3. 1. Introduction
Pioneering work to model the structure of production
in the industry using neoclassical cost function
approach was done by Nerlove in 1961.
Scale of economies in electricity generation.
Cobb-Douglas Production Function with three inputs
Capital, Labor and Fuel
Prices of inputs Cant be treated as
exogenous rather they are endogenous
A research Gap
Gap Bridging
Treated as exogenous factor.
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4. 2. Theoretical Development
Cobb–Douglas function to model output as a
function of capital, K, labor, L, and fuel, F:
𝑄 = 𝛼0𝐾𝛼𝐾𝐿𝛼𝐿𝐹𝛼𝐹𝑒𝜀𝑖
The economies of scale parameter is;
𝑟 = 𝛼𝐾 + 𝛼𝐿 + 𝛼𝐹
The value 1 indicates constant return to scale
The production model is loglinear
These three factors prices can be treated as
exogenous variables (Research Gap)
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5. 2. Theoretical Development
For a firm that optimizes by choosing its factors
of production, the demand for fuel would be;
𝑭∗
= 𝑭∗
𝑸, 𝑷𝑲, 𝑷𝑳, 𝑷𝑭
and likewise for labor and capital.
The firm’s objective of cost minimization
problem was;
𝑴𝒊𝒏 𝑷𝑲𝑲 + 𝑷𝑳𝑳 + 𝑷𝑭𝑭 + 𝝀(𝑸 − 𝜶𝟎𝑲𝜶𝑲𝑳𝜶𝑳𝑭𝜶𝑭)
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12. Conclusion
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There is evidence of a marked degree of
increasing returns to scale at firm level; but
the degree of returns to scale varies
inversely with output and is considerably
less, especially for large firms.
