Book Mark Book Mark delicious
Producer's Equilibrium or Optimisation or Least cost combination of Factors Homework Help, Tutoring
Home > Economics > Micro Economics > Production Theory > Producer's Equilibrium or Optimisation or Least cost combination of Factors
Tutors on NetTutors on Net
The Cobb Douglas Production Function, The CES Production Function Assignment Help, Tutor Help
Producer's Equilibrium or Optimisation or Least cost combination of Factors
Producer's Equilibrium or Optimisation or Least cost combination of Factors

Producer’s equilibrium or optimisation occurs when he earns maximum profit with optimal combinations of factors. A profit maximisation firm faces two choices of optimal combination of factors.

    1. To minimise its cost for a given output and
    1. To maximise its productivity for a given cost

            Thus the least cost combination of factors denotes to a firm producing the major volume of productivity from a given cost and producing a given level of productivity with the minimum cost when the factors are combined in an optimum manner.

The Cobb Douglas Production Function

            The Cobb Douglas production function is based on the empirical analysis of the American manufacturing industry made by Paul.H.Douglas and C.W.Cobb. “It is a linear homogeneous production function of degree one which takes into account two inputs, labour and capital, for the entire productivity of the manufacturing industry.” The Cobb-Douglas production function is expressed as below

                                                  Q = Ala Cb
            Where Q is the production or output, L and C are inputs of labour and capital respectively. A, a and b are positive parameters where = a > O, b > O.

            The equation describes that productivity depends directly on L and C and that part of output which cannot be explained by L and C are explained by A which is the residual, often called technical change.

The CES Production Function

            It means Constant Elasticity of Substitution or CES Function.

Properties

  1. The CES function is standardised of degree one. Thus like Cobb-Douglas production function, the ES function displays constant returns to scale.
  1. In the CES production function, the average and marginal products in the variables C and L are standardised of degree zero like all linear standardised production functions.
  1. From the above property the incline of an Isoquant i.e. Marginal rate of Technical Substitution MRTS of capital for labour can be represented convex to the origin.
  1. As a consequence of the above, if L and C are substitutable (infinity) for each other an increase in C will require less of L for a given productivity. As a consequent, the MP of L will increase. Thus the MP of an input will increase when the other input is increased.

Merits

It has the following merits and they are listed below.

  1. The CES function is a standardised of grade one, it is more general, it covers all type of returns
  1. This function takes account of a number of parameters
  1. This functions takes account of raw materials among its inputs
  1. CES functions are very easy to approximate and are free from impractical postulations.

Limitations

  1. This production function regards only two inputs. It can be comprehensive to more than two units.  However, it becomes very complex and intricate arithmetically to use it for more than two inputs.
  1. The distribution parameter or capital intensity factor co-efficient α is not dimensionless.
  1. If data are fitted to the CES function, the value of the competence a parameter cannot be made independent of the other units representing in this production function.
  1. If the CES function is used to explain the production of a firm, it cannot be used to explain the aggregate production function of all the firms in the industry. Thus it involves the problem of aggregation of production function of diverse firms in the industry.
  1. It suffers from the drawback that elasticity of substitution amidst any part of inputs is the same which does not materialize to be realistic.
  1. In approximation of the parameters of CES production function we may come across a large number of problems like choice of exogenous variables, judgment procedure and the problem of multi collinear.
  1. There is little possibility of identifying the production function under technological change.

Conclusion

            Despite these limits, CES functions is constructive in its application to prove Euler’s theorem, to reveal constant returns to scale to show that average and marginal products are standardised degree zero and to determine the elasticity of substitution.

Online Live Tutor Producer’s Equilibrium or Optimisation or Least cost combination of Factors:

            We have the best tutors in Economics in the industry. Our tutors can break down a complex Producer’s Equilibrium or Optimisation or Least cost combination of Factors problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Producer’s Equilibrium or Optimisation or Least cost combination of Factors concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Producer’s Equilibrium or Optimisation or Least cost combination of Factors tutoring and experience the quality yourself.

Online The Cobb Douglas Production Function, The CES Production Function Help:

            If you are stuck with an The Cobb Douglas Production Function, The CES Production Function Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide The Cobb Douglas Production Function, The CES Production Function help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing The Cobb Douglas Production Function, The CES Production Function Homework Help. Please do send us the The Cobb Douglas Production Function, The CES Production Function problems on which you need help and we will forward then to our tutors for review.