Scribd
Upload
269 views5 pages

C - D Production Function

The Cobb-Douglas production function models the relationship between the amount of inputs (labor and capital) and the amount of output. It is one of the most widely used production functions for empirical work. The function expresses output (Q) as a product of labor (L) and capital (K) inputs to some exponents (α and ß), with A representing technology. It has several key properties, including constant returns to scale if α + ß = 1, and the elasticity of substitution always being equal to 1.

Uploaded by

Anita Panthi
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
269 views5 pages

C - D Production Function

The Cobb-Douglas production function models the relationship between the amount of inputs (labor and capital) and the amount of output. It is one of the most widely used production functions for empirical work. The function expresses output (Q) as a product of labor (L) and capital (K) inputs to some exponents (α and ß), with A representing technology. It has several key properties, including constant returns to scale if α + ß = 1, and the elasticity of substitution always being equal to 1.

Uploaded by

Anita Panthi
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1/ 5

Cobb- Dauglas production function:

C.W. Cobb and P. H. Dauglas have propounded and


developed an empirical production function which is called
Cobb- Douglas production function. It is tasted on statistical
investigation. It is applicable to the manufacturing
industries. It is most widely used production function in
empirical work. The function is expressed by
Q =A Lα Kß where, Q = output
L = labour
K= capital
A, α and ß = positive Parameters
A is efficiency Parameter, the greater the value of A, the
more advanced is the technology. The parameter α
measures the percentage increases in Q resulting from
1% increase in L, when k is constant. Similarly ß
measures the percentage increase in Q resulting from 1%
increase in K, while L is constant. Thus, α and ß are
output elasticity of Land K.
Properties:
1. C-D production function is homogenous of degree α + ß
Let labour and capital is increased by t times, then
Q = A L α Kß
Q = A (t L) α (t K) ß
Q = A t αLα t ß K ß
Q = t α+ß A L α K ß
Q = t α+ß Q
Therefore, C-D production function is homogenous of
degree α+ ß.
If α + ß = 1  C.R.S
If α+ ß > 1  I.R.S.
If α + ß < 1  D.R.S.
The parameter α+ß together measures the degree of
homogeneity of the function or returns to scale.
2. Marginal physical product of labour and capital are
positive ( but diminishing)
MPPL = ∂Q/∂L = ∂ (A Lα K ß)/∂L
= A α Lα – 1 K ß
= α. A Lα K ß/L
= α. Q/L > 0 (α. APL)
(Since, α > 0, Q> 0, L> 0)
Again, MPPK = ∂Q/∂K = ∂ (A Lα K ß)/∂K
= A Lα ß. K ß – 1
= ß. A L α K ß/K
= ß. Q/K > 0 (ß. APK)
(Since, ß > 0, Q >0, K > 0)
Therefore, both MPPL and MPPK are positive but their
rate of change is negative. i. e.
∂MPPL/∂L < 0 and ∂MPPK/∂K < 0
3. The iso-quants of C-D production function are negative
slopped and they are convex to the origin.
We know the slope of iso- quant is
dK/d L = -MPPL/ MPPK
= - α. Q/L ÷ ß. Q/K
= - α/ß .Q/L .K/Q
= (- α/ß .K/L) < 0 (along iso quant dQ = 0
Or, 0 = MPPL. DL +MPPK.dK
dK/d L = - MPPL/MPPK)
Therefore, the slope of IQ in C-D production function is
negative.
Now for convexity, it requires the ratio of change of the
slope of iso – quant is positive. i. e. d2K/dL2 > 0
Now, d (d K/d L)/d L = d (- α/ß .K/L)/d L
= - α/ß. d (K/L)/ d L
= - α/ß[L.dK/dL – K. d L/dL÷L 2]
= - α/ß (L. –α/ß. K/L – K. 1 ÷ L 2)
= - α/ß [(α. K –K/ß) ÷ L 2]
= - α/ß – [α. K/ß + K ÷ L 2] > 0
Therefore, iso - quant of C-D production function is convex
to the origin. It depends on positivity of the rate of change of
the slope of IQ.
4. Multiplicative form of this function can be changed into
log linear form.
Q = A L α Kß
Log Q = log A + α log L + ß log K
In logarithmic form the function becomes simple to
handle and can be easily estimated using linear
regression analysis.
5. The elasticity of substitution of C-D production function
is always one (unity).
We know the elasticity of substitution
Es = ∂K/L . MRTS
∂MRTS K/L
Es = ∂K/L . (-α/ß . K/L)
= ∂ (- α/ß. K/L) K/L
= ∂K/L - α/ß
-α/ß. ∂K/L
= 1 Therefore the elasticity of substitution of C-D production
is unity which implies that the share of labour and capital does not
change.
6. C-D production function satisfies Euler’s theorem i.e.
Q = ∂Q/∂L. L + ∂Q/∂K. K
0r, Q = ∂ (A L α K ß)/∂L. L + ∂ (A L α K ß)/∂K/. k
Or, Q = (A α Lα – 1 K ß) L + (A Lα ß. K ß – 1) K
Or, Q = A α Lα – 1+1 K ß + A Lα ß. K ß – 1+1
Or, Q = A L α K ß. α + A L α K ß. ß
Or, Q = A L α K ß (α + ß)
Or. Q = Q. Since, α + ß = 1.
7. In C-D production function factor intensity is measured
by the ratio α/ß.
If α/ß > 1 (α > ß), it shows labour intensive technique.
If α/ß < 1 (α < ß), it shows capital intensive technology.

You might also like