value of P in equation (1)

we get
30 - 28 N + 3.5 3.1559 = 0
30 - 28 N + 11.045496 = 0
28 N = 41.045496
N = 1.465910
N = 2.148893

Second order condition for

maximization
F11 = - 15 N - 1.5 - 1.75 N - 1.5 P0.5
F22 = - 100 P 1.5 - 1.75 N0.5 P- 0.5
F21 or F12 = 1.75 N - 0.5 P - 0.5

By substituting the values of N and P we get

F11 = - 6.51
F22 = - 3.263
F21 or F12 = 0.38
Putting the values in B.H. determinant:
- 6.51
0.38
By expanding
-6.51 (-1225) - (+0.38) (- 840) - 24 (- 13.3 - 78.24)
= 7974.75 + 319.2 + 2196.96
= 10171.71

- 24

Hence, the second order condition is satisfied.

Expansion path :
F1
F2

r1
r2

30 N- 0.5 - 4 + 3.5 N- 0.5 P0.5

=
200 P- 0.5 - 30 + 3.5 N 0.5 P- 0.5

24
30

900 N-0.5 - 120 + 105 N-0.5 P0.5 = 4800 P-0.5 - 720 + 84 N0.5 P-0.5 = 0
900 N-0.5 - 4800 P-0.5 + 105 N - 0.5 P 0.5 - 84 N0.5 P-0.5 + 600 = 0
This is the equation of expansion path.
Ridgeline :
P
30 N- 0.5 - 4 + 3.5 N- 0.5 P0.5
=
=0
200 P- 0.5 - 30 + 3.5 N 0.5 P- 0.5
N
= 30 N-0.5 - 4 + 3.5 N-0.5 P0.5 = 0
N
= 200 P-0.5 - 30 + 3.5 N 0.5 P- 0.5 = 0
P
5)

Mitscherlich - Spillman Production function :

E.A. Mitscherlich is the first Economist to explore the nature of fertilizer response
function in 1909. The suggested equation is :
log ao - log (ao - Y) = CX

Where 'ao' is the maximum attainable yield with the addition of amount of nutrient;
'C' is proportionality constant, which defines the rate at which marginal yields decline and
Y is the yield response.
This function was severely criticised since it did not allow negative marginal
products. Moreover, to think of 'C' as constant irrespective of crop is also net reasonable.
6)

Spillman function :
Y = - ARx,
Where is the maximum attainable yield by increasing the level of nutrient, x; A is
a constant which represents the maximum response attainable from the use of input x; and
R = MPi / MPi-1;
The above function can also be written as :
Y = M - A + A - ARX = (M-A) + A (1 - RX) {Adding & subtracting 'A'}
Where (M - A) is the output obtained without any use of the input, and A (1 - RX) is
the addition to the yield or response. The function was further developed as under :
Y = A (1 - R1X1) ;
n
(1 - RiXi)
Y = A (1 - R1X1) (1 - R2X2) and y = A

i=1

Characteristics :
1) Input output curve is
asymptotic,

Y
Y = M - ARX

2)
M-A
O

= A (1- R1x1) x1- 1

It means AP of x1 is a function
of its own level.

X
Spillman function

3)

APx1 =

A (1-R1x1)
x1

MP curve is asymptotic to the input axis and never assuming a negative value.

MP of x1 = dy/dx1 = - ARx1 . log R1,

Thus, this function cannot be used in the situations where there is over utilisation
of resources.
4)

Isoquants :
Y = A (1 - AR1x1) (1 - AR1x2)
x1 = log

{ 1-

Y
A (1 - R2x2)

(log R1) - 1

This implies that one input can never substitute completely for the other.

5)

R.T.S. :
RTS of x2 for x1 =

dx1
dx2

(1- R1x1) R2x2 . log R2

(1- R2x2) R1x1 . log R1

RTS 21 is a function of the levels of x1 and x2 inputs.

6)

Isoclines :
By equating RTS equation to constant 'k' ;
(1- R1x1) R2x2 . log R2
(1- R2x2) R1x1 . log R1

=k

= k (1- R2x2) R1x1 . log R1 = (1- R1x1) R2x2 . log R2

= R2x2 . log R2 - R1x1 . R2x2 . log R2
k (1- R2x2) R1x1 . log R1 + R1x1 . R2x2 . log R2 = R2x2 . log R2
R2x2 . log R2
R =
k (1- R2x2) log R1 + R2x2 . log R2
x1
1

Take natural log on both the sides :

x1 . log R1 = log

x1 = log

R2x2 . log R2
k (1- R2x2) log R1 + R2x2 . log R2

R2x2 . log R2
k (1- R2x2) log R1 + R2x2 . log R2

These isoclines are therfore, not

straightlines. They pass through the
origin. The slope of the isoclines is
asymptotic.

log R1

Isoclines

Isoquants
X

7)

Ridgelines :
By equating the RTS equation with zero and solving for x1 in terms of x2 or vice
versa, it can be seen that the ridgelines are identical with the input axes.
7)

Balmukand or Resistance function :

B. Balmukand is the first Indian to give the production function. The form of the
function is :
Where a, b & c are parameters. In case of fertilizer fn
Y- 1 = a (b + x)- 1 + c,
'b' = nutrient in soil & x = amount added

Where, a, b and c are parameters and in case of fertilizer function,

"b" might be the amount of nutrient in the soil, i.e. Nitrogen, while 'x' is
the amount added. This function is also asymptotic, since maximum yield
is C - 1.
MP = dy/dx = a [a + c (b + x)]-2
This is always positive.
8)

Constant Elasticity of Substitution (CES) function :

It is also called A.C.M.S. function since it is given by Arrow, Chenery,
Minhas and Solow.
To overcome the problem of unit elasticity of substitution in C.D.
function, this function is used.
Original form of the function is :
Y- = k - + L-
Substituting = . and = (1 - ), this function is latteron
-1/
written as under:
Y = [ k- + (1 - ) L- ]
Where, =
Scale (efficiency) parameter, as it is constant in C.D.
function,
which is > 0.
=
Distribution parameter, i.e. as it is "bi" in CobbDouglas function.
=
Substitution paremeter.
Here, ==> > 0,
==> ranges from 0 to 1

Should be greater than or equal to minus one, i.e.

- 1.
*
1)

-1/

Basic properties / characteristics of the function :

Homogeneous of degree one :
-1/
e.g. y = f (x1, x2, ................., xn), if we increase all 'Xi' s by 'k' times,
-1/
'Y' will increase by tk times.
Y = [ k- + (1 - ) L- ]
Now, increase inputs by 't' times
-1/

Y = [ (t k)- + (1 - ) (t L)- ]
= [ k- t- + (1 - ) . t- . L- ]
Take -1/
t- as common,

= [t- { k- + (1 - ) L- }]
-1/

Taking t- outside the bracket,

i.e. (t- )
= t1 = t, and remaining portion becomes original
function i.e. Y.

Thus, CES function is a homogeneous of degree one ( power of

't' is one) i.e. it is
linearly homogeneous => output increases as same percentage as inputs increase. This
also implies that Euler's theorem is qualified here. In case of C.D. fucntion, it is
homogeneous, but it is homogeneous of degree one only when bi = 1.
e.g. Y = ax1b1 . x2b2
Now increase xi by 't' times,
Y
= a (x1t) b1 . (x2t) b2
= a x1b1 . t b1 . x2b2 . t b2
= tb1 + b2 . ax1b1 x2b2
= ( tb1 + b2 ) . Y
2)

Here, b 1 + b 2 = degree of
homogeneity. Thus, if b1 + b2 = 1, then only
the C.D. function becomes homogeneous
of degree one.
*
Quadratic function is not
homogeneous.

Constant Elasticity of Substitution ( ES or ) :

Let us assume the two variables 'k' & 'L',

d (K/L)
d (dk/dL)

(K/L)
(dk/dL)
d (k/L)
(dk/dL)
ES =
*
(k/L)
d (dk/dL)
ES = =

Now, the CES function is :

y- = k- + L- ,
For working out dk/dL, differentiate this function. Here Y = fixed, hence its
derivative is zero.
0 = - k-1. dk - L-1 . dL
k-(+1) . dk = - L-(+1) . dL
Solving this :

OR

L-(1+)
=
k-(1+)
dk
MRTS =
=
dL

dk
dL

MRTS =

dk
dL

L
k

- (1 + )

( (( (

K
= (.
( ( L (

1+

d (dk/dL)
in MRTS =
d (k/L)

Reversing it, we get ;

d (k/L)

1
= .

d (dk/dL)
1+

L
k

( (

This is same as in C.D.

function, except (1 + ) in power.
Now differentiate the MRTS.
i.e. dk/dL w.r.t. k/L,

in MRTS = - (1 + )

K
L

( (

Now,
d (k/L)
(k/L)

ES =

(dk/dL)
d (dk/dL)

The value of encircled part is computed above, and

dk

=
dL

ES =

k
L

1+

( (
-

1
.

1+

L
k

( ( {{

k
L

1+

( ( {

(k / L)

ES = 1/ (1 + )
Thus, here determines the value of ES, but it is always -1, So, ES will be
constant.
Suppose = 0, then ES = 1, This indicates that CES function is reducing to CobbDouglas function, because in C.D. function ES = 1, but here due to our assumption of
0, ES will not be one, but varies from nearly zero to infinite and it may be constant at
a particular time / point.
3)

Average product :
Y = [ k- + (1 - ) L- ] -1/
-1/
OR y = [ x1- + (1 - ) x2- ]
Now, AP of x1 = Y/x1,
-1/
Y . x1-1 = x1-1 . [ x1- + (1 - ) x2- ]

4)

Thus, it implies that the

AP equation is homogeneous
of degree zero (solving the
above equation x1-1 . x1+1 = x10)

M.P. :
-1/
Y = A [ k- + (1 - ) L- ]
-(1/)1
MP of K = dy/dk = - (1/) A [ k- + (1 - ) L- ]
-(1+1/)
=
- A/ [ k- + (1 - ) L- ]
[k- (1+)]

Reversing it
= -

dy

= dk
dy

=
dk

(1)
+
k
L

-(1+1/)

k
L
+

(1-)

k
L
+

(1-)

[k- (1+)]
(1+(1/)

* [k- (1+)]
(1+(1/)

* [k

- (1+)

. [k-1]

Similarly,
dy/dL = - A/ [ k- + (1 - ) L- ]- (1+(1/)) * [(1) L-(1+)]
But > 0 and -1, thus, MP is always positive.
5)

MRTS :

k
L

1+

But, = (1) and = .

( (
(1)
k
MRTS = { This is the Slope of the
{
( L ( isoquant
.
for a given factor ratio.

1+

= - {(1- ) /} {k/L}1+
Case - I :

Here, MP is having positive values.

Assume that = -1

dk/dL = - {(1- ) /} {k/L}1-1 = {- (1- ) /}

k

i.e. MRTS is constant at each

point, because is constant, or
slope of an isoquant is a linear.
L

O
Case - II :
(a)

dk
dL

Suppose = i.e. infinite, Again, here few situations are there :

e.g. if = and K/L > 1,
K
1
k 1+
==-

L
(k/L) > 1

i.e. infinite, because = , and

is power to k/L and again k/L is
greater than one.
(b) If = and k/L < 1,
1

dk
= dL

then
1+

k
L

e.g. k = 100, and L = 200, i.e. k/L = 1/2,

=-

1
2

1+

(( (

Here, = dk/dL => 0, i.e. it tends to zero, or nearer to zero.

(c) If (k/L) = 1 and = ,

dk
= dL
dk
= dL

6)

1+

(( (
(
1

i.e. constant.

e.g. = 0,

Case - III :

(
(

dk
= dL

dk
dL

(
= -(
= -(

k
L

1+

(( (
( ( Lk (
( ( Lk (

Thus, if = 0, MRTS of CES

function is just equal to MRTS of C.D.
function [i.e. (b1/b2) . (x2/x1)].

Elasticity of production :
EP for x1 or k = (dy/dx1) . (x1/y)
Function is :
Y = A [ k- + (1 - ) L-] -1/
MP of k = dy/dk
dk
=A - 1
dL

( ( [t]

- (1 / )-1

* [ (- ) k - (1+) ]

Where t = k- + (1 - ) L-

dy
= A [ t ] - (1 / )-1 * k - ( 1)
dk
dy
= A [ t ] - (1+)/ * k - ( + 1)
dk
A1+
=
[ t ] - [(1+)/] * k - (1+)

=
{ A [ t ] - 1/}1+ * k - (1+)

A
Since (- 1/) (1 + ) = (- 1 / ) - 1.
But value of 't' = k- +(1- ) L ,
substituting this value, A (t) 1/ becomes 'Y',
Thus,

=
[Y]1+ * k - (1+)

A
y 1+

dy

=
K
A
dk

i.e. original function.

dy
k
dk * Y
Y 1+
k

=
*
k
Y
A
Y

EP of k =
k
A
EP of k =

Similarly, for second input ....

7)

L ' Hopital's rule :

As per this rule, we derive the function as below :
Y = k + L ,
if = 0, then
Y0 = k0 + L0 ,
1 = + , Now, total differentiation as per this rule for Y = k + L ,
- Y(1+) . dy = - k(1+) . dk - L(1+) . dL
dy
.dk
dL
=

(1+)
(1+)
1+
Y
k
L
dk
dL
= . 1+ + (1+)
k
L

dy
Y(1+)

Now, as per this rule, putting = 0.

dy
Y

= .

dy
= .
Y

dk
k

dL
L

dk
+
k

Integrate this function.

dL
L

Log Y = . log k + log L + log A i.e. constant,

So, this function is reduced to C.D. function, i.e. Y = A k . L .

Now, if = -1,
Y = k + L
Put = -1,
Y = k + L i.e. if = -1, then CES becomes linear function. Thus CES function
is based on the value of .
9)

VES function :
i.e. variable elasticity of substitution. This function was given by Ravenker.
= b Aa (1- dp) [ N + (P - 1) A ]adp
Where A = area,
N = labour,

= output

Here b > 0 => gives efficiency parameter,

a > 0 gives scale parameter i.e. just like in CES function.
P is the slope.
1-P
N
0 dp 1 ;

1 - dp
A

If "a" is removed from the function, then it will be linearly homogeneous

production function.

Q.1.
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
11)
12)
13)

Answer the following questions in brief.

Explain the meaning of fabrication coefficient.
What do you understand by linearly homogeneous production function ?
All ridgelines are isoclines but all isoclines are not ridgelines, comment on this
statement.
Prove that isoquant is a linear function in case of linear production function.
Derive the average product, when the square root function is given in deviation
form.
Find out the optimum level of input for profit maximisation in case of quadratic
function.
Differentiate the risk and uncertainty.
What do you understand by saddle point in Game Theory ?
The Cobb-Doglas production function has greater utility when there is less number
of observations. How ?
Calculate the elasticity of substitution for the following function :
Y = 1.5 x10.8 . x20.8
What do you understand by capital rationing ? What is the utility of capital
rationing ?
Find out the level of input, where total product is maximum in case of square-root
function.
Explain the variance criteria for diverssification.

Q.2. What is production function ? Explain various assumptions for estimating

production function.
Q.3. A]

B]

Explain the following characteristics of Cobb-Doglas production function:

i)
Ridgelines
ii) Isoquant iii) Expansion path
iv) Elassticity of production
Under which different situations, the Cobb-Doglas production function is
applied ?

Q.4. Discuss in details the returns to scale alongwith its test of significance and suitable
diagrams.
Q.5. Derive the equations of marginal rate of technical substitution and ridgelines in
case of quadratic function. Also give your comments.
Q.6. Give the graphical presentation of the following :
i)
Isoclines
ii) Isoquant map
iii) Ridgelines
iv) Scale line

*****