Question

Consider the following total cost function where TCi represents total cost for the ith firm and Qi represents quantity of output.

TC=?1+?2Qi+?3Qi^2+?4Qi^3+e

Consider the total cost function. What sign would you expect for ?2 ?3 , and ?4 ? Explain why. Answer this before looking at the data

Answer 1

The sign of B2 and B4 should be positive and the sign for B3 should be negative.

This the is general form of cubic cost function which has following characteristics:

1. For q=0 cost is equal to B1.

2. Fixed cost is constant for any output.

3. The sign is different for q^2 because the cost function exhibits various rates to scale for a given level of output. The cubic cost function has two points of inflexion where the firm changes from increasing returns to cknstaco return and thereafter to diminishing returns.