In the Cobb- Douglas production function, Q = AK^aL^b, where 'a' and 'b’ are output elasticities of capital and labour, respectively. If a + b > 1, the underlying return to scale will be

Question

Question

This question was previously asked in

UGC NET Paper 2: Commerce 4th March 2023 Shift 2

Answer 1

The correct answer is increasing.

Key Points

Cobb- Douglas production function:
- In its most standard form for the production of a single good with two factors, the function is given by:
  $Y(L,K)=AL^{\beta }K^{\alpha }$
- where:
- Y = total production (the real value of all goods produced in a year or 365.25 days)
- L = labor input (person-hours worked in a year or 365.25 days)
- K = capital input (a measure of all machinery, equipment, and buildings; the value of capital input divided by the price of capital)[clarification needed]
- A = total factor productivity $0<\alpha <1$
- $0<\alpha <1$
- The Cobb Douglas production function exhibits the three types of returns:
  1. If a+b>1, there are increasing returns to scale.
  2. For a+b=1, we get constant returns to scale.
  3. If a+b<1, we get decreasing returns to scale.