linerguide.blogg.se

But in 1937, David Durand proposed that the restricted function of the equation, Q = A.K α.L 1- α, needed modification. Several studies were made in 1920’s and 1930’s which assured that Cobb Douglass production function was highly reliable. Returns to scale in economics refers to a term that states that the degree of change in input factors changes the output proportionally and concurrently. Modified Cobb-Douglas production function

All the units of labour are assumed to be homogeneous.The Cobb-Douglas production function assumes the prevalence of perfect competition in the market.It is easier to calculate labor input in terms of number of men employed or hours of work, but it is difficult to measure capital input, more so because it depreciates over a period of time.The Cobb-Douglas production function assumes only constant Returns to scale, and thus it would be difficult to explain diminishing returns in process of production in the long-run.Besides Cobb-Douglas production function were often used for manufacturing sector alone. Such a form of the CobbDouglas production function assumes constant returns to scale of K and H, which can be thought of as combining two assumptions. If a production function f exhibits constant returns to scale and if the problem maximize x (x) pf(x)w x has a solution, the the optimal profit is zero. The Cobb-Douglas production function only considers two factor inputs viz, Labour and Capital. A simple aggregated CobbDouglas production function, with no natural resources, was the starting point for the estimation of the stock of human capital in the 19th century in Brazil. An important and somewhat counterintuitive property of constant returns to scale production is this.It tries to pinpoint increased production in relation to factors that contribute to production over a period of time. Criticism of the Cobb-Douglas Production function The term 'returns to scale' refers to how well a business or company is producing its products. The Cobb-Douglas production function strengthens the validity of Euler’s Theorem, which states that if factors of production are paid according to their marginal product then the total product will be exhausted. Further it hints that if one of the inputs is zero the output will also be zero. The Cobb-Douglas Production function also shows that Elasticity of Substitution equals One. Thus the Cobb-Douglas Production function indicates constant Returns to scale.