Question

1. A constant elasticity cost function is used frequently for empirical work in economics because it...

1. A constant elasticity cost function is used frequently for empirical work in economics because it is __________________________________.

a. easy to estimate demand relationships when data is not available

b. statistically difficult to work with but makes theoretical sense

c. easy to convert into linear form using logarithms

d. fixed in all its variables

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Answer #1

The elasticity of cost can be defined as EC(q) = . It means change in cost with respect to change in quantity divided by cost by quantity. It is basically the ratio between marginal cost and average cost.

Constant cost elasticity means there will be fixed relationship between MC and AC. Let suppose ratio is 1 i.e in all level of output MC and AC are same. Let suppose the ratio is 2, it means at all level of output MC= 2AC.

So we get a fixed relationship at every level of output. So the answer is d. fixed in all its variables.

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