An Analysis of the Cost Structure of Food Industries in Pakistan: An Application of the Translog Cost Function

Abstract

Given the importance of food industriesin Pakistan, this studyanalyzestheircost structure by estimating thetranscendental logarithmic cost function. The study also considers elasticity of substitution along with own-price elasticity and cross-price elasticity. Four factor inputs,i.e.,labor, capital, energy,and materials,are used toestimatethe cost function. The results indicate that materialsaccount for the highest share of the cost. The elasticity of substitution of materialsfor capital and energy is also weak. The own-price elasticities indicate that the demand for materialsis least responsive to a change in its own price while the demand for other inputs varies with price. The cross-priceelasticities show that labor, capital and energy are substitutes foreach other. The output elasticity of cost demonstrates the presence of economies of scale.