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This study estimated a generalized constant elasticity of substitution (CES) and Cobb-Douglas production functions of the Palestinian stone cutting industry in 1997 by using the ordinary least squares (OLS) technique. Results of the study revealed that the stone industry, in general, was characterized by decreasing returns to scale, while small firms enjoyed constant returns to scale. Also, it was found that the output elasticity with respect to labor, was greater than the output elasticity with respect to capital. In addition, a significant statistical difference at 1% level of significance was found between large and small firms in the sense that large firms faced a low elasticity of substitution between labor and capital, while small firms had higher possibilities of substituting labor for capital.