An Evaluation of Resource Utilisation in Palm Oil Industry using the Modified Cobb-Douglas Decision Model

Abstract

Aggregate production functions, particularly the Cobb-Douglas model have been widely used in modeling input and output relationships in various organisations and at national economic levels. Most commonly used is the two-factor model where all inputs are aggregated as capital and labour factors of production. In this paper, a six-factor Cobb-Douglas model has been fitted to a ten-year production data obtained from a palm-oil producer. By logarithmic transformation, the normal equations obtained from the model were solved by the Least Squares method to obtain the output elasticities. The bootstrapping technique was used to establish their validity. The input components were aggregated and used in the traditional aggregate Cobb-Douglas model to obtain comparative results. For the disaggregated model, the output elasticities for the six input components were found to be 0.1653, 0.0457, 0.0864,-0.3136, 0.0403 and 0.3845 respectively, resulting in a decreasing return to scale of 0.4086. In the case of aggregate model, we have output elasticities of 0.4578 and 0.2730 for aggregate capital and labour respectively, also indicating a decreasing return to scale of 0.7308. However it was found that while the aggregate model gave a generalized result, the disaggregated approach pointed to specific aspects of the inputs that were adversely affecting the productivity of the organization and thus requiring stringent management control. Thus the study showed that the disaggregated Cobb-Douglas production function is superior to the traditional two-factor model. The model developed which was statistically tested, is novel and provides robust decision support for budding and seasoned firms.

Keywords

• Cobb-Douglas Production function,Disaggregated,Return to scale,Output Elasticity,Urn

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