Constant Elasticity of Substitution Production Function _ Economics.pdf - Constant Elasticity of Substitution Production Function | Economics Economics

Constant Elasticity of Substitution Production Function _ Economics.pdf

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6/14/2019 Constant Elasticity of Substitution Production Function | Economics 1/17 Economics Discussion Economics Discussion Constant Elasticity of Substitution Production Function | Economics Article Shared by ADVERTISEMENTS: In this article we will discuss about the constant elasticity of substitution production function. Elasticity of Substitution: One of the limitations of Cobb-Douglas production function is the unitary elasticity of substitution between labour and capital. This is a rigid assumption of Cobb-Douglas production function. “The elasticity of substitution in the Cobb-Donglas Production Function is unity” can be proved below. The Cobb-Douglas production function: ADVERTISEMENTS: Y = b X X ………………. (100) Where Y = Production X = Labour 0 1 b1 2 b2 1 India as a less Developed Country Read Next Story
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6/14/2019 Constant Elasticity of Substitution Production Function | Economics 2/17 ADVERTISEMENTS: X = Capital Marginal product of labour [∂Y/∂X ] is b Y/X and marginal product of capital [∂Y/∂X ] is b Y/X . The ratio of marginal product of capital to marginal product of labour is known as marginal rate of technical substitution [MRTS] i.e., ADVERTISEMENTS: MRTS = MPX /MPX = b Y/X /b Y/X = b Y/X .X b Y = b X /b X The estimate of elasticity of substitution between two inputs [Labour and Capital] will be obtained by regressing log [X /X ] on log [MRTS] or log [b X /b X ] The derivative of log X /X with respect to log b X /b X is b , which will always be unity. Therefore there is a need to follow other production function. One such type of production function is the CES [Constant Elasticity of Substitution] production function. 2 1 1 1 2 2 2 2 1 2 2 1 1 1 2 1 1 2 1 1 2 1 2 2 1 1 2 1 2 2 1 1 2 1 India as a less Developed Country Read Next Story
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6/14/2019 Constant Elasticity of Substitution Production Function | Economics 3/17 This production function will be specified as follows: ADVERTISEMENTS: Where Y = Production ADVERTISEMENTS: X and X = Labour and Capital inputs respectively. A = Efficiency parameter > 0 δ = Distribution parameter 0 < δ < 1 ρ = Extent of substitution between labour and capital related to σ = 1/1+ ρ; ADVERTISEMENTS: σ = Elasticity of substitution ADVERTISEMENTS: As there is no method of linearization by a simple logarithmic transformation, the research investigators attempt to estimate the CES 1 2 India as a less Developed Country Read Next Story
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6/14/2019 Constant Elasticity of Substitution Production Function | Economics 4/17 Production Function by marginal productivity conditions.
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