5
$\begingroup$

How can I prove that for a production function $F:\mathbb X \rightarrow \mathbb R$ with constant returns to scale

$$\forall x\in \mathbb X, \forall t > 0: \ \ F(tx) = t F(x)$$

and with the cost function

$$C(p,y):=\min_{x \in \mathbb X} \{p^\top x\lvert F(x) \geq y\}$$

it must be the case that $$C(p,ty) = tC(p,y).$$

My first strategy has been to make a constructive proof along the following lines

$$C(p,ty) = \min_{x \in \mathbb X} \{p^\top x\lvert F(x) \geq ty\} =\min_{x \in \mathbb X} \{p^\top x\lvert F(x/t) \geq y\},$$ with the second identity using the constant returns to scale assumption. I then define $z=x/t$ and rewrite the variable over which to minimize $$= \min_{x/t} \{t p^\top(x/t) \lvert F(x/t) \geq y\} = t \min_z\{p^\top z \lvert F(z) \geq y\} = t C(p,y).$$

However I am not entirely sure that this proof is solid so I guess my question boils down to whether this proof really is solid or if there is another way to proove it?

$\endgroup$
2
  • 3
    $\begingroup$ Yes, your proof is fine. There are several other ways to show this, but this one is among the smartest. $\endgroup$
    – Bertrand
    Dec 27, 2020 at 21:29
  • $\begingroup$ Thx. Feel free to supplement though if you find the time. $\endgroup$
    – user270396
    Dec 27, 2020 at 23:58

0

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.