Abstract
This paper formulates a demand model for energy commodities using a household production function approach. The model is stated in a utility maximization framework where utility is assumed to be a function of two composite commodities directly yielding utility. Electricity and natural gas are used as inputs along with a capital stock to produce one of the utility-yielding commodities. The other utility-yielding commodity is assumed to be produced with two non-energy goods and capital stock which are purchased on the market. The Kuhn-Tucker conditions are then used to characterize the optimal time paths for input purchases and investments by the household.
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