A dynamic approach to the tendency of industries to cluster



Appendix A. Derivation of the cost function for manufacturing

The production function for the manufacturing firm is given by:
(1)

Z is a sub-production function over the producer service sector’s composite output of
and is of the CES-type:

(2)


(ZX 1- -


Z = Xi11
к i=1


n 2     .

÷Σ x1
i=1


1-


i21

)


n1                    n 2

The Lagrangean associated with the problem of minimizing pi 1 χi11 ÷ pi 2i 21

i =1                     i =1

subject to the constraint that the production level is constant at Z is:

(3)


nɪ                    n 2

f = Σ pi 1 χi11 ÷ Σ pi2i21 ÷ λ

i =1                     i =1


(

( JX 1-1 JX
Z
- χaσ ÷Σ


σ
i21


к i =1              i =1

к


The 1st order conditions are:

(4)


ɪ
^
xi11


= p< 1 - λ


( V- 1 -
Σ xi 11σ

к i=1


JX- Aσ -11 (    1A - -

÷Σ x 21σ I1 —I χi1σ
i=1    ) к σ )


= 0, V jj....n1


( n1


(5)


δχi21


pi2 t


Σ χ.


1-


i11


кi=1


÷Σ


i =1


1-


1 Aσ-1


i21


-1


χ σ
χi 21


= 0 V ij....n2


σ

a/       ( ʌ 1-ɪ   n 2  1Aσ-1

(6) ɪ = Z -Σχmσ ÷Σχmσ   = 0

        к i=1          i=1       )

Dividing (4) with ðf/ðχj 11 and (5) respectively, leads (after some manipulation) to

(7)


χj11


σ V

pλ


χi11


(8)


χi 21


p1 χ

,     χi11

!> 2t )


22




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