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Cost Function in Railways

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Introduction
This assignment focuses on the cost functions of the Dutch Railways. In this tutorial will be an estimated cost function developed for the Nederlandse Spoorwegen (NS). This cost function (expressed in Dutch Guilders) is based on the period of Year 1951 till Year 1993. This due to certain developments that made it more difficult to come to a good approach of a cost function. Based on the cost function, developed in this tutorial, there will be an answer provided on the question whether is it efficient to allow competition on the tracks.
First we will define a cost function related to the NS. Then we will describe the important variables. After defining the cost function, the relevance of the cost function will be explained. …show more content…

The type of production function is as follows Y=f(X), where Y is the maximum produced outputs and X is the given inputs. For every unit of input there is a price g related to it.
As said earlier if the company has a cost minimizing strategy then the earlier type can be written as follows:
Min∑▒〖Xg〗^
The results of the above type gives as the cost function for every level of Y given the input prices g.
So the type for the cost function is C= h(Y,g).
In the case where the firm does not follow a cost minimizing strategy it is preferable for the company to calculate a cost - output relation. In other words it is better to sum the costs and relate them to the input so that it can easily predict the effect of changes in output levels on total cost. The reason for not taking into account all the variables is that in the case of a public firm if we calculate many unnecessary variables then we will have a higher variance of the estimated parameters of the necessary variables. In this case our results will be biased as if the goal of the company is to minimize cost and we were missing data e.g. the input prices.
The most important step in producing the cost function is the estimation of its parameters. The most common form that is used for the calculation of production function is the Cobb- Douglas form. Cobb Douglas is a linear function and has many restrictions as the assumption that all elasticities of

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