Production Structure and Derived Demand for Factor Inputs in the Canadian Lumber Industry

The production structure of the Canadian lumber industry was studied using duality theory in production and costs. A nonhomothetic translog cost function was employed to derive a system of four input share equations which were estimated simultaneously with the cost equation by the Iterative Three-Stage Least-Squares method. Allen partial elasticities of substitution among pairs of inputs and price elasticities of factor demands were then computed. Finally, an average cost equation was estimated and the impacts of (i) factor costs, (ii) economies of scale, and (iii) technical change on the average cost of production were determined. The results indicated that the production structure of the industry is homothetic and homogeneous but the elasticities of substitution among pairs of inputs are other than unity. Elasticity measures indicated that factor inputs in the lumber industry are fairly substitutable. Average cost of production was found to be most sensitive to the price of roundwood, followed by the price of labor. The average cost equation did not indicate technological progress in the lumber industry in the last 17 years, although there exist substantial economies of scale in cost of production. Forest Sci 31:871-881.