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Translog Cost Functions: An Application for Mexican Manufacturing

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  • Héctor Salgado Banda
  • Lorenzo E. Bernal Verdugo

Abstract

We use translog cost functions to estimate own-price and substitution elasticities of input demands, economies of scale and average costs in Mexican manufacturing. Data from the Mexican Annual Industrial Survey is used for 1996, 2000 and 2003. We show that a model that allows for nonhomotheticity and nonunitary elasticities of substitution is appropriate to represent the production structure. Allen-Uzawa elasticities indicate the existence of substitution possibilities amongst inputs. The demand for electricity is essentially unitary elastic. All cross-price elasticities are less than one. Both scale economies and average costs diminish as the size of activity class increases. Economies of scale increased for any level of output. The differences in average costs between small and large activity classes were reduced and some disparities prevail in a number of manufacturing groups.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B41245D5E-C969-419F-B0F7-EC2DB03F5E25%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2007-08.

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Date of creation: Apr 2007
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Handle: RePEc:bdm:wpaper:2007-08

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Web page: http://www.banxico.org.mx
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Related research

Keywords: Simultaneous equation models; Translog cost function; Manufacturing;

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  1. Hanoch, Giora, 1975. "The Elasticity of Scale and the Shape of Average Costs," American Economic Review, American Economic Association, vol. 65(3), pages 492-97, June.
  2. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  3. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
  4. Dale Truett & Lila Truett, 1998. "A cost function analysis of the Mexican nonelectrical machinery industry," Applied Economics, Taylor & Francis Journals, vol. 30(8), pages 1027-1035.
  5. Sterner, Thomas, 1989. " Factor Demand and Substitution in a Developing Country: Energy Use in Mexican Manufacturing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(4), pages 723-39.
  6. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-76, August.
  7. Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
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Cited by:
  1. Bölük, Gülden & Koç, A. Ali, 2010. "Electricity demand of manufacturing sector in Turkey: A translog cost approach," Energy Economics, Elsevier, vol. 32(3), pages 609-615, May.

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