cost modeling of a firm

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Here we have assumed that both, HUL and ITC, are using the same technology¹. The price of the goods-basket has been normalized to unity for HUL in the year 1996. The average total cost curve for the industry has been fitted using the following specification, which allows for a learning model of capacity expansion and utilization;

Equation Set 2.1 starts here

ATC(Q_t)=%beta %alpha {Q^e_t}^{2} - 2 %alpha Q^e_t Q_t+ %alpha Q_t^2

; where %alpha geslant 0, %beta > 1 

%DELTA lnQ^e_t = %lambda_0 +%lambda_1 %DELTA lnQ^e_{t-1}+%mu %DELTA lnQ_{t-1}+ ε_t ; where 0< %lambda_1 < 1, ε_t sim N(0,%sigma^2)

Equation set 2.1 ends here

Where;

ATC(Q_t) = {Total cost at time 't'} over { Q_t}

Q_t = quantity of good basket produced²

MLE obtained from constrained³ LLF maximization were used to fit the data on HUL and ITC. From the estimators we obtained the maximum capacity corresponding to the minimum average cost for a firm in the industry. From the above we constructed a time-series for capacity utilizations for the two companies, HUL and ITC.

1Equation set: 2.1 has been estimated for data on HUL and ITC using identical set of parameters.

2Calculated as variable cost deflated by prevalent CPI.

3As constrained by parameters.