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Theoretical consistency property applied to the micro-economic modelling with flexible functional forms

By Dalibor Moravanský

Abstract

The paper brings a survey of flexible functional forms and summarizes the theoretical properties of several economic functional types (indirect utility, cost, expenditure function and the appropriate input demand systems). The notions of flexibility of the functional fonn (relating to the character of its parameters), consistency with the economic theory (considered in contexts of producer and consumer behaviour) and the domain of applicability (towards admissible values of independent variables) are discussed. The comparative example based on the TRANSLOG and the generalized Leontief unit cost function is chosen to elucidate the main topic of the article.Flexible functional fonns, TRANSLOG, generalized Leontief, theoretical consistency, domain of applicability, Shephard's lemma, Roy-Ville's identity, indirect utility function, expenditure function, commodity demand function

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