Do Chinese Grain Farmers Maximise their Profits?

Abstract

Profit maximisation is generally seen as the behavioural norm among firms (farms) operating in the market economic system. Thus one way of verifying how effectively economic reform has facilitated the transformation of Chinese farmers into market-oriented producers is to examine whether they are maximising their profits. Such an examination can be conducted with the use of production, cost or profit functions, but both primal and dual approaches require reliable data on price, inputs and outputs. In production function analysis, profit maximisation occurs at the point where the production function is tangential to the price line (Heady, 1952), so how can profit maximisation be verified when there are no price data? Profits are maximised, exhibiting optimal output, when the returns to scale are constant (Carlson, 1956). The argument in this chapter is that the above concept can be used to test the profit maximisation hypothesis when there are no price data. Therefore one approach to testing the hypothesis is to model the production process and identify the point of constant returns to scale in production. We specify the production process in a homothetic form, which is more general than the homogeneous form.