The second reason for introducing a simple formal model of managerial
decisions is to guide the estimation of the cost function and the interpretation of
the results. Assume for the moment that managerial effort is the only endogenous
variable in the cost function. Effort will be a function of all the other variables in
the cost function and managerial preferences. To illustrate the implications,
suppose that, after suitable transformation, the true cost function in area i at time t
is