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Duality, Optimization, And Microeconomic Theory: Pitfalls For The Applied Researcher

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  • Taylor, C. Robert

Abstract

This article graphically illustrates the one-to-one duality mapping among the production function, the product supply equation, the derived factor demand equation, and the indirect profit function for the classical profit maximization problem. This pedagogical framework is then used to illustrate how empirical application of conventional duality theory can lead to distorted empirical results if the theory (e.g. Hotelling's lemma) does not apply because the firm is not a profit maximizer or because envelope results from the wrong optimization model are used. Although the presentation is in terms of profit maximization, the basic concepts can be extended to other maintained behavioral hypotheses such as cost minimization or utility maximization. Plausible reasons why a firm, even in a competitive market, may not behave according to the neoclassical maximization paradigm are briefly reviewed.

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  • Taylor, C. Robert, 1989. "Duality, Optimization, And Microeconomic Theory: Pitfalls For The Applied Researcher," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 14(2), pages 1-13, December.
    • Handle: RePEc:ags:wjagec:32355
    DOI: 10.22004/ag.econ.32355
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    References listed on IDEAS

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    1. John L. Dillon & J. R. Anderson, 1971. "Allocative Efficiency, Traditional Agriculture, and Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 53(1), pages 26-32.
    2. Young, Douglas L., 1982. "Relevance Of Duality Theory To The Practicing Agricultural Economist: Discussion," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 7(2), pages 1-6, December.
    3. Boland, Lawrence A, 1981. "On the Futility of Criticizing the Neoclassical Maximization Hypothesis," American Economic Review, American Economic Association, vol. 71(5), pages 1031-1036, December.
    4. Caldwell, Bruce J, 1983. "The Neoclassical Maximization Hypothesis: Comment," American Economic Review, American Economic Association, vol. 73(4), pages 824-827, September.
    5. Giancarlo Moschini, 1988. "A Model of Production with Supply Management for the Canadian Agricultural Sector," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(2), pages 318-329.
    6. Chris Fawson & C. Richard Shumway, 1988. "A Nonparametric Investigation of Agricultural Production Behavior for U.S. Subregions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(2), pages 311-317.
    7. Robert D. Weaver, 1983. "Multiple Input, Multiple Output Production Choices and Technology in the U.S. Wheat Region," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 65(1), pages 45-56.
    8. Chambers, Robert G., 1982. "Relevance Of Duality Theory To The Practicing Agricultural Economist: Discussion," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 7(2), pages 1-6, December.
    9. Collins, Glenn S. & Taylor, C. Robert, 1983. "TECHSIM: A Regional Field Crop and National Livestock Econometric Simulation Model," Journal of Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, vol. 35(2), pages 1-18, April.
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    1. Vrankić Ilko & Krpan Mira, 2016. "Pseudoproduction, Pseudocost and Profit Functions in Monopoly from the Dual Perspective," Business Systems Research, Sciendo, vol. 7(2), pages 49-64, September.
    2. Bittencourt, Maurício Vaz Lobo, 2003. "Presence Of Stochastic Errors In The Input Demands: Are Dual And Primal Estimations Equivalent?," 2003 Annual meeting, July 27-30, Montreal, Canada 22096, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Bittencourt, Mauricio Vaz Lobo & Sampaio, Armando Vaz, 2011. "Are Dual and Primal Estimations Equivalent in the Presence of Stochastic Errors in Input Demand?," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 31(2), December.

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