Estimation of Area Elasticities from a Standard Profit Function

Abstract

This article demonstrates that both crop area and output elasticities can be calculated from a profit function. A Chambers/Just profit function (which includes land allocations as quasi‐fixed factors) is used to derive shadow price equations for each crop area allocation. Jointly solving these shadow price equations for crop area makes it possible to calculate individual crop area elasticities. A profit function is specified to represent agricultural producers in the state of Iowa. Shadow price equations are jointly estimated with output supply and input demand equations. From these estimated equations, we derive the individual crop area response and output response to a change in prices.