How to Explain Ubiquity of Constant Elasticity of Substitution (CES) Production and Utility Functions Without Explicitly Postulating CES

Authors

Olga Kosheleva, The University of Texas at El PasoFollow
Vladik Kreinovich, The University of Texas at El PasoFollow
Thongchai Dumrongpokaphan, Chiang Mai UniversityFollow

Publication Date

7-2016

Comments

Technical Report: UTEP-CS-16-45

Abstract

In many situations, the dependence of the production or utility on the corresponding factors is described by the CES (Constant Elasticity of Substitution) functions. These functions are usually explained by postulating two requirements: an economically reasonable postulate of homogeneity (that the formulas should not change if we change a measuring unit) and a less convincing CSE requirement. In this paper, we show that the CES requirement can be replaced by a more convincing requirement -- that the combined effect of all the factors should not depend on the order in which we combine these factors.