Every firm uses materials, labor and capital to produce output.

What is it about?

Production functions show the maximum output that can be produced from given inputs. Every economist agrees with the existence of the firm-level production functions. Some do not believe in the existence of economy-wide production functions. Shephard's lemma says technology may be equivalently represented by a production function, satisfying certain regularity conditions, or a cost function, satisfying certain regularity conditions. Not all known functional forms of production functions satisfy the regularity conditions. The phenomenon of re-switching denies any unique relationship between capital intensity and the rate of profits. No economist could prove that this phenomenon cannot occur. The prices at which capital is measured should be independent of factor shares. All these issues are discussed in the paper.

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Why is it important?

The paper insists on unique coefficients and error term. All misspecifications of production functions are avoided.

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