A cost function approach to dynamic duality: An application to the US cigarette manufacturing industry

The dynamic duality econometric approach with the case of multiple outputs is applied to the US cigarette manufacturing industry to test for the prese nce of adjustment casts and quasi-fixed inputs with regard to stocks of cap ital and tobacco. Capital and tobacco stocks are found to be quasi-fixed in puts and the empirical results indicate that there an significant adjustmen t costs associated with adjusting these inputs. Short- and long-nln own- an d cross-price elasticities of factor demands are estimated for domestic and imported tobaccoes, materials, tobacco stocks, and capital. Output demand elasticities an also estimated. The two outputs, cigarettes produced for ex port and for the US market, are examined for equality of marginal costs. No evidence of differences in marginal costs was found. There is evidence tha t government restrictions on advertising have negative effects on output de mand.