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Measuring Price Responsiveness Under a Profit Maximization Framework

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Abstract

The distinguishing feature of the study is in using a globally flexible functional form that permits one to calculate different types of elasticities under both constant and variable output hypotheses. The Symmetric Generalized McFadden cost function alongwith the output supply condition form the basis of the econometric model. To measure inputsubstitutabilities, we used Alien-Uzawa, Morishima, and Shadow elasticities of substitution. Empirical results, based on 300 farm households from West Bengal, India, show that fertilizer is most price sensitive input. It is a gross substitute for manure and human labor but complement to bullock labor. Manure is a gross substitute for all the inputs whereas human labor is gross complement to bullock labor. Using the Morishima measure we find that the fertilizer and bullock labor are complements when the price of the latterchanges. Similar complementary relationship is found between bullock and human labor due to changes in the price of human labor. All other inputs are Morishima substitutes. The Shadow elasticity of substitution estimates indicate that all factors are substitutes. The estimate of returns to scale indicates the presence of diminishing returns to scale.

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Authors and Affiliations

  1. Marketing Sciences, AT&T Somerset, NJ, 08873, USA

    Arunava Bhattacharyya

  2. Department of Economics, University of Texas at Austin, Austin, Texas, 78712-1173, USA

    Subal C. Kumbhakar

Authors
  1. Arunava Bhattacharyya
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  2. Subal C. Kumbhakar
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Bhattacharyya, A., Kumbhakar, S.C. Measuring Price Responsiveness Under a Profit Maximization Framework. J. Quant. Econ. 1, 66–81 (2003). https://doi.org/10.1007/BF03404649

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