Census Bureau conducts an Annual Survey of Manufactures in each of the four years between the economic census. If both capital and labor are increased by a factor of, then output increases by an amount less than such that. The opposite is true for decreasing returns. For increasing returns, if both capital and labor are increased by a factor of, then output increases by an amount greater than. That is, if both of the inputs, capital and labor, are increased by a factor of, then output also increases by a factor of. Will it also increase by double? Will output increase by more than double? Will it increase by some amount less than double?įormally, for constant returns to scale. The Cobb-Douglas production function helps you determine what happens to the output. For example, suppose both the capital and the labor inputs are doubled. This type of production function is particularly useful since it is linear in logarithms and can be used to determine whether the inputs exhibit increasing, decreasing, or constant returns to scale. The parameters and are all positive constants calculated from empirical data and is a multiplicative exponential error. Where output,, is a function of two inputs, capital ( ) and labor ( ). This is a two-input production function that takes on the form The simplest production function used frequently in economics is a Cobb-Douglas production function. Note, however, that they are limited to producing a single output, so that joint production is disallowed, although multiple inputs are used. Production functions can be applied to a single firm, an industry, or an entire nation. For example, the production of cars using steel, labor, machinery, and plantįacilities could be described as. A production function is a function that summarizes the conversion of inputs in to outputs.

Cobb douglas function