THE USE OF PRODUCTION FUNCTIONS TO MODEL COPPER-ALUMINUM SUBSTITUTION IN THE ELECTRICAL CONDUCTOR INDUSTRY

The effect of relative aluminum-copper prices on the use of these two metals in the electrical conductor industry was studied. Models expressing the copper-aluminum input ratio as a function of the aluminum-copper price ratio were obtained by using a CES and a VES production function. A similar model was obtained from a new VES production function derived in this work. This model is characterized by a decreasing elasticity of substitution as the input ratio goes to zero or infinity. This formulation was considered to give the best representation of the conditions found in the industry. These models were modified by replacing current prices by their expectations obtained from a form of the rational expectations hypothesis.;Finally, the three models were used to forecast the aluminum market. It was found that if relative prices continue favoring copper, this metal will increase its market share of the building cable market and of the insulated cable market taken as a whole. However, its market share of the building cable market and of the insulated cable market taken as a whole. However, its market share will decrease slightly in the power and magnet wire markets. On the other hand, if relative prices favor aluminum, the lighter metal will increase its market share in all the groups studied, especially in the power and magnet wire markets.;The models derived and data for the building, power, and magnet wire and cable product markets, and for the whole insulated cable industry were used to estimate the copper-aluminum elasticity of substitution (ES). It was necessary to divide in two the time period considered (1965-1981) according to whether the aluminum-copper price ratio was rising or falling. This led to the conclusion that the apparent ES is the result of relative prices and of technological diffusion. During the first period, when the aluminum-copper price ratio is declining, technological diffusion favors the substitution of aluminum for copper and hence reinforces the price effects. However, during the second period relative prices move in the opposite direction, thus, the effect of price and technological diffusion offset each other. This results in high estimates for ES in the first period and low estimates for the second one.