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The Cobb-Douglas Production Function

Y=

EL(1-E) AK
Lectures in Macroeconomics- Charles W. Upton

History
Developed by Paul Douglas and C. W. Cobb in the 1930s

The Cobb-Douglas Production Function

History
Developed by Paul Douglas and C. W. Cobb in the 1930s
Douglas went on to be professor at Chicago and U.S. Senator Cobb - ??
The Cobb-Douglas Production Function

The General Problem


An increase in a nations capital stock or labor force means more output. Is there a mathematical formula that relates capital, labor and output?

The Cobb-Douglas Production Function

The General Form

Yt ! At K L
The Cobb-Douglas Production Function

E 1E t t

Increasing Capital

Yo ! AK L

E o

1E o 1E o

Y ! A(2 K o ) L
The Cobb-Douglas Production Function

Increasing Capital

Yo ! AK L
E

E o

1E o 1E o E

Y ! A(2 K o ) L 2 AK L
E E o 1E o

! 2 Yo

The Cobb-Douglas Production Function

Increasing Capital

Yo ! AK L
E

E o

1E o 1E o E

Y ! A(2 K o ) L 2 AK L
E E o 1E o

! 2 Yo

Diminishing returns to proportion


The Cobb-Douglas Production Function

Increasing Labor

Yo ! AK L
E

E o

1E o 1E

Y ! AK o (2 Lo )
The Cobb-Douglas Production Function

Increasing Labor

Yo ! AK L
E

E o

1E o 1E 1E

Y ! AK o (2 Lo ) 2
1E

AK L

E o

1E o

! 2 Yo

The Cobb-Douglas Production Function

Increasing Labor

Yo ! AK L
E

E o

1E o 1E 1E

Y ! AK o (2 Lo ) 2
1E

AK L

E o

1E o

! 2 Yo

Diminishing returns to proportion


The Cobb-Douglas Production Function

Increasing Both

Yo ! AK L
E

E o

1E o 1E

Y ! A(2 K o ) (2 Lo )

The Cobb-Douglas Production Function

Increasing Both

Yo ! AK L
E

E o

1E o 1E

Y ! A(2 K o ) (2 Lo ) 2 AK L
E o 1E o

! 2 Yo

The Cobb-Douglas Production Function

Increasing Both

Yo ! AK L
E

E o

1E o 1E

Y ! A(2 K o ) (2 Lo ) 2 AK L
E o 1E o

! 2 Yo

Constant returns to scale


The Cobb-Douglas Production Function

Substitution

Yo ! AK L
E

E o

1E o 1E

Y ! A(2 K o ) ( xLo )
The Cobb-Douglas Production Function

! Yo

Capital and Labor Can be Substituted

An Illustration

Yt ! At K L
The Cobb-Douglas Production Function

1/ 2 t

1/ 2 t

An Illustration

Y ! AK L
The Cobb-Douglas Production Function

1/ 2

1/ 2

An Illustration

Y ! A KL
The Cobb-Douglas Production Function

An Illustration
A =3 L =10

Y ! A KL
K =10
The Cobb-Douglas Production Function

An Illustration

Y ! 3 (10)(10) ! 3 100 ! 30

The Cobb-Douglas Production Function

Doubling Capital

Y ! 3 (20)(10) ! 3 200 ! 30 2 $ 42

The Cobb-Douglas Production Function

Constant Returns to Scale

Y ! 3 (20)(20) ! 3 400 ! 60

The Cobb-Douglas Production Function

Substitution

Y ! 3 (20)( x) ! 30 x!5

The Cobb-Douglas Production Function

Estimation

Yt ! At K L

E t

1E t

log(Yt ) ! log( At )  E log( K t )  (1  E ) log( Lt )


The Cobb-Douglas Production Function

Estimation

log(Yt ) ! C  t  F1 log( K t )  F 2 log( Lt )  I t

The Cobb-Douglas Production Function

Estimation

log(Yt ) ! E  F1 log( K t )  F 2 log( Lt )  I t


Statistical issues abound!
The Cobb-Douglas Production Function

Best Estimate

1 E$ 3
The Cobb-Douglas Production Function

Factor Payments
E= % of Income going to owners of capital 1-E = % of Income going to workers

The Cobb-Douglas Production Function

How well does it work?

Yt ! At K L
The Cobb-Douglas Production Function

E t

F t

You cant beat something with nothing

CES Production Function

K % ( L W! w % ( r
The Cobb-Douglas Production Function

CES Production Function


Suppose 10% increase in K 10% wage rate( to % leads increase in capital L labor W !ratio. W = 1.

w % ( r

The Cobb-Douglas Production Function

CES Production Function


Suppose 10% increase in Kto5% wage % ( rate leads increase in capital L labor W !ratio. W = .

w % ( r

The Cobb-Douglas Production Function

CES Production Function


In the Cobb-Douglas K Production %( Function,

1.L W= W! w % ( r

The Cobb-Douglas Production Function

CES Production Function


The CES allows for a different elasticity of substitution. Little gained.

The Cobb-Douglas Production Function

Leontief Production Function


K

L
The Cobb-Douglas Production Function

Leontief Production Function


K = aY L = bY K

L
The Cobb-Douglas Production Function

Leontief Production Function


K = aY L = bY K

L
The Cobb-Douglas Production Function

Leontief Production Function


K = aY L = bY K

W=0

L
The Cobb-Douglas Production Function

Leontief Production Function


K = aY L = bY K

Doesnt work. We can and do substitute labor for capital all the time
The Cobb-Douglas Production Function

Other Factors?

Yt ! At K L LND

E t

F t

1E  F t

The Cobb-Douglas Production Function

And in Conclusion

Yt ! At K L
The Cobb-Douglas Production Function

E 1E t t

End
2003 Charles W. Upton. All rights reserved

The Cobb-Douglas Production Function

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