End of Section Exercises: Basic Cost Model versus Nerlove Cost Model 143 FURTHER CONSIDERATIONS It was stated previously that a proper cost model is monotonic (increasing) and homogeneous of degree one in input prices, which implies that, for a given level of output, a doubling of all input prices results in a doubling of total cost. What this means is that the estimated parameters of the input price variables should be positive in sign and sum to unity. Reviewing the results of the basic cost model, it is clear that neither condition holds; as such, the basic cost model does not represent an appropriately specified cost function. At first blush, it may appear that the Cobb­Douglas specification employed by Nerlove does not conform either. However, you may recall that the estimated model is derived from the underlying production function and that the parameter estimates are actually functions of other parameters and variables, which was detailed in Chapter 4 and reviewed here. More specifically, we have (5.6) 1 = 1 r and 2 = 2 r, which imply that (5.7)