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Econometrics and Cobb-Douglas Function - Research Paper Example

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This work "Econometrics and Cobb-Douglas Function" describes manufacturing firms in Italy for the period 1983 to 1998. The Cobb-Douglas functional form is used to represent the relationship of output to input. The author outlines the individual significance of the variables yields the elasticity of production…
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Econometrics and Cobb-Douglas Function
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Download file to see previous pages The coefficients derived from the Cobb-Douglas model are very useful in evaluating the characteristics of a given time series data in econometrics. The coefficients are used to examine characteristics such as elasticity of production and return to scale. 
The individual significance of the variables yields the elasticity of production. The elasticity of production refers to the responsiveness of production to changes in input (capital and labor). The coefficients from the Cobb-Douglas model enable us to understand both the capital elasticity of production and the labor elasticity of production (Greene, 1993).
The capital elasticity of production is given by our model and thus is equal to 0.7489%. This means that if capital increases by 1% and labor are unchanged, we expect the production to increase by 0.7489%.
The labor elasticity of production is given by the Cobb-Douglas model. In our model, labor elasticity equals 0.2993%. This means that if labor increases by 1% and the capital held constant, we expect the production to increase by 0.2993%.
The joint significance of the variables yields the returns to scale. Returns to scale describe what is expected to occur as the scale of production increases in the long term, when capital and labor are variable. Returns to scale explain the association between the rate of change in production to the subsequent change in the factors of production. In the Cobb-Douglas function, we take into account the two coefficients relating to capital and labor i.e. and
In cases where = 1, the model is said to have constant returns to scale, that is, if labor and capital are increased by 10%, we expect a 10% increase in production. If however, the model is said to have increasing returns to scale. In this situation, the outputs increase faster than the inputs. Finally, if, the model is said to have decreasing returns to scale. This means that the outputs increase slower than the inputs. Our model, therefore, has increasing returns to scale and as such the outputs increase at a much faster rate than the inputs. ...Download file to see next pagesRead More
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