A Simple Statistical Test of Violation of the Weak Axiom of Cost Minimization

No 2004-17, Working papers from University of Connecticut, Department of Economics

Abstract: A problem with a practical application of Varian.s Weak Axiom of Cost Minimization is that an observed violation may be due to random variation in the output quantities produced by firms rather than due to inefficiency on the part of the firm. In this paper, unlike in Varian (1985), the output rather than the input quantities are treated as random and an alternative statistical test of the violation of WACM is proposed. We assume that there is no technical inefficiency and provide a test of the hypothesis that an observed violation of WACM is merely due to random variations in the output levels of the firms being compared.. We suggest an intuitive approach for specifying a value of the variance of the noise term that is needed for the test. The paper includes an illustrative example utilizing a data set relating to a number of U.S. airlines.

Pages: 14 pages
Date: 2004-02
Note: This paper was written while the author was visiting the Indian Statistical Institute, Calcutta.
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://media.economics.uconn.edu/working/2004-17.pdf Full text (application/pdf)

Related works:
Journal Article: A Simple Statistical Test of Violation of the Weak Axiom of Cost Minimization (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2004-17

Access Statistics for this paper

More papers in Working papers from University of Connecticut, Department of Economics University of Connecticut 365 Fairfield Way, Unit 1063 Storrs, CT 06269-1063. Contact information at EDIRC.
Bibliographic data for series maintained by Mark McConnel ().