Quick Reference Guide to Common Functional Forms

Peter J. Wilcoxen
Departments of Economics and Public Administration
Syracuse University
16th June 2003
1
CONTENTS 2
Contents
1 Consumption 3
1.1 Leontief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Cobb-Douglas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Constant Elasticity of Substitution . . . . . . . . . . . . . . . . . . . . . . . 5
1.4 Linear Expenditure System . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.5 Transcendental Logarithmic Indirect Utility . . . . . . . . . . . . . . . . . . 6
1.6 Generalized Leontief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2 Intertemporal Utility 8
2.1 Logarithmic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Constant Intertemporal Elasticity of Substitution . . . . . . . . . . . . . . . 8
2.3 Intertemporal Analog to the Linear Expenditure System . . . . . . . . . . . 9
3 Production 10
3.1 Leontief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2 Cobb-Douglas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.3 Constant Elasticity of Substitution . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Transcendental Logarithmic Cost Function . . . . . . . . . . . . . . . . . . . 11
1 CONSUMPTION 3
1 Consumption
1.1 Leontief
Zero elasticity of substitution; own-price elasticities are less than one; cross-price elasticities
are negative; homothetic.
Utility:
u = min
_
x
i

i
_
(1)
Indirect Utility:
v = m
_
N

i=1

i
p
i
_
1
(2)
Expenditure Function:
e = u
N

i=1

i
p
i
(3)
Price Index:
p
u
=
N

i=1

i
p
i
(4)
Typical Demand Equation:
x
i
=
i
m
p
u
(5)
Income Elasticity:

m
= 1 (6)
Expenditure Share:
s
i
=
i
p
i
p
u
(7)
1 CONSUMPTION 4
1.2 Cobb-Douglas
Unitary elasticity of substitution; own-price elasticities are equal to one; cross-price elastic-
ities are zero; homothetic.
Utility:
u =
N

i=1
x

i
i
(8)
Indirect Utility:
v = m
N

i=1
_

i
p
i
_

i
(9)
Expenditure Function:
e = u
N

i=1
_
p
i

i
_

i
(10)
Price Index:
p
u
=
N

i=1
_
p
i

i
_

i
(11)
Typical Demand Equation:
x
i
=

i
m
p
i
(12)
Uncompensated Demand Elasticity:

i
= 1 (13)
Income Elasticity:

m
= 1 (14)
Expenditure Share:
s
i
=
i
(15)
1 CONSUMPTION 5
1.3 Constant Elasticity of Substitution
Elasticity of substitution can vary; homothetic.
Utility:
u =
_
N

i=1

i
x
1

i
_

1
(16)
Indirect Utility Function:
v = m
_
N

i=1

i
p
1
i
_
1
1
(17)
Expenditure Function:
e = u
_
N

i=1

i
p
1
i
_
1
1
(18)
Price Index:
p
u
=
_
N

i=1

i
p
1
i
_
1
1
(19)
Typical Demand Equation:
x
i
=

i
m
p

i
_
N

i=1

i
p
1
i
_
1
=

i
m
p
u
_
p
u
p
i
_

(20)
Uncompensated Demand Elasticity:

i
= (1 s
i
) s
i
(21)
Income Elasticity:

m
= 1 (22)
Expenditure Share:
s
i
=
i
_
p
u
p
i
_
1
(23)
1 CONSUMPTION 6
1.4 Linear Expenditure System
Does not impose homotheticity.
Utility Function:
u =

i
(x
i

i
)

i
(24)
Supernumary Income (excess of income over required expenditure):
m
sn
= m

i
p
i

i
(25)
Indirect Utility Function:
v = m
sn

i
_

i
p
i
_

i
(26)
Expenditure Function:
e =

i
p
i

i
+ u

i
_
p
i

i
_

i
(27)
Typical Demand Equation:
x
i
=
i
+

i
m
sn
p
i
(28)
Expenditure Share:
s
i
=
p
i

i
m
+
i
m
sn
m
(29)
1.5 Transcendental Logarithmic Indirect Utility
Does not impose homotheticity.
Indirect Utility Function:
ln v =

i
ln
p
i
m
+
1
2

ij
ln
p
i
m
ln
p
j
m
Typical Expenditure Share:

i
=

i
+

j

ij
ln
p
j
m

k
_

k
+

j

kj
ln
p
j
m
_
(30)
1 CONSUMPTION 7
1.6 Generalized Leontief
Under construction...
2 INTERTEMPORAL UTILITY 8
2 Intertemporal Utility
The following assume an intertemporal budget constraint of the form below, where B
0
is the
initial stock of nancial assets and y is total income from all other sources:
_

0
p(s)c(s)e
rs
ds = B
0
+
_

0
y(s)e
rs
ds (31)
For convenience, let W be total wealth:
W = B
0
+
_

0
y(s)e
rs
ds
2.1 Logarithmic
Unitary intertemporal elasticity of substitution.
Utility Function:
U =
_

0
ln(c(s))e
s
ds (32)
First-order condition for consumption at time s:
1
c(s)
e
s
= p(s)e
rs
(33)
Consumption expenditure at time s in terms of expenditure at time 0:
p(s)c(s) = p(0)c(0)e
(r)s
(34)
Initial expenditure as a function of wealth:
p(0)c(0) = W
2.2 Constant Intertemporal Elasticity of Substitution
Utility Function:
U =
_

0
c(s)
1

e
s
ds (35)
First-order condition for consumption at time s:
2 INTERTEMPORAL UTILITY 9
_
1

_
c(s)
1/
e
s
= p(s)e
rs
(36)
Consumption expenditure at time s in terms of expenditure at time 0:
p(s)c(s) = p(0)c(0)
_
p(s)
p(0)
_
1
e
(r)s
(37)
Initial expenditure as a function of wealth:
p(0)c(0) =
W

, =
_

0
_
p(s)e
rs
p(0)
_
1
e
s
ds (38)
2.3 Intertemporal Analog to the Linear Expenditure System
Additional parameters allow consumption to be hump-shaped over the life cycle.
Utility Function:
U =
T

s=0
(c
s

s
)
s
(1 + )
s
(39)
3 PRODUCTION 10
3 Production
In the following, w
i
is the price of input i and p is the price of output.
3.1 Leontief
Production Function:
q = min
_
x
i

i
_
(40)
Cost Function:
C = q

i
w
i
(41)
Unit Cost Function:
c =

i
w
i
(42)
Factor Demand Equation:
x
i
=
i
q (43)
3.2 Cobb-Douglas
Production Function:
q = A

i
x

i
i
(44)
Cost Function:
C =
1
A

i
_
w
i

i
_

i
q (45)
Unit Cost Function:
c =
1
A

i
_
w
i

i
_

i
(46)
3 PRODUCTION 11
Factor Demand Equation:
x
i
=

i
qc
w
i
(47)
3.3 Constant Elasticity of Substitution
Production Function:
q = A
_

i
x
1

i
_
1
(48)
Cost Function:
C =
q
A
_

i
w
1
i
_ 1
1
(49)
Unit Cost Function:
c =
1
A
_

i
w
1
i
_ 1
1
(50)
Factor Demand Equation:
x
i
=
i
A
1
_
c
w
i
_

q (51)
Cost Share:
s
i
=
i
_
Ac
w
j
_
1
(52)
3.4 Transcendental Logarithmic Cost Function
Unit Cost Function:
ln c =
0
+

i
lnw
i
+
1
2

ij
ln w
i
ln w
j
(53)
Cost Share:
3 PRODUCTION 12
s
i
=
i
+

ij
ln w
j
(54)