Read Anytime Anywhere Easy Ebook Downloads at ebookmeta.

com

Handbook of Production Economics Subhash C. Ray

(Editor)

https://ebookmeta.com/product/handbook-of-production-
economics-subhash-c-ray-editor/

OR CLICK HERE

DOWLOAD EBOOK

Visit and Get More Ebook Downloads Instantly at https://ebookmeta.com

Subhash C. Ray
Robert G. Chambers
Subal C. Kumbhakar
Editors

Handbook of
Production
Economics
Handbook of Production Economics
Subhash C. Ray • Robert G. Chambers •
Subal C. Kumbhakar
Editors

Handbook of Production
Economics

With 108 Figures and 20 Tables

123
Editors
Robert G. Chambers
Subhash C. Ray
Department of Agricultural and
Department of Economics
Resource Economics
University of Connecticut
University of Maryland
Storrs, CT, USA
College Park, MD, USA
Subal C. Kumbhakar
Department of Economics
Binghamton University
Binghamton, NY, USA

ISBN 978-981-10-3454-1 ISBN 978-981-10-3455-8 (eBook)

ISBN 978-981-10-3456-5 (print and electronic bundle)
https://doi.org/10.1007/978-981-10-3455-8

© Springer Nature Singapore Pte Ltd. 2022

All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specif-
ically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction
on microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now known or
hereafter developed
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
does not imply, even in the absence of a specific statement, that such names are exempt from the relevant
protective laws and regulations and therefore free for general use.
The publisher, the authors, and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or
the editors give a warranty, expressed or implied, with respect to the material contained herein or for any
errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional
claims in published maps and institutional affiliations

This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd.
The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721,
Singapore
Preface

In recent years, the neoclassical theory of production seems to have lost its appeal
among academics and graduate students in microeconomic theory courses. Students
in standard economics doctoral programs only receive the minimal exposure to
production and cost functions necessary for an exposition of the theory of markets
en route to the ultimate goal of game theory, experimental economic issues, and
strategic behavior. For example, only 40 of the 971 pages of the Microeconomic
Theory book by Mas-Colell, Whinston, and Green (1995) are devoted to production,
cost minimization, and profit maximization. While a student admittedly has learnt
the basic theory of producer behavior in their “Intermediate Micro Theory” courses,
more advanced concepts like Allen-Uzawa partial elasticities of substitution are
not covered either at undergraduate or at graduate level. An average student
never sees a transcendental logarithmic (Translog) or a Generalized Leontief cost
function in class. Yet, the latter half of the twentieth century was an era of
spectacular development in production theory within economics. The 1951 Cowles
Foundation anthology Activity Analysis of Production and Allocation edited by
Koopmans remains one of the richest collection of essays in economic theory.
Appearing at about the same time, the duality theory of Hotelling, Roy, Hicks,
Samuelson, and Shephard opened up novel ways of analyzing the production
technology through cost, revenue, and profit functions. These topics are rarely
covered in microeconomics courses, although these topics are covered in the two-
volume Production Economics: A Dual Approach to Theory and Applications edited
by Fuss and McFadden (1978). In the meantime, Nerlove used the dual cost function
to empirically estimate the parameters of a Cobb Douglas production function using
data for electric utilities in the USA (1965). Emergence of generalized cost functions
(like the Translog, the Generalized Leontief, and the Generalized CES) liberated
the empirical analyst from the confines of Cobb Douglas, Leontief, or the CES
specifications and enriched both economic theory and econometric analysis in equal
measures. These seem to be history now. By the last decade of the past century,
interest in production theory had clearly waned. Resurgence of identification of
production function in the recent literature mostly focuses on the primal Cobb-
Douglas production function – completely bypassing the duality literature.
Papers included in this three-volume handbook focus on both theoretical con-
cepts and empirical issues from neoclassical production economics. Each of the
chapters is intended to provide a state-of-the-art survey on a specific topic in
v
vi Preface

production economics. The objective is to serve as a single unified source of

reference for the serious scholar seeking in-depth knowledge of the underlying
theory behind the sophisticated empirical analysis appearing in applied papers.
The chapters in volumes 1 and 2 of the handbook are devoted exclusively to
theory and different analytical methodologies for empirical estimation. By contrast,
every chapter in volume 3 offers an overview of empirical applications in the
accepted literature that employ the theoretical framework described in volume 1 to
analyze the technical and behavioral relations between relevant variables in various
industries ranging from banking or air transportation to education or professional
sports.
Putting together the 45 chapters of the handbook contributed by more than
twice as many authors, each somehow contributing their valuable time to write the
chapters within their busy schedules already full of numerous commitments, has,
naturally, been a long-drawn effort lasting over years. On top of it, the upheaval
brought about by the Covid-19 pandemic put the viability of the entire project
in jeopardy. Fortunately, however, through the collective effort and cooperation of
the contributing authors and the editorial staff at Springer Nature, we managed to
overcome all hurdles and completed the project.
We are grateful to the editorial staff at Springer Nature for their help and par-
ticularly thank Sagarika Ghosh, Nupoor Singh, Audrey Wong-Hillman, Mokshika
Gaur, and Salmanul Faris Nedum Palli for their valiant effort to keep the publication
on track as much as possible.
At the present moment, rapid and sweeping developments in information tech-
nology are changing the fundamental character of production in many industries,
prompting serious researchers to wonder if there will be any workers left in the
workplace in the near future. We hope that the handbook will help to revive interest
in production economics and inspire a new generation of scholars to revisit and
extend the theory. Only that will make editing this handbook worthwhile.

May 2022 Subhash C. Ray

Robert G. Chambers
Subal C. Kumbhakar
Contents

Volume 1

Part I Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1 Neoclassical Production Economics: An Introduction . . . . . . . . . . . . 3

Robert G. Chambers and Subhash C. Ray
2 Reminiscences of “Returns to Scale in Electricity Supply” . . . . . . . . 49
Marc Nerlove
3 Duality in Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
W. Erwin Diewert
4 Multiproduct Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Rolf Färe, Daniel Primont, and W. L. Weber
5 Functional Structure and Aggregation . . . . . . . . . . . . . . . . . . . . . . . . . 215
Daniel Primont
6 Elasticities of Substitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
R. Robert Russell
7 Distance Functions in Production Economics . . . . . . . . . . . . . . . . . . . 295
Robert G. Chambers and Rolf Färe
8 Stochastic Frontier Analysis: Foundations and Advances I . . . . . . . 331
Subal C. Kumbhakar, Christopher F. Parmeter, and Valentin
Zelenyuk
9 Stochastic Frontier Analysis: Foundations and Advances II . . . . . . 371
Subal C. Kumbhakar, Christopher F. Parmeter, and Valentin
Zelenyuk
10 Data Envelopment Analysis: A Nonparametric Method
of Production Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409
Subhash C. Ray

vii
viii Contents

11 Activity Analysis in Production Economics . . . . . . . . . . . . . . . . . . . . . 471

Thijs ten Raa
12 Bad Outputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483
Sushama Murty and R. Robert Russell

Volume 2
13 Market Structures in Production Economics . . . . . . . . . . . . . . . . . . . 537
Devin Garcia, Levent Kutlu, and Robin C. Sickles
14 Production Under Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575
Robert G. Chambers
15 Dynamic Analysis of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611
Spiro E. Stefanou
16 Cost, Revenue, and Profit Function Estimates . . . . . . . . . . . . . . . . . . 641
Levent Kutlu, Shasha Liu, and Robin C. Sickles
17 Scale Elasticity and Returns to Scale . . . . . . . . . . . . . . . . . . . . . . . . . . 681
Victor V. Podinovski and Finn R. Førsund
18 Nonconvexity in Production and Cost Functions: An
Exploratory and Selective Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 721
Walter Briec, Kristiaan Kerstens, and Ignace Van de Woestyne
19 Index Numbers and Productivity Measurement . . . . . . . . . . . . . . . . . 755
D. S. Prasada Rao
20 Conceptualization and Measurement of Productivity Growth
and Technical Change: A Nonparametric Approach . . . . . . . . . . . . . 821
Subhash C. Ray
21 Modeling Technical Change: Theory and Practice . . . . . . . . . . . . . . 871
Subal C. Kumbhakar
22 Economics of Externalities: An Overview . . . . . . . . . . . . . . . . . . . . . . 925
Jean-Paul Chavas
23 Shadow Pricing in Production Economics . . . . . . . . . . . . . . . . . . . . . . 951
Rolf Färe, Shawna Grosskopf and Dimitris Margaritis
24 Capacity and Capacity Utilization in Production Economics . . . . . . 1001
Dale Squires and Kathleen Segerson
25 Aggregation of Efficiency and Productivity: From Firm to
Sector and Higher Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1039
Valentin Zelenyuk
Contents ix

Volume 3

Part II Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1081

26 Choice of Inputs and Outputs for Production Analysis . . . . . . . . . . . 1083

Subhash C. Ray
27 Airline Economics: A Survey of Applied Issues in the
Performance of the US and International Airline Industry . . . . . . . 1117
Levent Kutlu, Daniel Prudencio, and Robin C. Sickles
28 Globalization, Innovation, and Productivity . . . . . . . . . . . . . . . . . . . . 1145
Shunan Zhao and Man Jin
29 Empirical Analysis of Production Economics: Applications
to Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1165
Stephen M. Miller
30 Applications of Production Economics in Education . . . . . . . . . . . . . 1193
Jill Johnes
31 Dairy Farming from a Production Economics Perspective:
An Overview of the Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1241
Boris E. Bravo-Ureta, Alan Wall, and Florian Neubauer
32 Performance Evaluation of Mutual Funds Using Frontier
Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1281
Subrata Sarkar
33 Performance of Microfinance Institutions: A Review . . . . . . . . . . . . 1309
Christopher F. Parmeter and Valentina Hartarska
34 The Economics of Production in Marine Fisheries . . . . . . . . . . . . . . . 1339
Dale Squires and John Walden
35 Production Economics in Spatial Analysis . . . . . . . . . . . . . . . . . . . . . . 1379
Luis Orea and Inmaculada C. Álvarez
36 Technical Efficiency and Its Determinants in the
Manufacturing Sector: What We Know and What We
Should Know . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1411
Sumon Kumar Bhaumik
37 Application of Production Economics in the Electricity
Distribution Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1433
Ørjan Mydland and Gudbrand Lien
38 Production and the Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1463
Moriah Bostian and Tommy Lundgren
x Contents

39 Applications of Production Theory in Transportation . . . . . . . . . . . . 1491

Phill Wheat, Kristofer Odolinski, and Andrew Smith
40 Productivity in Global Aquaculture . . . . . . . . . . . . . . . . . . . . . . . . . . . 1525
Frank Asche, Ruth Beatriz Mezzalira Pincinato,
and Ragnar Tveteras
41 Benchmarking in the European Water Sector . . . . . . . . . . . . . . . . . . 1563
Alan Horncastle, Joseph Duffy, Chien Xen Ng, and Peter Krupa
42 The Economics of Sports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1629
Joshua Congdon-Hohman and Victor Matheson
43 The Effects of Management on Production: A Survey
of Empirical Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1651
Alecos Papadopoulos
44 Production Economics in the Telecommunications Industry . . . . . . 1699
Arun Bhattacharyya
45 Cost Assessment of (Un)bundling: Separation of Vertically
Integrated Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1751
Pablo Arocena and Subal C. Kumbhakar

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1787
About the Editors

Subhash C. Ray is Professor of Economics at the

University of Connecticut, USA. His principal area
of research is nonparametric measurement of produc-
tivity and efficiency using Data Envelopment Analy-
sis (DEA). His reference textbook Data Envelopment
Analysis: Theory and Techniques for Economics and
Operations Research (Cambridge University Press)
was published in 2004. He is an associate editor of
the Journal of Productivity Analysis. He has served as
guest editor of special issues of the Journal of Produc-
tivity Analysis and Indian Economic Review. He was
a member of the editorial board of Indian Economic
Review. He has lectured and conducted workshops on
DEA in different countries including China, India,
Korea, England, Brazil, Peru, Germany, Malaysia, and
Turkey, among others. He received the W.W. Cooper
Lifetime Contribution Award from International DEA
Society in 2016.

xi
xii About the Editors

Robert G. Chambers was born in Washington,

DC and raised in nearby Rockville, Maryland. He
received his undergraduate training at Georgetown
University, his MS degree from the University of Mary-
land, and his PhD from the University of California
(Berkeley). He joined the faculty at the University of
Maryland in 1979 and has been there ever since apart
from leave to serve as senior economist at the US Presi-
dent’s Council of Economic Advisers. He is a fellow of
the Agricultural and Applied Economics Association.
His areas of interest include production economics,
microeconomic theory, decision-making under uncer-
tainty, and agricultural economics. He is married and
has three sons, Christopher, Geoffrey, and Timothy. He
currently resides in Maryland, New York, and New
Mexico with his wife Michelle, his youngest son Tim,
and their Portuguese Water Dogs, Nelson and Skipper.

Professor Subal C. Kumbhakar (http://bingweb.

binghamton.edu/~kkar/) is a University Distinguished
Research Professor of Economics at the State Uni-
versity of New York at Binghamton. His main area
of research is applied microeconomics with a focus
on estimation of efficiency in production using cross-
sectional and panel data.
Professor Kumbhakar is a fellow of the Journal
of Econometrics (1998) and a distinguished author
of Journal of Applied Econometrics (2017). He holds
an honorary doctorate degree (Doctor Honoris Causa)
from Gothenburg University, Sweden (1997).
Professor Kumbhakar is currently a co-editor of
Empirical Economics, associate editor of Empirical
Economics since 2001, and former associate editor
of the American Journal of Agricultural Economics
(1997–1999). He is serving in the board of editors of
the Journal of Productivity Analysis since 1998; Tech-
nological Forecasting and Social Change: An Interna-
tional Journal since 1991; International Journal of Busi-
ness and Economics since 2002; Macroeconomics and
Finance in Emerging Market Economies since 2007;
Applied Econometrics, http://appliedeconometrics.
cemi.rssi.ru/AppEc_en.html, since 2016; and Ecos de
Economía: A Latin American Journal of Applied Eco-
nomics, http://publicaciones.eafit.edu.co/index.php/
ecos-economia/index, since 2016. He is a board mem-
ber of the Journal of Regulatory Economics since 2015.
About the Editors xiii

Professor Kumbhakar is the co-author (with Knox

Lovell) of Stochastic Frontier Analysis (2000), A Prac-
titioner’s Guide to Stochastic Frontier Analysis Using
Stata (with Hung-Jen Wang and A. Horncastle) (2015)
both published by the Cambridge University Press.
Google Scholar Citations: https://scholar.google.
com/citations?user=-rB5HVsAAAAJ&hl=en
Wikipedia: https://en.wikipedia.org/wiki/Subal_
Kumbhakar
Personal webpage: https://sites.google.com/
binghamton.edu/subalckumbhakar/homes
Contributors

Inmaculada C. Álvarez Oviedo Efficiency Group, Department of Economics,

Universidad Autónoma de Madrid, Madrid, Spain
Pablo Arocena Universidad Pública de Navarra (UPNA), Institute for Advanced
Research in Business and Economics (INARBE), Pamplona, Navarra, Spain
Frank Asche School of Forest, Fisheries and Geomatics Sciences, Institute for
Sustainable Food Systems and Fisheries and Aquatic Sciences, University of
Florida, Gainesville, FL, USA
Arun Bhattacharyya Director of Strategic Forecasting at Pfizer Inc. NYC., New
York, NY, USA
Sumon Kumar Bhaumik Sheffield University Management School, University of
Sheffield, Sheffield, UK
IZA – Institute of Labor Economics, Bonn, Germany
Global Labor Organization, Geneva, Switzerland
Moriah Bostian Department of Economics, Lewis & Clark College, Portland, OR,
USA
Department of Economics, Centre for Environmental and Resource Economics
(CERE), Umeå University, Umeå, Sweden
Boris E. Bravo-Ureta Agricultural and Resource Economics, University of Con-
necticut, Storrs, CT, USA
Walter Briec University of Perpignan, LAMPS, Perpignan, France
Robert G. Chambers Department of Agricultural and Resource Economics,
University of Maryland, College Park, MD, USA
Jean-Paul Chavas University of Wisconsin, Madison, WI, USA
Joshua Congdon-Hohman College of the Holy Cross, Worcester, MA, USA

xv
xvi Contributors

W. Erwin Diewert Vancouver School of Economics, University of British

Columbia, Vancouver, BC, Canada
School of Economics, UNSW, Sydney, NSW, Australia
Joseph Duffy Oxera Consulting, Oxford, UK
Rolf Färe Department of Economics and Department of Agricultural and Resource
Economics, Oregon State University, Corvallis, OR, USA
Department of Economics and Department of Applied Economics, School of Public
Policy, Oregon State University, Corvallis, OR, USA
Department of Agricultural Economics, University of Maryland, College Park, MD,
USA
Finn R. Førsund Department of Economics, University of Oslo, Oslo, Norway
Devin Garcia Ernst and Young, LLP, Houston, TX, USA
Shawna Grosskopf Department of Economics, School of Public Policy, Oregon
State University, Corvallis, OR, USA
Valentina Hartarska Auburn University, Auburn, AL, USA
Alan Horncastle Oxera Consulting, Oxford, UK
Man Jin Department of Economics, Oakland University, Rochester, MI, USA
Jill Johnes Huddersfield Business School, University of Huddersfield, Hudders-
field, UK
Kristiaan Kerstens IESEG School of Management, CNRS, Université de Lille,
UMR 9221-LEM, Lille, France
Peter Krupa Oxera Consulting, Oxford, UK
Subal C. Kumbhakar Department of Economics, State University of New York at
Binghamton, Binghamton, NY, USA
Inland Norway University of Applied Sciences, Lillehammer, Norway
Levent Kutlu Department of Economics and Finance, University of Texas Rio
Grande Valley, Edinburg, TX, USA
Gudbrand Lien Inland School of Business and Social Sciences, Inland Norway
University of Applied Sciences, Lillehammer, Norway
Shasha Liu Enterprise Model Risk, Freddie Mac, McLean, VA, USA
Tommy Lundgren Department of Economics, Centre for Environmental and
Resource Economics (CERE), Umeå University, Umeå, Sweden
Dimitris Margaritis Department of Accounting and Finance, University of Auck-
land Business School, Auckland, New Zealand
Contributors xvii

Victor Matheson College of the Holy Cross, Worcester, MA, USA

Ruth Beatriz Mezzalira Pincinato UiS Business School, University of Stavanger,
Stavanger, Norway
Stephen M. Miller Department of Economics, Lee Business School, University of
Nevada, Las Vegas, Las Vegas, NV, USA
Sushama Murty Centre for International Trade and Development, School of
International Studies, Jawaharlal Nehru University, New Delhi, India
Ørjan Mydland Inland School of Business and Social Sciences, Inland Norway
University of Applied Sciences, Lillehammer, Norway
Marc Nerlove Department of Agricultural and Resource Economics, College of
Agriculture and Natural Resources, University of Maryland, College Park, MD,
USA
Florian Neubauer Agricultural and Resource Economics, University of Connecti-
cut, Storrs, CT, USA
Kristofer Odolinski Institute for Transport Studies, University of Leeds, Leeds,
UK
Society, Environment, and Transport, The Swedish National Road and Transport
Research Institute (VTI), Stockholm, Sweden
Luis Orea Oviedo Efficiency Group, Department of Economics, University of
Oviedo, Oviedo, Spain
Alecos Papadopoulos Athens University of Economics and Business, Athens,
Greece
Christopher F. Parmeter Department of Economics, University of Miami, Miami,
FL, USA
Victor V. Podinovski School of Business and Economics, Loughborough Univer-
sity, Loughborough, UK
Daniel Primont Department of Economics, Southern Illinois University-
Carbondale, Carbondale, IL, USA
Daniel Prudencio Department of Economics, Rice University, Houston, TX, USA
D. S. Prasada Rao School of Economics, The University of Queensland, Brisbane
St. Lucia, QLD, Australia
Subhash C. Ray Department of Economics, University of Connecticut, Storrs, CT,
USA
R. Robert Russell Department of Economics, University of California, Riverside,
Riverside, CA, USA
Subrata Sarkar Indira Gandhi Institute of Development Research, Mumbai, India
xviii Contributors

Kathleen Segerson Department of Economics, University of Connecticut, Storrs,

CT, USA
Robin C. Sickles Department of Economics, Rice University, Houston, TX, USA
Andrew Smith Society, Environment, and Transport, The Swedish National Road
and Transport Research Institute (VTI), Stockholm, Sweden
Dale Squires NMFS, Southwest Fisheries Science Center, La Jolla, CA, USA
Department of Economics, University of California San Diego, La Jolla, CA, USA
Spiro E. Stefanou Food and Resource Economics Department, University of
Florida, Gainesville, FL, USA
Wageningen University, Wageningen, Netherlands
Thijs ten Raa Utrecht School of Economics, Utrecht University, Utrecht, The
Netherlands
Ragnar Tveteras UiS Business School, University of Stavanger, Stavanger, Nor-
way
Ignace Van de Woestyne Research Unit MEES, KU Leuven, Brussel, Belgium
John Walden NMFS, Northeast Fisheries Science Center, Woods Hole, MA, USA
Alan Wall Department of Economics, University of Oviedo, Oviedo, Spain
W. L. Weber Department of Accounting, Economics and Finance, Southeast
Missouri State University, Cape Girardeau, MO, USA
Phill Wheat Institute for Transport Studies, University of Leeds, Leeds, UK
Chien Xen Ng Oxera Consulting, Oxford, UK
Valentin Zelenyuk School of Economics and Centre for Efficiency and Productiv-
ity Analysis (CEPA), The University of Queensland, Brisbane, QLD, Australia
Shunan Zhao Department of Economics, Oakland University, Rochester, MI, USA
 Part I
Theory
Neoclassical Production Economics: An
Introduction 1
Robert G. Chambers and Subhash C. Ray

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
An Overview of Neoclassical Production Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Primal Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Dual Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Restricted Profit Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The Search for a Practical Production Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The Cobb-Douglas Production Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The Constant Elasticity of Substitution (CES) Production Function . . . . . . . . . . . . . . . . . . . 26
Homothetic and Non-homothetic CES Production Functions . . . . . . . . . . . . . . . . . . . . . . . . 28
Additive Implicit Multiple Input Production Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Constant Ratio of Elasticities of Substitution (CRES) Production Functions . . . . . . . . . . . . 32
Indirect Production Function: An Aside . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Additive Implicit Indirect Production Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Flexible Functional Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Appendix 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Appendix 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Appendix 3 Elasticity of Substitution Derived from the Dual Cost Function . . . . . . . . . . . . . . 45
Cross-References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

We thank Chuang Li for his technical assistance in preparing the final version of this manuscript.
R. G. Chambers
Department of Agricultural and Resource Economics, University of Maryland,
College Park, MD, USA
e-mail: rchamber@umd.edu
S. C. Ray ()
Department of Economics, University of Connecticut, Storrs, CT, USA
e-mail: subhash.ray@uconn.edu

© Springer Nature Singapore Pte Ltd. 2022 3

S. C. Ray et al. (eds.), Handbook of Production Economics,
https://doi.org/10.1007/978-981-10-3455-8_18
4 R. G. Chambers and S. C. Ray

Abstract

To emphasize the nexus between the theory and the empirics of production, this
chapter is split into two parts. The first presents a brief overview of the state of
neoclassical production theory as it exists in the third decade of the twenty-first
century. The second part presents an overview of the history of the development
of functional forms for the production function.

Keywords

Production · Primal · Dual · Profit-maximization

Introduction

This handbook is divided into two volumes. The first volume focuses on theoretical
issues of production economics. The second volume focuses on empirical applica-
tions of the theories to applied production analysis. This split, hopefully, clarifies the
presentation. In practice, however, no such clear separation exists. Throughout its
history, production theory has responded to empirical exigency. An early exemplar
is von Thünen’s [25] induction of the principle of diminishing marginal returns from
records for his farming estate. So, too, are the Cobb and Douglas [6] development
of their production function to fit observed trends in US macroeconomic data and
Gorman’s [10] theorem on the aggregation of fixed factors of production.
To emphasize this nexus between production theory and production empirics,
we split this volume’s introductory chapter into two parts. The first presents a brief
overview of the state of neoclassical production theory as it exists in the third decade
of the twenty-first century. The second part presents an overview of the history of
the development of functional forms for the production function

An Overview of Neoclassical Production Theory

Neoclassical theory gradually emerged from classical economics during the last
quarter of the nineteenth century. And, as illustrated by Marshall’s Principles, the
early twentieth-century discussions of producer behavior were heavily sprinkled
with neoclassical notions such as marginal productivity (returns), marginal cost,
and diminishing marginal returns. Often, these ideas were not wholly original to
neoclassical thinkers. For example, classical writers had recognized the principle
of diminishing returns. But they often attributed it to different causes (e.g.,
deteriorating quality of inputs) than the neoclassical school. What distinguished the
early neoclassical writers was their emphasis on the marginal principle defined in
terms of identical units of inputs and outputs.
As the economic analysis of productions systems developed, it became increas-
ingly evident that identical was to be interpreted in the narrowest possible terms
to mean identical in all aspects (e.g., quality, time, place, state of nature, etc.).
1 Neoclassical Production Economics: An Introduction 5

An example from early empirical studies of economic growth illustrates. Growth

accounting seeks to attribute output growth to its basic causes. In the neoclassical
framework, that means attributing output growth to increased resource use and
technical advances in know-how. Abramovitz [1] observed that, according to then
current measurement techniques, the primary source of US national product growth
in the preceding eight decades was not measured resource growth. Instead, it was
an increase in total factor productivity defined as the residual between measured
output growth and input growth. This challenged received neoclassical production
theory because it implied that the neoclassical model of rational producers reacting
to a technology could only explain observed growth patterns in a deus ex machina
fashion as unexplained shifts in production frontiers. Jorgenson and Griliches [14]
showed, however, that once mismeasurements of inputs, outputs, and prices were
eliminated to ensure a closer concordance between measured variates and their
theoretical counterparts, all but a small residual of output growth could be explained
by input adjustments along a given production frontier.1
The essential point is that neoclassical production theory works with precisely
defined mathematical variates, while the extramathematical reasoning [8] that we
attach to it often does not. That theory is a way of organizing our thinking about
how producers behave in real life. Or it’s a set of formal stories about producers
based on a model of real-world decision settings. If the mathematics are correct, so
too must be those formal stories. But because models are not replicas, those formal
stories can and will differ from reality. The ultimate test of a model and its derived
theory is whether they allow us to say something useful about reality.
Ideally, models would allow us to predict exactly observed or measured behavior.
But that seems beyond our reach. So while confronting theoretical models with data
is crucial, one needs to remember that observed data are only truly informative about
a model’s accuracy to the extent that measured variates correspond to the model’s
theoretical variates. Of course, the converse is also true; a model’s usefulness is
circumscribed by the correspondence between the measured variates of interest in
real-world settings and the model’s theoretic variates. The ultimate challenge is to
strike the proper balance.
Our theoretical overview is broken into two parts that roughly accord with dif-
ferent analytic approaches popularly known as the primal and the dual approaches.
This terminology stems from four sources: the mathematical notion of a dual space,
the economist’s choice of market value as the producer’s objective function, the
economist’s expression of behavioral relations for quantities as functions of prices
with both treated as objects falling in the same dimensional real space, and the
different perspectives adopted in analyzing these relations.

1 Atroughly the same that Abramovitz [1] wrote, Schultz [21] articulated the idea that an ideal
input-output formula would have measured output growth completely explained by measured input
growth. If that could be achieved, it would suggest that a complete economic explanation of output
growth had been accomplished. Schultz [21], in a footnote, attributed the idea to Zvi Griliches,
who was a graduate student at the time.
6 R. G. Chambers and S. C. Ray

For an arbitrary space, X, its dual space, X∗ , is defined as the space of linear
operators for X. An important property of finite dimensional real spaces, denoted by
RM , is that they are self-dual in the sense that RM∗ = RM and RM∗∗ = RM . Thus,
as purely mathematical objects, an M−dimensional vector of quantities, denoted
z ∈ RM , and an M−dimensional vector of prices, q ∈ RM , are both recognizable
as linear operators. The  market value of bundleM∗ z ∈ RM is given by the linear
function of quantities m qm zm for prices q ∈ R . But because the dual space of
RM∗ is RM , the same  market value of z ∈ R can
M also be interpreted as the linear
function of prices m zm qm for quantities z ∈ RM∗∗ .
Originally, economists focused their attention on value maximization viewed as
a problem of choosing quantities
 to optimize market values of commodity bundles.
That placed the focus on m qm zm viewed as a linear function of quantities. It was
only with the development of the theory of optimization in the decades following
World War  II that researchers apprehended and exploited the analytic advantages of
viewing m zm qm as a linear function of prices. The quantity-based approach was
identified with the primal terminology and the price-based approach with the dual
approach.
It is to be emphasized that the analytic difference between the two approaches is
one of perspective and technique. The same substantive results are available from
either approach. However, the dual approach quickly proved particularly popular
because it offered an econometrically advantageous way to model production
systems.
The discussion that follows first considers the primal approach. Then the model
is generalized and analyzed from a dual perspective. A brief demonstration of how
the general model can accommodate both long-run and short-run producer behavior
follows.

The Primal Perspective

Prior to roughly 1970, the approach that economists used to analyze productive sys-
tems closely followed Samuelson’s [18] classic treatment of the profit-maximizing
firm. Competitive profit-maximizing producers were modeled as facing a technolog-
ical constraint treated typically as a smooth transformation or production function,
and programming techniques were used to characterize profit-maximizing solutions
and to make inferences about producer responses to price perturbations.
Let x ∈ RN + , y ∈ R+ , w ∈ R++ , and p ∈ R++ denote, respectively, a vector
M N M

of inputs, a vector of outputs, the input price vector, and the output price vector.
We denote by t (x, y) a function of inputs and outputs that is nondecreasing in y
and nonincreasing in x such that x can produce y if and only if t (x, y) ≤ 0. Posed
formally, the producer’s problem is to choose (x, y) to
 
max p y − w  x : t (x, y) ≤ 0 . (1)

(Here, and in what follows, x  y for x, y ∈ RN denotes the usual inner product,

n xn yn .) The Lagrangian associated with this problem is written
1 Neoclassical Production Economics: An Introduction 7

L (x, y, w, p, λ) = p y − w  x − λt (x, y)

where λ is a nonnegative Lagrangian multiplier, and the first-order conditions for an

optimal interior solution are

∇y L = p − λ∇y t (x, y) = 0,
∇x L = −w − λ∇x t (x, y) = 0,
∇λ L = −t (x, y) = 0.

Here ∇h f (h) denotes the gradient of f with respect to the argument h.

These conditions are familiarly interpretable as: output price ratios, (pk /pj ), are
equated to marginal rates of transformation between yk and yj , dy∂t
/ ∂t ; input price
k dyj
∂t
ratios, (wn /wi ), are equated to marginal rates of technical substitution, ∂x / ∂t ; the
n ∂xi
marginal product of xn in producing ym , − ∂x ∂t
/ ∂t is equated to (wn /pm ); and
n ∂ym
x and y are technically efficient (i.e., fall on the relevant frontiers). Figure 1a–c
illustrate visually.
The associated second-order conditions for a local maximum (under the assump-
tion that λ > 0) require that

Fig. 1 (a): Input equilibrium (b): Output equilibrium (c): Efficient production
8 R. G. Chambers and S. C. Ray

⎡ ⎤
∇yy  t (x, y) ∇yx  t (x, y) ∇y t (x, y)
H = − ⎣ ∇xy  t (x, y) ∇xx  t (x, y) ∇x t (x, y) ⎦
∇y t (x, y) ∇x t (x, y) 0
be negative semi-definite. Then under the assumptions that (a) the first-order
conditions are satisfied, (b) the second-order conditions are satisfied, and (c) the
conditions of the implicit function theorem are met, optimal producer behavior is
differentially characterized by
⎡ ⎤ ⎡ ⎤
dy (p, w) dp
⎣ dx (p, w) ⎦ = −H −1 ⎣ −dw ⎦ , (2)
λ̂ (p, w) 0
where y (p, w) and x (p, w) denote, respectively, optimal (profit-maximizing)
supply and derived demand (for inputs) vectors, λ (p, w) denotes the optimal value
of the Lagrangian multiplier, and λ̂ (p, w) = d ln λ (p, w) .
Using assumptions (a)–(c) and (2) establishes that:
Behavioral Prediction (1) ∂ym∂p(p,w)
m
≥ 0, m = 1, 2, . . . , M;
Behavioral Prediction (2) ∂xn∂w
(p,w)
n
≤ 0, n = 1, 2, . . . , N;
Behavioral Prediction (3) ∂ym∂p
(p,w)
k
= ∂yk (p,w)
∂pm , k, m = 1, 2, . . . , M;
∂xj (p,w)
Behavioral Prediction (4) ∂xn∂w
(p,w)
j
= ∂wn , j, n = 1, 2, . . . , N ; and
∂x (p,w)
Behavioral Prediction (5) ∂ym∂w
(p,w)
j
= − j∂pm , m = 1, 2, . . . , M,
j = 1, 2, . . . , N.
Because the objective function for the profit-maximizing firm is linear in (p, w)
and t (x, y) is independent of (p, w) , any solution to the problem, y (p, w) and
x (p, w) , for (p, w) must also be a solution for (μp, μw) where μ > 0, whence
y (μp, μw) = y (p, w) and x (μp, μw) = x (p, w) . Combined with Behavioral
Predictions (1) − (5), zero-degree homogeneity summarizes the core results for
neoclassical production theory. Producers do not suffer from money illusion, profit-
maximizing supplies slope upward in their own prices, profit-maximizing demands
slope downward in their prices, and in a smooth world differential supply and
demand adjustments possess an essential symmetry. A number of related results,
for example, the Le Chatelier principle relating long- and short-run supply respon-
siveness, follow from suitable modifications of these basic techniques.
Some comments are relevant: First, the setting of the problem and the assumed
motivation behind producer behavior are key to its analysis. Assuming that produc-
ers are price takers and small relative to the market eliminates the possibility for
strategic interactions that would complicate analyses. Second, assuming producers
are profit seekers lets them be modeled “as if” they solve a maximization problem
with a clearly articulated objective function and constraints. Optimal or rational
behavior is then identified with conditions required for profit maximization. And,
more suggestively, producers are said to be “in equilibrium” if their behavior is
consistent with that optimum. As Samuelson [18] explained, the resemblance
to physical systems being “in equilibrium” when entropy is maximized is not
1 Neoclassical Production Economics: An Introduction 9

accidental. Neither is the fact that the tools of analysis, variational techniques
applied to differentiably smooth systems, closely parallel those used in classical
thermodynamics.
Consequently, equilibrium behavior is described primarily in terms of condi-
tions which the physical technology must satisfy in an optimum. Marginal rates
of transformation and marginal rates of substitution, which characterize trade-
offs between inputs and outputs internal to the technology, must be equated
to real market prices. Moreover, maxima (at least local) are distinguished from
inflection points or minima by conditions that the technology must satisfy (see
the second-order conditions). Again the resemblance to classical mechanics and
thermodynamics is not accidental. And once these conditions are assured, producers
can be shown to behave in a manner that accords with the most familiar parables of
microeconomic theory as captured by Behavioral Predictions (1) and (2) and zero-
degree homogeneity.
Third, optimal producer behavior is characterized in infinitesimal terms. To
be sure, directional results are obtained, but they only strictly apply in tiny
neighborhoods of the identified equilibria. Individuals are modeled “as if” they will
perceive and respond (smoothly) to even the tiniest perturbations in market prices.
And to make inferences about how individuals respond to discrete changes, these
differential results must be augmented by a combination of integral analysis and the
correspondence principle.

The Dual Perspective

In this section, we continue to treat producers who are profit maximizers and face
given prices and a technological constraint. But we alter the framing of the problem
and its mathematical analysis.
We now model the producer’s technological constraints as a closed and nonempty
subset of M-dimensional real space, T ⊂ RM , that we shall refer to interchangeably
as the technology set or the technology. We relax the distinction between inputs and
outputs and work instead with net outputs (netputs for short) denoted as z ∈ RM .
Using netputs accommodates the possibility that in differing circumstances the same
commodity can function variously as an input or an output.
The technology set, T ⊂ RM , is defined as

T = z ∈ RM : z is technically feasible .

In principle, the technology subsumes all feasible productive activities.2 The

convention is that zk < 0 denotes a netput functioning as an input and zk > 0

2 This raises a semantic point. One often reads or hears references to individuals or firms facing
different technologies. For example, a hand-push, reel lawn mower and a self-propelled lawn
mower might be referred to as two different technologies for cutting grass. This is not our
interpretation of T , which we take to encompass all technically feasible activities. In what follows,
we shall discriminate between different productive activities (e.g., growing wheat as opposed to
producing steel) not as different technologies but as different production processes that fall in T .
10 R. G. Chambers and S. C. Ray

Fig. 2 Netput technology

one functioning as an output. That role can change. Figure 2 illustrates one possible
T . Netput prices are denoted as q ∈ RM++ .
We now show that the behavioral predictions for producers derived indirectly
from t (x, y) via H and the Lagrangian approach can be deduced directly from the
following postulates:
Postulate (a) Producers face competitive pricing for netputs.
Postulate (b) Producers are profit maximizers.
Postulate (c) Finite solutions exist for
 
π (q) ≡ max q  z : z ∈ T (3)
z

for all q ∈ RM
++ .

In what follows, we refer to π (q) as the profit function. More formally, it is the
support function for T [17, p. 28]. Let
 
Z (q) = arg max q  z : z ∈ T

denote the correspondence3 giving the profit-maximizing solutions to (3) and

z (q) ∈ RM denote a particular element of Z (q).
Because q  z is linear in q and T is independent of q, any solution for (3) for q
is also a solution for μq with μ > 0. Hence, for μ > 0, Z (μq) = Z (q) (optimal
netput supplies are homogeneous of degree zero in q) and π (μq) = μπ (q) (π (q)
is positively homogeneous in q). The homogeneity properties of Z (q) and π (q)

3A correspondence represents a point to set mapping. Thus, Z (q) ⊂ RM denotes the set of profit-
maximizing solutions associated with the point q ∈ RM . We use the correspondence notation to
remind the reader that profit maximization problems may have multiple, global solutions.
1 Neoclassical Production Economics: An Introduction 11

manifest the familiar adage that “only real prices matter” in making economic
choices.
Because z (q o ) , z (q ∗ ) ∈ T , the definition of π (q) ensures that π (q o ) =
q z (q o ) ≥ q o z (q ∗ ) and π (q ∗ ) = q ∗ z (q ∗ ) ≥ q ∗ z (q o ) . These inequalities,
o

which characterize maxima, are the fundamental source of the behavioral results
that follow. Geometrically,  they require for all q ∈ RM++ that z (q) ∈ T and that
T fall in the half-space z ∈ R : q  z ≤ q  z (q) generated by the hyperplane with
M

normal q that passes through z (q) . Visually, that translates into a hyperplane with
normal q being tangent to T (from above) at z (q) .
Adding the inequalities and rewriting gives4

z qo − z q∗ q o − q ∗ ≥ 0. (4)

Formally, expression (4) says that Z (q) is (positively) cyclically monotone in q

[17, p. 228]. Cyclical monotonicity represents one multidimensional generalization
of univariate monotonicity.5 As an example, when M = 1, cyclical monotonicity
requires z (q) to be nondecreasing in q. More generally, setting qko = qk∗ for all
k = m in (4) gives

zm q o − zm q ∗ o
qm ∗
− qm ≥ 0.

The economic interpretation of this basic characteristic of maxima is that optimal

netput supplies must be nondecreasing in their own prices. This condition, which
applies for discrete as well as infinitesimal price changes, is to be compared to
Behavioral Predictions (1) and (2).
Now observe that for all q o , q ∗

π q o ≥ q o z q ∗
⇓

π qo ≥ π q∗ + z q∗ qo − q∗ , (5)



where the second inequality follows by adding zero in the form of π (q ∗ ) −q ∗ z(q ∗ )
to the right-hand side of the first inequality. In words, expression (5) requires that
any element of Z (q) must belong to the subdifferential correspondence for π (q) ,
which we denote by ∂π (q) ⊂ RM , at q ∗ [13, p. 220].

4 Samuelson [18, pp. 80–1] established an equivalent result in the one-output, multiple-input case.
5 But not the only one. Another stronger notion of monotonicity is that q  ≥ q ⇒ z q  ≥
z(q). This version implies cyclical monotonicity but is not implied by cyclical monotonicity. One
intuitive way to discriminate between the two notions of monotonicity is that cyclical monotonicity
means that price and quantity movements are positively correlated. The stronger notion requires
that any price increase be matched by all quantities at least weakly increasing.
12 R. G. Chambers and S. C. Ray

The subdifferential notion generalizes the more familiar gradient to accom-

modate nonsmooth (nondifferentiable) functions. Where a gradient is interpreted
geometrically as the unique normal of a hyperplane that is tangent to the graph of
a function, the subdifferential is interpreted as the set of normals to the hyperplanes
that support the graph of the function from below. Panels (a) and (b) of Fig. 3
illustrate. Thus, h ∈ RM belongs to the subdifferential of f (v) for f : RM → R
at v o if the hyperplane h v satisfies h v o = f (v o ) and f (v) ≥ h v for all v so
that the graph of f (v) lies above that of h v while sharing a point in common. A
function that possesses a nonempty ∂f (v) is differentiable if and only if ∂f (v) is a
nonempty singleton set.
Intuitively, therefore, expression (5) says that tangent hyperplanes that support
the graph of π (q) from below at q ∗ must belong to Z (q ∗ ). Figure 4 illustrates.
This is a general version of Hotelling’s lemma, which says that profit-maximizing
netput supplies correspond to partial derivatives of the profit function, π (q),

∂π (q)
zm (q) = , m = 1, 2, . . . , M
∂qm

when π (q) is smooth (differentiable). Conversely, π (q) is differentiable in qm only

if there is a unique optimal solution zm for (3).
A familiar geometric characterization of smooth convex functions is that they
are always underapproximated by first-order Taylor series around the point of
approximation. Cyclical monotonicity of subdifferentials is the generalization of
that characterization that covers nonsmooth convex functions. Hence, cyclical
monotonicity of ∂π (q) ensures that π (q) is convex as a function of q [17,
Theorems 24.8 and 24.9]. Or as Fig. 4 illustrates, all of π (q) s tangent hyperplanes
support it from below for all q. (One can show directly that π (q) is a convex
function of q. Versions of that argument are presented in several of the chapters
that follow, and so we do not repeat it here.)

Fig. 3 (a): Gradients as unique tangents for smooth function (b): Elements of subdifferential for
nonsmooth function
1 Neoclassical Production Economics: An Introduction 13

Fig. 4 Subdifferential as profit-maximizing netput

Having demonstrated zero-degree homogeneity of z (q) and the discrete general-

ization of Behavioral Predictions (1) and (2), all that remains is to derive the netput
analogues of Behavioral Predictions (3)–(5). This is done easily by assuming that,
in addition to being convex, π (q) is twice-continuously differentiable and applying
Hotelling’s lemma and the Schwarz-Young symmetry theorem.
Thus, Postulates (a)–(c) suffice to establish generalized versions of the results
established using techniques borrowed from classical thermodynamics. While the
robustness of those results is to be remarked, it is essential to recognize that they
derive not from conditions placed upon T but from Postulates (a) and (b) that require
that producers maximize profit in a competitive market setting.
As long as T admits a maximum, the behavioral predictions are robust to T  s
actual structure. Thus, they are best recognized as extramathematical reasoning
applied to fundamentally mathematical results about solutions to optimization
problems. So, what we interpret as an economic result involving upward-sloping
supply curves is a mathematical characteristic of optimal solutions to a class
of optimization problems, cyclical monotonicity, that has intuitively plausible
economic implications.
The powerful corollary is that models of producer behavior need not be con-
structed from the “ground up,” so to speak, by starting with t (x, y) and then laboring
through first- and second-order conditions to obtain behavioral economic relations.
Instead, if we accept Postulates (a)–(c), a direct specification of behavioral models
in terms of π (q) and ∂π (q) is available that provides observationally equivalent
behavioral predictions to those derived via t (x, y).
A natural consequence is that production economists have become less focused
on the technical aspects of the underlying technology. Beyond manifesting the theo-
rem of comparative advantage relative to more physically oriented disciplines, such
as engineering and the biological sciences, that change in focus also emphasizes the
14 R. G. Chambers and S. C. Ray

true role T , and its representations play in economic analysis. Clearly, producers
must understand the details of T if they are to prove successful. On the other hand,
production economists are not themselves producers. Their job is to develop models
that accurately depict producer behavior. And that requires an understanding of the
characteristics of T that play an essential role in conditioning that behavior but not
of all of its technical details.
Our arguments have shown that, as a mathematical object, π (q) is positively
homogeneous and convex (sublinear) as a function of q ∈ RM ++ . Under weak
continuity restrictions, those properties ensure that π (q) is the support function
for the closed, convex subset T̄ of RM [17, Theorems 13.1 and 13.2], [13, Theorem
C.3.1.1] given by

T̄ = z ∈ RM : q  z ≤ π (q) for all q ∈ RM

++ .

Recall that a set B ⊂ RM is convex if b0 , b1 ∈ B implies λb0 + (1 − λ) b1 ∈ B for

all 0 < λ < 1.
The construction of T̄ is illustrated in Fig. 5. There the hyperplanes labeled q̄  z =
π (q̄) and q̂  z = π q̂ , respectively, represent the upper boundaries for the closed,
   
convex half-spaces z ∈ RM : q̄  z ≤ π (q̄) and z ∈ RM : q̂  z ≤ π q̂ generated
by q̄ ∈ RM++ and q̂ ∈ R++ . T̄ must be contained in
M

 q̄, q̂ = z ∈ RM : q̄  z ≤ π (q̄) ∩ z ∈ RM : q̂  z ≤ π q̂

 
and in all other half-spaces z ∈ RM : q  z ≤ π (q) generated by the remaining q ∈
RM++ . Because  q̄, q̂ , as Fig. 5 illustrates, and these other half-spaces are closed
convex, T̄ must be as well. Moreover, as is visually apparent from Fig. 5, z̃ ≤ z ∈ T̄

Fig. 5 Constructing T̄
1 Neoclassical Production Economics: An Introduction 15

implies z̃ ∈ T̄ (free disposability of netputs) because z̃ ≤ z requires q  z̃ ≤ q  z for

all q ∈ RM ++ .
These observations show that T̄ cannot correspond to technology sets that are
nonconvex and that do not exhibit free disposability of netputs. (Recall the only
restrictions which have been placed upon T are that it be nonempty and closed.)
Convex technologies exhibit what economists refer to as diminishing marginal
returns and decreasing returns to scale. (Strictly speaking, diminishing and decreas-
ing should be replaced with nonincreasing.) Free disposability of netputs, on the
other hand, is the mathematical generalization of t (y, x) nondecreasing in y and
nonincreasing in x (nonnegative marginal productivities).
Therefore, as a general rule, T̄ = T . Nevertheless, given Postulates (a)–(c),
T ⊂ T̄ necessarily. This claim follows from the observation that z ∈ T only if
q  z ≤ π (q) for all q ∈ RM ++ . (If this were not true, there would exist a z ∈ T such
that q  z > π (q) for some q, which violates the definition of π (q) .) On the other
hand, as z̃ in Fig. 6 illustrates, there can exist points falling in T̄ that do not belong to
T . Thus, T̄ represents an over or outer approximation to T . All technically feasible
points necessarily fall in T̄ , but T̄ can contain technically infeasible netputs. 
For example, in Fig. 6, it is visually obvious that Z q̂ = z1 q̂ , z2 q̂
and z̃ ≤ μz1 q̂ + (1 − μ) z2 q̂ for all μ ∈ [0, 1] . In words, for q̂ ∈ RM ++ ,
multiple solutions exist for the profit maximization problem, and there exist points
dominated by all the convex combination of those multiple solutions that fall in T̄
but not in T . The existence of such points manifests the nonconvex nature of the
boundary of T between the points z1 q̂ and z2 q̂ . These nonconvexities can be
interpreted, respectively, as the technology exhibiting increasing returns in z1 and
z2 in the neighborhood of the origin. It is well known, however, that Postulates (a)
and (b) guarantee that points falling between z1 q̂ and z2 q̂ on the nonconvex
portion of the boundary of T will never be utilized by profit-maximizing producers
(e.g., [15, 18]). One sees this visually in Fig. 6 by noting that any hyperplane with

Fig. 6 Non-convex T
16 R. G. Chambers and S. C. Ray

a strictly positive normal cannot support T from above in a region where it is

nonconvex. In more traditional terms, profit maximizers never operate in region 1
of the production function.
Thus, while T̄ may not characterize T if the latter is nonconvex, the information
lost in going from T to T̄ is economically superfluous under Postulates a) and b)
because T and T̄ yield the same π (q) . Put another way, π (q) derived from T and T̄
are observationally equivalent to one another in the sense that the profit-maximizing
choices made by an individual facing T cannot be distinguished from those of an
individual facing T̄ .
In more formal terms, T̄ is the free disposal convex hull of T . That is, T̄ is the
smallest convex set consistent with free disposability for which T ⊂ T̄ . It consists
of all convex combinations of T and all elements of RM dominated (in the sense of
≤) by those convex combinations of T [17, Theorem 2.3].
The practical import is that choosing to model producer behavior in terms of
a positively homogeneous and convex π (q) whose subdifferentials depict profit-
maximizing netput supplies is mathematically equivalent to assuming that producers
solve (3) for convex T satisfying free disposability of netputs. The importance of
this observation is hard to overestimate.
Few economists would argue that either convexity of the technology or
free disposability of netputs is realistic. As just one example, intermediate
micro students are routinely introduced to lazy-S-shaped production functions
that violate both convexity and free disposability. Nevertheless, in the form
of convexity and monotonicity assumptions on t (x, y) , these properties are
routinely imposed in more formal analyses of the profit maximization problem
because they provide a mathematical foundation for using calculus tools and
Kuhn-Tucker theory. What our arguments show is that Postulates (a)–(c) ensure
that observed profit and netput supply functions can be treated “as if” they
come from a T satisfying these conditions, even if the true T does not exhibit
these “nice” regularity conditions, without losing any economically relevant
information.
When translated from netput space to more familiar input-output space, a convex
T exhibiting free disposability would resemble the area on or below the graph of
t (x, y) illustrated in Fig. 1c. Figure 1c represents a technology where complete
inaction is possible, so that if economic circumstances dictate, the individual is free
to operate at (0, 0) . We have not yet endowed T with a parallel property, and as
Fig. 7 illustrates, it is possible to specify closed, convex T for which π (q ∗ ) < 0 for
some q ∗ ∈ RM ∗
++ . If one were to confront such a T and q in the real world, common
sense would dictate that, in a free market economy, the best long-run solution is not
to produce. (Of course, one can easily imagine circumstances in which short-run
circumstances would dictate rationally accepting short-term negative profits.) Our
Postulate (b), properly interpreted, allows for such decisions. But it is essential
to recognize that in formal terms maximizing profit is not the same thing as
mechanically solving (3). On the other hand, if T is allowed to permit inaction,
formally 0M ∈ T where 0M denotes the traditional origin in M-dimensional real
space, then π (q) ≥ 0 for all q ∈ RM ++ .
1 Neoclassical Production Economics: An Introduction 17

Fig. 7 Negative π (q)

Our discussion motivates the following definition.

Definition 1. A technology set, T ⊂ RM , is neoclassical if:

(a) T is closed and nonempty.

(b) z ∈ T ⇒ z ∈ T for all z ≤ z (free disposability of netputs).
(c) z0 , z1 ∈ T ⇒ λz0 + (1 − λ) z1 0 < λ < 1 (convexity).
(d) 0M ∈ T (inaction is possible).

The following theorem presents the basic duality results that establish the
equivalence of approaching the firm’s problem either via π (q) or via T and then
developing π (q).

Theorem 1 (Fundamental Duality). If T is neoclassical, π (q) ≥ 0 for all q ∈

RM
++ , π (q) is positively homogeneous and convex as a function of q, and

T = z ∈ RM : q  z ≤ π (q) for all q ∈ RM

++ .

In many practical settings, working with set-based concepts can prove challeng-
ing. And cardinal functional representations of T then prove attractive. Define
z
γ (z) = inf λ > 0 : ∈T
λ
as the gauge function for T . Figure 8 illustrates γ (z) visually as the maximal radial
expansion of z that is consistent with z/λ remaining technically feasible. If z ∈ T ,
it’s geometrically obvious from Fig. 8 that γ (z) ≤ 1. Conversely, if γ (z) ≤ 1,
then by the definition of γ (z) , z ≤ z/γ (z) ∈ T under free disposability of netput.
Hence, if T is neoclassical, γ (z) is a complete function representation of T in the
sense that
18 R. G. Chambers and S. C. Ray

Fig. 8 Gauge function for

neoclassical T

z ∈ T ⇔ γ (z) ≤ 1. (Indication property)

Knowing γ (z) is mathematically equivalent to knowing neoclassical T . Moreover,

a basic property of gauge functions [13, Theorem C.1.2.5] ensures that if T is
neoclassical, then γ (z) is nondecreasing, positively homogeneous, and convex
(sublinear) as a function of z .
There are a variety of ways to interpret γ (z) . For example, as Fig. 8 illustrates,
if a point, z∗ , falls in the interior of T , then γ (z∗ ) < 1. In a production context,
that means that z∗ does not lie on the frontier of T and, as such, is not technically
efficient. Thus, γ (z) can be viewed as a measure of technical efficiency. (In
particular, it is closely related to the distance-function concept discussed in detail
in Chambers and Färe, this volume).
Another natural interpretation of γ (z) is as a formally derived version of
the transformation function used in our Lagrangian formulation of the profit
maximization problem. Slightly abusing notation, this can be seen by defining

t (z) ≡ γ (z) − 1.

Adopting this interpretation and applying the indication property, problem (3) can
be reformulated in equivalent mathematical programming terms as
 
π (q) = max q  z : γ (z) ≤ 1
z

If T is neoclassical, it follows from standard Kuhn-Tucker theory in the smooth

case that the first- and second-order conditions developed for the Lagrangian
formulation are necessary and sufficient conditions for a global solution to the profit
maximization problem.
Given Theorem 1, it is natural to suspect that the existence of a positively
homogeneous and convex π (q) implies the existence of a γ (z) consistent with
1 Neoclassical Production Economics: An Introduction 19

a neoclassical T . A simple perspective on that relationship is offered by observing

the definition of γ (z) requires that z/γ (z) ∈ T , whence

q z
≤ π (q) for all q ∈ RM
++ , z ∈ R .
M
γ (z)

Therefore,

q z
≤ γ (z) for all q ∈ RM
++
π (q)

so long as γ (z) and π (q) > 0. (When T exhibits constant returns to scale, T is a
cone, so that both γ (z) and π (q) equal zero.) Thus, if Z (q) = ∅, it must be true
z
that there exists z (q) such that q  z (q) = π (q) γ (z) so that the upper bound of πq(q)
in the inequality must be achieved. Hence,
 
q z
γ (z) = max
q∈RM
++
π (q)
 
= max q  z : π (q) ≤ 1 , (6)
q∈RM
++

where the normalization after the second equality follows from the homogeneity of
degree zero in q of the objective function. Thus,

Theorem 2 (Profit-Gauge Duality). If T is neoclassical,

 
π (q) = max q  z : γ (z) ≤ 1
z∈RM

and
 
γ (z) = max q  z : π (q) ≤ 1 .
q∈RM
++

Figure 9 illustrates the solutions to the two programming problems posed in

Theorem 2. For ease of illustration, we have assumed that z2 always acts as an input
in T and that the boundary of T is smooth. Otherwise, the visual demonstration is
general. From this perspective and the fact that π (q) is the support function for T ,
it is apparent that an alternative interpretation of γ (z) is as a support function for
the dual technology set

T ∗ = q ∈ RM
++ : π (q) ≤ 1 .

And, although we do not present a formal demonstration, it also follows that π (q)
has a natural interpretation as the gauge function for T ∗ that is associated with a
neoclassical T .
20 R. G. Chambers and S. C. Ray

Fig. 9 Support function for T ∗

Modifying earlier arguments, Theorem 2 allows us to establish the following

generalized version of Shephard’s lemma for neoclassical technologies (Hotelling’s
lemma is a special case):

z ∈ ∂π (q) ⇔ q ∈ ∂γ (z) (Shephard’s lemma) (7)

As was shown earlier, z ∈ ∂π (q) implies z ∈ Z (q), so that z ∈ Z (q) requires that
q support the graph of γ from below at that z. (In other words, market price ratios
are equated to marginal rates of substitution (transformation).) Going the other way,
Shephard’s lemma shows that if market price ratios are equated to marginal rates of
substitution (transformation), then z ∈ Z (q) . This is a generalization of the familiar
envelope theorem that can be cast more formally as saying that Z (q) and
 
Q (z) = arg max q  z : π (q) ≤ 1 ,

the set of price-dependent netput supplies, are (lower) inverses of one another.
Shephard’s lemma links multiplicity of solutions to the profit-maximizing
problem to the smoothness properties of γ (z) and π (q) . To illustrate, suppose
that ∂π (q ∗ ) is a nonsingleton set so that at q ∗ , π (q ∗ ) possesses a continuum of
supporting hyperplanes. Geometrically, this is manifested by π (q ∗ ) being kinked
as illustrated in Fig. 10. By Shephard’s lemma, that implies that q ∗ must be a
supporting hyperplane to γ (z) for all z ∈ ∂π (q ∗ ) . That can be true only if γ (z) is
linear over that continuum of z. Conversely, if γ (z) is kinked at z∗ , z∗ must provide
a supporting hyperplane to π (q) over a continuum of q. In short, flats in primal
space map into kinks in dual space, and kinks in primal space map into flats in dual
1 Neoclassical Production Economics: An Introduction 21

Fig. 10 Kinks and flats

space, and vice versa. It follows that γ (z) is strictly convex in z if and only if π (q)
is strictly convex in q.
Apart from the slight difference in their domains, RM versus RM ++ , γ (z) and
π (q) , as mathematical objects, are both positively homogeneous and convex (sub-
linear) functions. That they should be derivable from similar calculating formulae
should not be surprising. The recognition, however, that they are essentially natural
inverses of one another for neoclassical technologies is fundamental and reflects the
mathematical principles behind Theorem 1. In fact, the first formal demonstration
of a duality between a dual economic object (a cost function) and a primal
representation of the technology (a distance function) due to Shephard [22] assumed
virtually the same structure as Theorem 2. Ultimately, however, the analytic message
is the same. If there exists a netput supply system, z (q) , which satisfies the usual
neoclassical postulates of homogeneity of degree zero (absence of money illusion),
upward-sloping output supplies, and downward-sloping demand, there must exist a
neoclassical technology that is consistent with it.
We close this section with Fig. 11 that illustrates the triadic relationship between
T , π (q) , and γ (z).

Restricted Profit Functions

To this point, all M netputs have been treated as freely variable in solving the
profit maximization problem. Thus, π (q) represents a long-run profit function.
Economists, however, are frequently interested in examining short-run behavior that
is characterized by some of netputs being fixed. Two important cases in analyses that
maintain a split between inputs and outputs are offered by the cost function
 
c (w, y) = min w  x : (x, y) ∈ T
x

and the revenue function

22 R. G. Chambers and S. C. Ray

Fig. 11 A triad of
production relations

 
R (p, x) = max p y : (x, y) ∈ T .
y

Both the cost and the revenue function are manifestations of the more general
notion of a restricted (short-run) profit function. Restricted profit functions give the
maximal profit available conditional on holding a subvector of z fixed. Partition z
as z = z0 , z1 , where z0 ∈ RN with N < M and z1 ∈ RM−N . We refer to z0 as
variable netputs and z1 as (potentially) fixed netputs. Given this partition

 

π (q) = max q 0 z0 + q 1 z1 : z0 , z1 ∈ T
z0 ,z1
  
 
= max max q 0 z0 : z0 , z1 ∈ T + q 1 z1 ,
z1 z0

where the second equality follows by Bellman’s Principle, which in the current
setting simply means that long-run profit maximization always implies variable
profit maximization. Defining the variable profit function as
 

π 0 q 0 , z1 ≡ max q 0 z0 : z0 , z1 ∈ T ,
z0

it is easy to identify c (w, y) with the case where z0 = −x and z1 = y and R (p, x)
with z0 = y and z1 = x.
It is immediate from preceding developments that π 0 q 0 , z1 is positively homo-
geneous and convex in q 0 and that variable-profit-maximizing netputs z0 q 0 , z1
satisfy z0 q 0 , z1 ∈ ∂π 0 q 0 , z1 (where the subdifferential is understood to be
in terms of q 0 ). Moreover, a suitably modified version of Theorem 1 implies the
existence of a closed convex T 0 z1 ⊂ RN
1 Neoclassical Production Economics: An Introduction 23

 

T 0 z1 = z0 ∈ RN : q 0 z0 ≤ π 0 q 0 , z1 for all q 0 ∈ RN
++ .

Making these arguments only requires modifying our previous notation, and so we
do not pursue it here. Straightforward corollaries, therefore, are as follows: c (w, y)
is positively homogeneous and concave in w, the subdifferentials of −c (w, y) in
w represent minus cost-minimizing demands, and those demands are downward
sloping in their own input prices; R (p, x) is positively homogeneous and convex
in p, the subdifferentials of R (p, x) represent revenue-maximizing supplies, and
those supplies are upward sloping in their own prices.
From the functional equation

 
π (q) = max π 0 q 0 , z1 + q 1 z1 ,
z1

we can infer for all q̂, q̃ that

 
π q̂ ≥ q̂ 0 z0 q̂ 0 , z1 (q̃) + q̂ 1 z1 (q̃)

whence

  
π q̂ − π (q̃) ≥ π 0 q̂ 0 , z1 (q̃) − π 0 q̃ 0 , z1 (q̃) + q̂ 1 − q̃ 1 z1 (q̃) . (8)

Figure 12 illustrates. Expression (8) confirms that z1 (q) belongs to the subdifferen-
tial of π (q) in the subvector q 1 and that the short-run profit function and π (q) are
tangent to one another when z1 is evaluated at z1 (q) .
Setting q̂ 1 equal to q̃ 1 , so that only variable netput prices change, gives

 
π q̂ − π (q̃) ≥ π 0 q̂ 0 , z1 (q̃) − π 0 q̃ 0 , z1 (q̃) .

This expression manifests the Le Chatelier principle that characterizes optima. As

commonly interpreted in economics, that principle requires unconstrained (long-
run) optima to respond more to parametric changes than constrained (short-run)
optima. A direct corollary from it and Hotelling’s lemma is that long-run optimal
netput supplies are more responsive to own price changes than their short-run
counterparts.
Intuitively, the Le Chatelier principle simply reflects the fact π 0 q̂ 0 , z1 (q̃) −
π 0 q̃ 0 , z1 (q̃) is the producer’s best response to the price change holding the
fixed netput constant at z1 (q̃) . Because this alternative is always available to the
producer, her optimal long-run response must at least weakly dominate that strategy.
24 R. G. Chambers and S. C. Ray

Fig. 12 Le Chatelier
principle

The Search for a Practical Production Function

The Cobb-Douglas Production Function

The Cobb-Douglas production function remains a classic example of empirical

evidence inspiring a theoretical formulation of a production function that has served
as the gold standard in neoclassical production economic theory for decades and has
retained much of its popular appeal despite the advent of more flexible functional
forms even as it nears its centenary.
It started from the remarkable observation by Douglas that when plotted on
semi-log paper with output (Y), labor (L), and capital (K) measured on the
logarithmic scale along the vertical axis against time (t) measured along the
horizontal axis, over the years 1899 through 1922, the time series plot of the
three series exhibited the tendency that the distance between log(Y) and log(L) was
approximately one quarter of the distance between log(L) and log(K). At Douglas’s
request, Cobb (a mathematician at Amherst College) came up with the specification
3 1
Y = AL 4 K 4 ; A = 1.01. All of its theoretical properties including constant factor
shares, constant returns to scale, diminishing marginal productivities, and unitary
elasticity of substitution between the inputs were validated rather than imposed as
prior restrictions on the technology.
Samuelson [19] offers the following direct derivation of the Cobb-Douglas form
as a simple back-of-the-envelope calculation:

ln Yt −ln Lt
= 14 ; 1899 ≤ t ≤ 1922
ln Kt −ln Lt (9)
⇒ ln Yt = 34 ln Lt + 14 ln Kt
Discovering Diverse Content Through
Random Scribd Documents
 von

ANTON BÖTTCHER
Ingenieur
Unter Mitwirkung von Ingenieur G. Frasch
XV u. 500 Seiten. gr. 8o, mit 492
Textabbildungen, 41 Tabellen und 48 Tafeln
2 Bände — Text- und Tafelband — in
Leinwand gebunden Preis M. 25.—.

Der Eisenbau
Ein Handbuch für den
Brückenbauer und den
Eisenkonstrukteur
von

LUIGI VIANELLO
Mit einem Anhang: Zusammenstellung aller
von deutschen Walzwerken hergestellten -
u. -Eisen

von Gustav Schimpff

(Oldenbourgs Technische Handbibliothek Bd.
IV.) XVI u. 691 Seiten, 8o, mit 415
Textabbildungen. In Leinwand gebunden
Preis M. 17.50.
 Drahtlose
Telegraphie und
Telephonie
von

Professor D. MAZZOTTO
Deutsch bearbeitet von J.
Baumann
XXIV. 368 S. mit 235 Textabbildungen und
einem Vorwort von R. Ferrini.
(Schwachstromtechnik in Einzeldarstellungen
Bd. II.) Preis M. 7.50.

Die Dampfturbine
Ein Lehr- und Handbuch für
Konstrukteure und Studierende
von

WILH. H. EYERMANN
Ingenieur

VIII und 212 Seiten, gr. 8o. Mit 153

Textabbildungen sowie 6 Tafeln und einem
Patentverzeichnis. In Leinwand gebunden
Preis M. 9.—.
Ausführliches Verzeichnis neuerer techn.
Werke steht auf Wunsch zur Verfügung.
 Illustrierte

Technische
Wörterbücher
in Einzelbänden für jedes
Spezialgebiet der Technischen
Industrie.
Deutsch – Englisch –
Französisch – Russisch –
Italienisch – Spanisch.
Alle 6 Sprachen in einem Bande nach
besonderem System nebeneinander
angeordnet.

Die Erwerbung irgend eines

Bandes macht den Kauf weiterer
Bände weder notwendig noch
verpflichtet sie dazu.
Erschienen ist Band I:

Die Maschinenelemente und

die
 gebräuchlichsten Werkzeuge.

Redigiert von Dipl.-Ing. P. Stülpnagel.

2200 Worte in jeder der 6 Sprachen unter
Berücksichtigung des Amerikanischen. Mit
823 Abbildungen u. zahlreichen Formeln. IV
und 404 Seiten Taschenformat.

Preis in biegsamem Leinen

gebunden M. 5.—.
Diesem Bande folgen zunächst:

2. Elektrotechnik
3. Dampfkessel,
Dampfmaschinen und
Dampfturbinen
4. Explosionsmotoren und
Explosionsturbinen
5. Automobile.
Jeder Band bildet ein in sich
abgeschlossenes Ganzes und ist einzeln
käuflich.
Die Vorzüge der inneren Einrichtung, die diese
»Illustr. Techn. Wörterbücher« gegenüber
bestehenden Methoden auszeichnen, bestehen darin,
daß:
I. Jeder Band des Unternehmens nur ein
Spezialgebiet der Technik umfaßt.
II. jedem Wort (Begriff oder Gegenstand), soweit
möglich, dessen bildliche Übersetzung in Form
der Skizze, der Formel, des Symbols, also in einer
allen Ländern verständlichen Universalsprache
beigegeb. ist.

III. Die Illustr. Techn. Wörterbücher die bisherige

alphabetische Anordnung vermeiden und den
Gesamtinhalt eines Bandes in sachgemäß
zusammengehörige Gruppen einteilen.

Jedem Band ist am Schlusse ein alphabetisches

Register aller aufgenommenen Worte sämtlicher in
dem Bande enthaltener Sprachen mit dem kurzen
Verweis auf die betreffende Stelle im Hauptteil
beigegeben und ermöglicht daher, ein und dasselbe
Exemplar in jedem Lande der aufgenommenen
Sprachen:

Deutsch — Englisch —
Französisch — Russisch —
Italienisch — Spanisch
zu gebrauchen, so daß durch die erwähnte
grundsätzliche Abweichung von der bisherigen
lexikalischen Einrichtung
ein Band der Illustrierten Technischen
Wörterbücher 30 zweisprachige Wörterbücher
alten Systems ersetzt.

Verlag von R Oldenbourg in

München und Berlin W. 10
in Gemeinschaft mit

Archibald Constable & Co.,

Ltd, London; Mac Graw
Publishing Co., New York; H.
Dunold & F. Pinat, Paris; K. I.
Ricker, St. Petersburg; Ulrico
Hoepli, Mailand; Bailly-
Baillière é Hijos, Madrid.
*** END OF THE PROJECT GUTENBERG EBOOK DIE TECHNIK DER
LASTENFÖRDERUNG EINST UND JETZT ***

Updated editions will replace the previous one—the old editions

will be renamed.

Creating the works from print editions not protected by U.S.

copyright law means that no one owns a United States
copyright in these works, so the Foundation (and you!) can copy
and distribute it in the United States without permission and
without paying copyright royalties. Special rules, set forth in the
General Terms of Use part of this license, apply to copying and
distributing Project Gutenberg™ electronic works to protect the
PROJECT GUTENBERG™ concept and trademark. Project
Gutenberg is a registered trademark, and may not be used if
you charge for an eBook, except by following the terms of the
trademark license, including paying royalties for use of the
Project Gutenberg trademark. If you do not charge anything for
copies of this eBook, complying with the trademark license is
very easy. You may use this eBook for nearly any purpose such
as creation of derivative works, reports, performances and
research. Project Gutenberg eBooks may be modified and
printed and given away—you may do practically ANYTHING in
the United States with eBooks not protected by U.S. copyright
law. Redistribution is subject to the trademark license, especially
commercial redistribution.

START: FULL LICENSE

THE FULL PROJECT GUTENBERG LICENSE
 PLEASE READ THIS BEFORE YOU DISTRIBUTE OR USE THIS WORK

To protect the Project Gutenberg™ mission of promoting the

free distribution of electronic works, by using or distributing this
work (or any other work associated in any way with the phrase
“Project Gutenberg”), you agree to comply with all the terms of
the Full Project Gutenberg™ License available with this file or
online at www.gutenberg.org/license.

Section 1. General Terms of Use and

Redistributing Project Gutenberg™
electronic works
1.A. By reading or using any part of this Project Gutenberg™
electronic work, you indicate that you have read, understand,
agree to and accept all the terms of this license and intellectual
property (trademark/copyright) agreement. If you do not agree
to abide by all the terms of this agreement, you must cease
using and return or destroy all copies of Project Gutenberg™
electronic works in your possession. If you paid a fee for
obtaining a copy of or access to a Project Gutenberg™
electronic work and you do not agree to be bound by the terms
of this agreement, you may obtain a refund from the person or
entity to whom you paid the fee as set forth in paragraph 1.E.8.

1.B. “Project Gutenberg” is a registered trademark. It may only

be used on or associated in any way with an electronic work by
people who agree to be bound by the terms of this agreement.
There are a few things that you can do with most Project
Gutenberg™ electronic works even without complying with the
full terms of this agreement. See paragraph 1.C below. There
are a lot of things you can do with Project Gutenberg™
electronic works if you follow the terms of this agreement and
help preserve free future access to Project Gutenberg™
electronic works. See paragraph 1.E below.
1.C. The Project Gutenberg Literary Archive Foundation (“the
Foundation” or PGLAF), owns a compilation copyright in the
collection of Project Gutenberg™ electronic works. Nearly all the
individual works in the collection are in the public domain in the
United States. If an individual work is unprotected by copyright
law in the United States and you are located in the United
States, we do not claim a right to prevent you from copying,
distributing, performing, displaying or creating derivative works
based on the work as long as all references to Project
Gutenberg are removed. Of course, we hope that you will
support the Project Gutenberg™ mission of promoting free
access to electronic works by freely sharing Project Gutenberg™
works in compliance with the terms of this agreement for
keeping the Project Gutenberg™ name associated with the
work. You can easily comply with the terms of this agreement
by keeping this work in the same format with its attached full
Project Gutenberg™ License when you share it without charge
with others.

1.D. The copyright laws of the place where you are located also
govern what you can do with this work. Copyright laws in most
countries are in a constant state of change. If you are outside
the United States, check the laws of your country in addition to
the terms of this agreement before downloading, copying,
displaying, performing, distributing or creating derivative works
based on this work or any other Project Gutenberg™ work. The
Foundation makes no representations concerning the copyright
status of any work in any country other than the United States.

1.E. Unless you have removed all references to Project

Gutenberg:

1.E.1. The following sentence, with active links to, or other

immediate access to, the full Project Gutenberg™ License must
appear prominently whenever any copy of a Project
Gutenberg™ work (any work on which the phrase “Project
Gutenberg” appears, or with which the phrase “Project
Gutenberg” is associated) is accessed, displayed, performed,
viewed, copied or distributed:

This eBook is for the use of anyone anywhere in the United

States and most other parts of the world at no cost and
with almost no restrictions whatsoever. You may copy it,
give it away or re-use it under the terms of the Project
Gutenberg License included with this eBook or online at
www.gutenberg.org. If you are not located in the United
States, you will have to check the laws of the country
where you are located before using this eBook.

1.E.2. If an individual Project Gutenberg™ electronic work is

derived from texts not protected by U.S. copyright law (does not
contain a notice indicating that it is posted with permission of
the copyright holder), the work can be copied and distributed to
anyone in the United States without paying any fees or charges.
If you are redistributing or providing access to a work with the
phrase “Project Gutenberg” associated with or appearing on the
work, you must comply either with the requirements of
paragraphs 1.E.1 through 1.E.7 or obtain permission for the use
of the work and the Project Gutenberg™ trademark as set forth
in paragraphs 1.E.8 or 1.E.9.

1.E.3. If an individual Project Gutenberg™ electronic work is

posted with the permission of the copyright holder, your use and
distribution must comply with both paragraphs 1.E.1 through
1.E.7 and any additional terms imposed by the copyright holder.
Additional terms will be linked to the Project Gutenberg™
License for all works posted with the permission of the copyright
holder found at the beginning of this work.

1.E.4. Do not unlink or detach or remove the full Project

Gutenberg™ License terms from this work, or any files
 containing a part of this work or any other work associated with
Project Gutenberg™.

1.E.5. Do not copy, display, perform, distribute or redistribute

this electronic work, or any part of this electronic work, without
prominently displaying the sentence set forth in paragraph 1.E.1
with active links or immediate access to the full terms of the
Project Gutenberg™ License.

1.E.6. You may convert to and distribute this work in any binary,
compressed, marked up, nonproprietary or proprietary form,
including any word processing or hypertext form. However, if
you provide access to or distribute copies of a Project
Gutenberg™ work in a format other than “Plain Vanilla ASCII” or
other format used in the official version posted on the official
Project Gutenberg™ website (www.gutenberg.org), you must,
at no additional cost, fee or expense to the user, provide a copy,
a means of exporting a copy, or a means of obtaining a copy
upon request, of the work in its original “Plain Vanilla ASCII” or
other form. Any alternate format must include the full Project
Gutenberg™ License as specified in paragraph 1.E.1.

1.E.7. Do not charge a fee for access to, viewing, displaying,

performing, copying or distributing any Project Gutenberg™
works unless you comply with paragraph 1.E.8 or 1.E.9.

1.E.8. You may charge a reasonable fee for copies of or

providing access to or distributing Project Gutenberg™
electronic works provided that:

• You pay a royalty fee of 20% of the gross profits you derive
from the use of Project Gutenberg™ works calculated using the
method you already use to calculate your applicable taxes. The
fee is owed to the owner of the Project Gutenberg™ trademark,
but he has agreed to donate royalties under this paragraph to
the Project Gutenberg Literary Archive Foundation. Royalty
 payments must be paid within 60 days following each date on
which you prepare (or are legally required to prepare) your
periodic tax returns. Royalty payments should be clearly marked
as such and sent to the Project Gutenberg Literary Archive
Foundation at the address specified in Section 4, “Information
about donations to the Project Gutenberg Literary Archive
Foundation.”

• You provide a full refund of any money paid by a user who

notifies you in writing (or by e-mail) within 30 days of receipt
that s/he does not agree to the terms of the full Project
Gutenberg™ License. You must require such a user to return or
destroy all copies of the works possessed in a physical medium
and discontinue all use of and all access to other copies of
Project Gutenberg™ works.

• You provide, in accordance with paragraph 1.F.3, a full refund of

any money paid for a work or a replacement copy, if a defect in
the electronic work is discovered and reported to you within 90
days of receipt of the work.

• You comply with all other terms of this agreement for free
distribution of Project Gutenberg™ works.

1.E.9. If you wish to charge a fee or distribute a Project

Gutenberg™ electronic work or group of works on different
terms than are set forth in this agreement, you must obtain
permission in writing from the Project Gutenberg Literary
Archive Foundation, the manager of the Project Gutenberg™
trademark. Contact the Foundation as set forth in Section 3
below.

1.F.

1.F.1. Project Gutenberg volunteers and employees expend

considerable effort to identify, do copyright research on,
transcribe and proofread works not protected by U.S. copyright
law in creating the Project Gutenberg™ collection. Despite these
efforts, Project Gutenberg™ electronic works, and the medium
on which they may be stored, may contain “Defects,” such as,
but not limited to, incomplete, inaccurate or corrupt data,
transcription errors, a copyright or other intellectual property
infringement, a defective or damaged disk or other medium, a
computer virus, or computer codes that damage or cannot be
read by your equipment.

1.F.2. LIMITED WARRANTY, DISCLAIMER OF DAMAGES - Except

for the “Right of Replacement or Refund” described in
paragraph 1.F.3, the Project Gutenberg Literary Archive
Foundation, the owner of the Project Gutenberg™ trademark,
and any other party distributing a Project Gutenberg™ electronic
work under this agreement, disclaim all liability to you for
damages, costs and expenses, including legal fees. YOU AGREE
THAT YOU HAVE NO REMEDIES FOR NEGLIGENCE, STRICT
LIABILITY, BREACH OF WARRANTY OR BREACH OF CONTRACT
EXCEPT THOSE PROVIDED IN PARAGRAPH 1.F.3. YOU AGREE
THAT THE FOUNDATION, THE TRADEMARK OWNER, AND ANY
DISTRIBUTOR UNDER THIS AGREEMENT WILL NOT BE LIABLE
TO YOU FOR ACTUAL, DIRECT, INDIRECT, CONSEQUENTIAL,
PUNITIVE OR INCIDENTAL DAMAGES EVEN IF YOU GIVE
NOTICE OF THE POSSIBILITY OF SUCH DAMAGE.

1.F.3. LIMITED RIGHT OF REPLACEMENT OR REFUND - If you

discover a defect in this electronic work within 90 days of
receiving it, you can receive a refund of the money (if any) you
paid for it by sending a written explanation to the person you
received the work from. If you received the work on a physical
medium, you must return the medium with your written
explanation. The person or entity that provided you with the
defective work may elect to provide a replacement copy in lieu
of a refund. If you received the work electronically, the person
or entity providing it to you may choose to give you a second
opportunity to receive the work electronically in lieu of a refund.
If the second copy is also defective, you may demand a refund
in writing without further opportunities to fix the problem.

1.F.4. Except for the limited right of replacement or refund set

forth in paragraph 1.F.3, this work is provided to you ‘AS-IS’,
WITH NO OTHER WARRANTIES OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR ANY PURPOSE.

1.F.5. Some states do not allow disclaimers of certain implied

warranties or the exclusion or limitation of certain types of
damages. If any disclaimer or limitation set forth in this
agreement violates the law of the state applicable to this
agreement, the agreement shall be interpreted to make the
maximum disclaimer or limitation permitted by the applicable
state law. The invalidity or unenforceability of any provision of
this agreement shall not void the remaining provisions.

1.F.6. INDEMNITY - You agree to indemnify and hold the

Foundation, the trademark owner, any agent or employee of the
Foundation, anyone providing copies of Project Gutenberg™
electronic works in accordance with this agreement, and any
volunteers associated with the production, promotion and
distribution of Project Gutenberg™ electronic works, harmless
from all liability, costs and expenses, including legal fees, that
arise directly or indirectly from any of the following which you
do or cause to occur: (a) distribution of this or any Project
Gutenberg™ work, (b) alteration, modification, or additions or
deletions to any Project Gutenberg™ work, and (c) any Defect
you cause.

Section 2. Information about the Mission

of Project Gutenberg™
Project Gutenberg™ is synonymous with the free distribution of
electronic works in formats readable by the widest variety of
computers including obsolete, old, middle-aged and new
computers. It exists because of the efforts of hundreds of
volunteers and donations from people in all walks of life.

Volunteers and financial support to provide volunteers with the

assistance they need are critical to reaching Project
Gutenberg™’s goals and ensuring that the Project Gutenberg™
collection will remain freely available for generations to come. In
2001, the Project Gutenberg Literary Archive Foundation was
created to provide a secure and permanent future for Project
Gutenberg™ and future generations. To learn more about the
Project Gutenberg Literary Archive Foundation and how your
efforts and donations can help, see Sections 3 and 4 and the
Foundation information page at www.gutenberg.org.

Section 3. Information about the Project

Gutenberg Literary Archive Foundation
The Project Gutenberg Literary Archive Foundation is a non-
profit 501(c)(3) educational corporation organized under the
laws of the state of Mississippi and granted tax exempt status
by the Internal Revenue Service. The Foundation’s EIN or
federal tax identification number is 64-6221541. Contributions
to the Project Gutenberg Literary Archive Foundation are tax
deductible to the full extent permitted by U.S. federal laws and
your state’s laws.

The Foundation’s business office is located at 809 North 1500

West, Salt Lake City, UT 84116, (801) 596-1887. Email contact
links and up to date contact information can be found at the
Foundation’s website and official page at
www.gutenberg.org/contact
 Section 4. Information about Donations to
the Project Gutenberg Literary Archive
Foundation
Project Gutenberg™ depends upon and cannot survive without
widespread public support and donations to carry out its mission
of increasing the number of public domain and licensed works
that can be freely distributed in machine-readable form
accessible by the widest array of equipment including outdated
equipment. Many small donations ($1 to $5,000) are particularly
important to maintaining tax exempt status with the IRS.

The Foundation is committed to complying with the laws

regulating charities and charitable donations in all 50 states of
the United States. Compliance requirements are not uniform
and it takes a considerable effort, much paperwork and many
fees to meet and keep up with these requirements. We do not
solicit donations in locations where we have not received written
confirmation of compliance. To SEND DONATIONS or determine
the status of compliance for any particular state visit
www.gutenberg.org/donate.

While we cannot and do not solicit contributions from states

where we have not met the solicitation requirements, we know
of no prohibition against accepting unsolicited donations from
donors in such states who approach us with offers to donate.

International donations are gratefully accepted, but we cannot

make any statements concerning tax treatment of donations
received from outside the United States. U.S. laws alone swamp
our small staff.

Please check the Project Gutenberg web pages for current

donation methods and addresses. Donations are accepted in a
number of other ways including checks, online payments and
credit card donations. To donate, please visit:
www.gutenberg.org/donate.

Section 5. General Information About

Project Gutenberg™ electronic works
Professor Michael S. Hart was the originator of the Project
Gutenberg™ concept of a library of electronic works that could
be freely shared with anyone. For forty years, he produced and
distributed Project Gutenberg™ eBooks with only a loose
network of volunteer support.

Project Gutenberg™ eBooks are often created from several

printed editions, all of which are confirmed as not protected by
copyright in the U.S. unless a copyright notice is included. Thus,
we do not necessarily keep eBooks in compliance with any
particular paper edition.

Most people start at our website which has the main PG search
facility: www.gutenberg.org.

This website includes information about Project Gutenberg™,

including how to make donations to the Project Gutenberg
Literary Archive Foundation, how to help produce our new
eBooks, and how to subscribe to our email newsletter to hear
about new eBooks.
back
back
back
back
back
back
back
back
back