New study reveals how production functions shape cost curves in industries.
The article explores different ways to represent production functions and cost functions in economics. By using generalized production functions, the researchers were able to determine how the shape of cost functions changes based on the scale elasticity and substitution elasticity functions. They found that as output increases, the scale elasticities decrease, and average cost curves have unique minima in a U- or L-shape. The study used data from the US transportation equipment industry and statistical methods to estimate these functions.