ESTIMATING PRODUCTION RESPONSE OF BROADACRE FARMS IN WESTERN AUSTRALIA: THE NEXUS OF EMPIRICS AND ECONOMICS REVISITED

Recently there has been a growing debate as to whether the empirical properties ofproduction response derived from the multi-product framework are consistent with thebehavioral assumption in the duality theory of production. This issue could in turn affectthe reliable estimates of elasticities which are fundamental requirement to accurateeconomic forecasting and valid analyses of the impacts of changes in governmentpolicies or international events.The crux of the debate is particularly related to whether to estimate cost or profit functionand which types of functional form should be used, as well as imposing restrictions onprofit and cost functions when those properties are not satisfied by the estimation models.After reviewing the literature, we found that the duality theory may not always hold inempirical work. This depends on many factors such as risk, stochastic error or dataquality, and selected functional forms. We also found that the normalized quadraticfunction has more advantage than other functional forms, although all of flexiblefunctional forms often fail to pass the regularity condition in the duality theory. As such,there is a requirement to impose curvature restriction if normalized quadratic function isused and monotonicity condition needs to be checked if the cross price elasticities aremore than unity.We examined the above-mentioned issues by estimating production response forbroadacre farms in Western Australia. A normalized quadratic profit function is estimatedusing the ABARE’s quasi-micro farm level data for the period 1977/78 to 2005/06. Theresult reflects the imposition of curvature restrictions for a normalized profit function,and estimated elasticities are found to be less elastic in