Short-run Estimation Of The Cost Structure Of A Canadian, Fully-integrated Steel Plant

This thesis has three objectives. The first objective is to discover the characteristics of production of iron and steelmaking. A unique data set allows hypotheses, which are frequently maintained in empirical work, to be tested. The second objective is to determine substitution between variable inputs. It can be learned if variable inputs are used in fixed proportions at the firm level in iron and steelmaking. The third objective is to learn if there are economies of joint production in iron and steelmaking.;These objectives can be achieved by estimating short-run or restricted translog cost functions separately for ironmaking, for steelmaking and then a joint cost function.;Two problems which must be tackled are the endogeneity of output and the absence of data on the quantity of capital services. Instrumental variables are used to deal with the endogeneity of output while capital services are estimated in a non-linear way in the estimation itself.;The estimated cost function for ironmaking is well-behaved. Residual diagnostics indicate no evidence of autocorrelation. Variables whose parameters are insignificant are eliminated in a logical manner to arrive at a reduced model. The reduced model indicates that production is not homothetic, that technical change is Hicks neutral, that capital reduces variable costs for the majority of the sample, and that capital has variable input biases. Labour and iron ore, and labour and coke are substitutes while iron ore and coke are complements from 1974-80. A number of alternative models were rejected.;The same type of analysis was carried out for steelmaking. However, the joint estimation indicated that it is not appropriate to estimate steelmaking on its own.;The joint cost function found that production was not homothetic and that capital has variable input biases. Evidence of economies of joint production was found. The marginal cost of steelmaking is reduced by increasing the output of iron