Cost Minimization under Variable Input Prices: A Theoretical Approach

It is generally admitted that fixed, low input prices for resources cause distortions in the input mix, in the sense of inefficient usage of resources.We consider a particular homogeneous functional form for representing the potential distortions in the input factor quantities in the context of deriving Cobb-Douglas cost functions and such a representation can offer a justification for why the average cost may behave eratically, altghough the technology remains unchanged. Fixed input prices become a special case. Our generalized form of Shepard3’s lemma allows us to interpret the corresponding input prices’s homogeneity orders as measures of the efficiency wages.