The production function model is a structural model which forecasts two primary phenomenon: yields (Qi ) and crop shares (Hi ). Established on earlier studies, the yield per hectare of each crop is likely to be a function of climate, soils, and other inputs. For a set of well−behaved production functions,
Qi = Qi (Ki, E), i = 1,...,n
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But as the farmers voluntarily choose them only if they are beneficial, hence we can consider both the expense and profits of modifications. The Ricardian approach measures damages as reductions in net revenues or land values. Assume a set of well−behaved production functions of the form:
Qi = Qi (Ki, E), i = 1,...,n
where, Ki = [ Kil ,. . . Kij ,. . . KiJ ] is a vector of all purchased inputs in the production of good i.
Kij is the purchased input j (j = l,. . .J) in the production of good i.
E = [ El ,. . .Em ,. . .EM ] is a vector of exogenous environmental inputs such as temperature, precipitation, and soils which is common to a production site.
Given a set of factor prices Wj for Kj , E, and Q, cost minimization leads to a cost function:
Ci = Ci (Qi, W, E)
where Ci is the cost of production of good i
W = [ wl ,. . .wi ,. . .wJ ] is the vector of factor