European Integration - Realities and Perspectives.

Proceedings 2021

Performance and Risks in the European Economy

Behavior of Production Factors when Changing their Price for a Cobb-

Douglas Production Function

Cătălin Angelo Ioan1

Abstract: The paper deals with the behavior of the factors of production when changing their price as well as
the total cost for a Cobb-Douglas production function.
Keywords: production function; Cobb-Douglas; total cost

1. Introduction
Let us consider a firm F whose activity is formalized using a production function Q which depends on
a number of production factors x1,...,xn, n2. In order to ensure its competitiveness on the market, its
main purpose is to reduce its total cost which will implicitly lead to the output of its products at the
lowest possible cost. On the other hand, the company wants to maximize its profit. For example, we will
consider the production function as Cobb-Douglas type, which is equivalent to a constancy of the
elasticities of production in relation to the factors of production, which is not restrictive, at least for a
limited time.
The Cobb-Douglas function has the following expression:
α α
Q:D𝐑n+-{0}→R+, (x1,...,xn)→Q(x1,...,xn)=x1 1 ...xn n R+ (x1,...,xn)D, 𝐑∗+, 1,...,n𝐑∗+.
α α −1 α αi Q
Q′xi = αi x1 1 ...xi i ...xn n = xi
̅̅̅̅̅
,i=1, n

The main indicators are:

𝜕𝑄 α α −1 α αi Q
• ηxi = 𝜕𝑥 = αi x1 1 ...xi i ...xn n = xi
, ̅̅̅̅̅
i=1, n
𝑖

𝑄 α α −1 α Q
• wxi = = x1 1 ...xi i ̅̅̅̅̅
...xn n = , i=1, n
𝑥𝑖 xi
αi x j
• ̅̅̅̅̅
RMS(i,j)=α x , i,j=1, n
j i

x η
• ̅̅̅̅̅
εxi = w i = αi , i=1, n
xi

• ij=-1, i,j=1,
̅̅̅̅̅
n

1 Danubius University of Galati, Romania, Address: 3 Galati Blvd., 800654 Galati, Romania, E-mail:
catalin_angelo_ioan@univ-danubius.ro.
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ISSN: 2067 – 9211 Performance and Risks in the European Economy

2. Behavior of Production Factors when Changing their Price for a Cobb-Douglas

Production Function
Considering now the problem of minimizing costs for a given production Q0, where the prices of inputs
̅̅̅̅̅
are pi, i=1, n, we have:
n

min ∑ pk xk
k=1
α1 α
x1 ...xn n
≥ Q0
{ x1 ,..., xn ≥ 0
α1 α α p
p1 x 1
= ... = p nx xk = αk pn xn ,k = ̅̅̅̅̅̅
1,n-1
From the obvious relations: { α α
n n we obtain: { α
n k
α
and from the second
x1 1 ...xn n = Q 0 x1 1 ...xn n = Q 0
∑ n−1
α αk
pnk=1 k ∏n−1
k=1 αk ∑n αk
equation:  ∑n−1 α αk
xn k=1 = Q 0 . Noting r=∑nk=1 αk 0, we finally obtain:
αnk=1 k ∏n−1
k=1 pk

α
(∏n k 1⁄r
k=1 pk )
1⁄r
αk Q0
x̅k = α
̅̅̅̅̅
, k=1, n
(∏n k 1⁄r p 1⁄r
k=1 αk ) k

The total cost is:

α
i 1⁄r rQ1⁄r
(∏n
i=1 pi )
TC(Q0)=∑nk=1 pk x̅k = α
0
i 1⁄r 1⁄r
.
(∏n
i=1 αi )

Let us now calculate the influence of the price increase of one of the factors of production on the absolute
value of that factor.
1⁄r n α αi αi
αk Q0 (∏s=1 ps s )1⁄r αi 𝑟 −1
𝜕x̅k p pk −pi𝑟 𝛿𝑖𝑘 αk Q1⁄r (∏n αs 1⁄r
s=1 ps ) αi pk −𝑟𝛿𝑖𝑘 pi
= 𝑘≠𝑖
α
𝑟 i
= 0
α , ̅̅̅̅̅
k,i=1, n
𝜕𝑝𝑖 ( ∏n s 1⁄r
s=1 αs ) 𝑝𝑘2 ( ∏n s 1⁄r
s=1 αs ) rpi 𝑝𝑘2

In particular:
1⁄r α
𝜕x̅k α Q (∏n p s )1⁄r r−αk
=− k 0∏n s=1αs s1⁄r , ̅̅̅̅̅
k=1, n
𝜕𝑝𝑘 ( s=1 αs ) r𝑝𝑘2

1⁄r s 1⁄r α
𝜕x̅k αk Q0 (∏n s=1 ps ) αi
= αs 1⁄r , ̅̅̅̅̅
k,i=1, n, ik
𝜕𝑝𝑖 ( ∏n α
s=1 s ) rp i pk

The first differential of x̅k is:

1⁄r s 1⁄r α
𝜕x̅ αk Q0 (∏n
s=1 ps ) r−αk α
𝑑x̅k = ∑𝑛𝑖=1 𝜕𝑝k 𝑑𝑝𝑖 = αs 1⁄r (− 𝑑𝑝𝑘 + ∑𝑛𝑖=1 pi 𝑑𝑝𝑖 )=
rpk ( ∏n
s=1 αs ) 𝑝𝑘
𝑖
𝑖𝑘 i

⁄ α 𝑛
αk Q10 r (∏ns=1 ps s )1⁄r r αi
n αs 1⁄r (− 𝑑𝑝𝑘 + ∑ 𝑑𝑝𝑖 )
rpk ( ∏s=1 αs ) 𝑝𝑘 pi
𝑖=1
r α r α
The factor 𝑥̅𝑘 will decrease if and only if: 𝑑x̅k0  − 𝑝 𝑑𝑝𝑘 + ∑𝑛𝑖=1 pi 𝑑𝑝𝑖 0  𝑝 𝑑𝑝𝑘  ∑𝑛𝑖=1 pi 𝑑𝑝𝑖
𝑘 i 𝑘 i
αi 𝑛 αi
∑𝑛
𝑖=1 𝑑𝑝𝑖 ∑𝑖=1 𝑑𝑝𝑖
𝑑𝑝𝑘 αi 𝑑𝑝𝑘 𝑑𝑝
  ∑𝑛𝑖=1 𝑖 𝑝 𝑖 and ∑𝑛𝑖=1 𝑖 =1.
pi pi
 = ∑n
. If we note: i=∑n (0,1) we obtain:
𝑝𝑘 𝑟 i=1 αi i=1 αi 𝑝𝑘 𝑖

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European Integration - Realities and Perspectives. Proceedings 2021
𝑑𝑝
∑𝑛
𝑖=1 𝑖 𝑝
𝑖
𝑑𝑝𝑘 1 𝑑𝑝 𝑑𝑝𝑘 𝑖 𝑖
 1− ∑𝑛𝑖=1 𝑖 𝑝 𝑖 or  ∑𝑛  .
𝑖𝑘
If we note again: i=∑𝑛 𝑛, ik we have: ∑𝑛𝑖=1 𝑖 =1.
̅̅̅̅̅
, i=1,
𝑝𝑘 𝑘 𝑖𝑘 𝑖 𝑝𝑘 𝑖=1 𝑖 𝑖=1 𝑖 𝑖𝑘
𝑖𝑘 𝑖𝑘

𝑑𝑝𝑘 𝑑𝑝 𝑑𝑝𝑖
The condition becomes: 𝑝𝑘
 ∑𝑛𝑖=1 𝑖 𝑝 𝑖 𝑛
On the other hand, the expression ∑𝑖=1 𝑖 𝑝𝑖
represents the
𝑖𝑘 𝑖
𝑖𝑘
convex combination of the relative variations of the factors except for pk.
Therefore, a relative variation of the pk factor outside the convex combination (for clarification, the
convex combination of two quantities is given by the inside of the segment, three sizes by the inside of
the triangle etc.) will lead to a decrease of its absolute value.
𝑑𝑝𝑖 𝑑𝑝𝑘
For example, if 𝑝𝑖
=C, CR we will have that: 𝑝𝑘
C will lead to a decrease of absolute value of 𝑥̅𝑘 .

A concrete example is that of the labor force. In the conditions of inflationary pressures that increase the
prices of other factors of production (electricity, liquid fuels etc.) by a percentage of C%, in order to
maintain the existing labor force, wages must increase by at most C%.
More:

𝑑x̅k 𝑑𝑝 𝑑𝑝𝑖 𝑑𝑝𝑘 𝑑𝑝𝑖

𝑥̅𝑘
n
=− (∑i=1 αi ) 𝑘
𝑝𝑘
+ ∑𝑛𝑖=1 αi
pi
=𝑟 (−(1 − 𝑘 ) 𝑝𝑘
+ ∑𝑛𝑖=1 i
pi
)
𝑖𝑘 𝑖𝑘 𝑖𝑘

which expresses the relative variation of the factor xk as a function of the relative variations of the prices
pi.
Let us now calculate the influence of the price increase of one of the factors of production on the total
cost of production.
⁄ αk 1⁄r
rQ10 r (∏n
k=1 pk ) αi α
𝜕𝑇𝐶(𝑄0 ) 𝑘𝑖 𝑖 −1 rQ10⁄r (∏n k 1⁄r
k=1 pk ) 𝑖 
= αk 1⁄r pi𝑟 = α =𝑇𝐶(𝑄0 ) 𝑟𝑝𝑖
𝜕𝑝𝑖 ( ∏n
k=1 αk )
𝑟 n
( ∏k=1 α ) k
k 1⁄ r 𝑟𝑝 𝑖 𝑖

Therefore:
𝜕𝑇𝐶(𝑄0 ) 
𝑑 𝑇𝐶(𝑄0 ) = ∑𝑛𝑖=1 𝑑𝑝𝑖 =∑𝑛𝑖=1 𝑇𝐶(𝑄0 ) 𝑟𝑝𝑖 𝑑𝑝𝑖 from where:
𝜕𝑝𝑖 𝑖

𝑑 𝑇𝐶(𝑄0 ) 𝑖 𝑑𝑝𝑖 𝑑𝑝𝑖

𝑇𝐶(𝑄0 )
= ∑𝑛𝑖=1 𝑟 𝑝𝑖
=∑𝑛𝑖=1 𝑖 𝑝𝑖
.

As a result of these calculations, the relative variation of the total cost will be found in the convex
combination of the relative variations of the factors of production.

References
Chiang, A. C. (1984). Fundamental Methods of Mathematical Economics. McGraw-Hill Inc.
Harrison, M. & Waldron P. (2011). Mathematics for Economics and Finance. Routledge.
Ioan, C. A. & Ioan, G. (2011). The Extreme of a Function Subject to Restraint Conditions. Acta Universitatis Danubius.
Œconomica 7, 3, pp. 203-207.
Ioan C.A. & Ioan G. (2012). On the General Theory of Production Functions. Acta Universitatis Danubius. Œconomica, no.5,
vol.8, ISSN 2065-0175, pp. 223-236.
Simon, C. P. & Blume, L.E. (2010). Mathematics for Economists. w.w.w. Norton&Company.
Stancu S. (2006). Microeconomics. Bucharest: Ed. Economica.

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