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Abstract

Because of a lack of data or multicollinearity problems, it is fairly common to include only a subset of the relevant prices in econometric model of supply response. This paper provides some evidence on the validity of using price ratios in this situation: A model of the U.S. poultry and egg industry where feed cost and output price are the only economic variables considered suggests that the use of price ratios would be inappropriate. If careful attention is given to model specification, it appears that homogeneity restrictions should not be imposed on supply response models unless the excluded prices are known to have little influence on production decisions.

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