Since the oil shock of 1973, energy inputs have become the obstacle to the economic growth and development. Therefore we need to add the energy factor to the capital and the labor into the production function in analyzing economic growth.
The purpose of this study is the estimation and the predictions of production technology structures or derived energy demand structures in the Korean Manufacturing industry through the interfuel substitution and the energy-nonenergy substitution relationships.
In cases where more than two production factors are used, a generalized functional form is required for analysis. In such cases, transcendental logarithmic (translog) cost function is used.
In using this translog cost function, the weak seperability between energy-nonenergy inputs is assumed. This assumption links the energy-submodel and the aggregate model through an appropriate instrumental variable i.e., the aggregate energy price index.
For both the energy-submodel and the aggregate model, the own ＆ proper Allen Elasticities (AES) and the own ＆ cross price Elasticities (PE) are computed.
The result of the study shows that the unit energy cost function and the aggregate cost function as computed produced some unusual result. For example, some of the own AES's ＆ PE's have the positive signs and the condition of cancavity of the cost function is not satisfied.