Abstract
The traditional, neoclassical derivation of the long-run average cost(LAC) function is based on minimizing the cost of a given output. However, there are a number of reasons why the theoretical concept of this ex ante LAC function is likely to differ significantly from ex post cost-output observations when output is stochastic. In agriculture, the farmer's decision making criterion is assumed to be one of minimizing the cost of producing some planned output level. Average cost is then a function, inter alia, of planned output rather than realized output. It is argued that there is no operational significance in the cost-realized output relationship; in practice, the farmer's concern is with the cost-planned output relationship. This paper proposes a two-stage procedure to estimate the latter relationship. Cross-section data on UK dairy farms for 1980/1 are used to show significant differences in the ex ante and ex post relationships.
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