Elasticities of Substitution and Firm Behavior

This paper investigates a firm's response to a factor price change in a competitive industry. R. G. D. Allen showed that the cross factor price elasticity is related in a particular manner to the elasticity of substitution under certain conditions. By introducing functional separability in the discussion, this paper transforms Allen's equation into one which explicitly incorporates the relation between the Allen partial elasticity of substitution and the intra- and inter-group elasticities of substitution.