Estimating Substitution and Expansion Effects Using a Profit Function Framework

Abstract

Abstract This study reports a first attempt to derive all the relevant information with respect to the structure of production of an industry using knowledge of only a profit function. Using estimates of a profit function for Canadian agriculture, a procedure to separate substitution and expansion effects for both inputs and outputs was implemented. Information concerning net input and output substitution and complementarity possibilities were obtained. The most important empirical results suggest that the hypothesis of nonjoint production of crop and animal outputs in Canadian agriculture cannot be rejected, and that hired and operator labor are complements rather than substitutes.

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