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Y=
EL(1-E) AK
Lectures in Macroeconomics- Charles W. Upton
History
Developed by Paul Douglas and C. W. Cobb in the 1930s
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
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
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
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
Y ! AK o (2 Lo ) 2
1E
AK L
E o
1E o
! 2 Yo
Increasing Labor
Yo ! AK L
E
E o
Y ! AK o (2 Lo ) 2
1E
AK L
E o
1E o
! 2 Yo
Increasing Both
Yo ! AK L
E
E o
1E o 1E
Y ! A(2 K o ) (2 Lo )
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
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
Substitution
Yo ! AK L
E
E o
1E o 1E
Y ! A(2 K o ) ( xLo )
The Cobb-Douglas Production Function
! Yo
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
Doubling Capital
Y ! 3 (20)(10) ! 3 200 ! 30 2 $ 42
Y ! 3 (20)(20) ! 3 400 ! 60
Substitution
Y ! 3 (20)( x) ! 30 x!5
Estimation
Yt ! At K L
E t
1E t
Estimation
Estimation
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
Yt ! At K L
The Cobb-Douglas Production Function
E t
F t
K % ( L W! w % ( r
The Cobb-Douglas Production Function
w % ( r
w % ( r
1.L W= W! w % ( r
L
The Cobb-Douglas Production Function
L
The Cobb-Douglas Production Function
L
The Cobb-Douglas Production Function
W=0
L
The Cobb-Douglas Production Function
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
And in Conclusion
Yt ! At K L
The Cobb-Douglas Production Function
E 1E t t
End
2003 Charles W. Upton. All rights reserved