Econometric Methods
FIN5EME
Semester 1, 2013
Assignment 2

* Cobb-Douglas cost function:

TCi = µQiβ2 pi1β3 pi2β4 pi3β5 (1)

Where, TCi= Total Cost for firm i Q= Output of firm i pi1= Wage Rate pi2= Rental Price of Capital pi3= Fuel Price

* Taking the natural log of equation (1)

log(TCi)= β1 + β2 log(Qi) + β3 log(pi1) + β4 log(pi2) + β5 log(pi3) + ei (2)

where β1= (logµ) and ei= error term.

* Eviews Output of the log-log model is as follows:

Dependent Variable: LOG(TC) | | | Method: Least Squares | | | Date: 06/12/13 Time: 12:47 | | | Sample: 1 145 | | | | Included observations: 145 | | | | | | | | | | | | | Variable | Coefficient | Std. Error | t-Statistic | Prob. | | | | | | | | | | | C | -3.526503 | 1.774367 | -1.987471 | 0.0488 | LOG(Q) | 0.720394 | 0.017466 | 41.24448 | 0.0000 | LOG(WAGE) | 0.436341 | 0.291048 | 1.499209 | 0.1361 | LOG(CAPITAL) | -0.219888 | 0.339429 | -0.647819 | 0.5182 | LOG(FUEL) | 0.426517 | 0.100369 | 4.249483 | 0.0000 | | | | | | | | | | | R-squared | 0.925955 | Mean dependent var | 1.724663 | Adjusted R-squared | 0.923840 | S.D. dependent var | 1.421723 | S.E. of regression | 0.392356 | Akaike info criterion | 1.000578 | Sum squared resid | 21.55201 | Schwarz criterion | 1.103224 | Log likelihood | -67.54189 | Hannan-Quinn criter. | 1.042286 | F-statistic | 437.6863 | Durbin-Watson stat | 1.013062 | Prob(F-statistic) | 0.000000 | | | | | | | | | | | | | |

Solution 1:
The estimated coefficients show the proportional change in total cost that results from proportional changes in firm’s output, changes in wages, changes in rental price of capital and changes in prices of fuel. | Estimated Coefficient | β2 | 0.720394 | β3 | 0.436341 | β4 |