From a theoretical standpoint, the most appealing functional form for production function estimation might be cubic, such as the equation
This form is general in that it exhibits stages of first increasing and then decreasing returns to scale. The marginal products of the input factors exhibit a pattern of first increasing and then decreasing returns, as was illustrated in Figure 7.3.
MANAGERIAL APPLICATION 7.4
The table below depicts sales per employee and net income per employee for a sample of 10 of the most productive companies in America. Freddie Mac (Federal Home Loan Mortgage Corporation) purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing debt instruments in the capital markets. It's a capital-intensive business, and highly lucrative. Freddie Mac generates an astonishing $8.6 million in sales per employee, and net income of $727,714 per employee. Similarly, Burlington Resources, Inc., a prosperous oil and natural gas producer, requires few employees to efficiently conduct its business. Others that generate enormous profits per employee include software juggernaut Microsoft Corp., financial services powerhouse Stilwell Financial (purveyor of Janus mutual funds), and biopharmaceutical leader Biogen.
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