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Economics Beta

How can I obtain Leontief and Cobb-Douglas production function from

CES function?
Asked 5 years, 11 months ago Active 6 months ago Viewed 30k times

In most Microeconomics textbooks it is mentioned that the Constant Elasticity of Substitution

(CES) production function,
22 1
−𝜌 −𝜌 −
𝑄 = 𝛾 [𝑎𝐾 + (1 − 𝑎)𝐿 ] 𝜌

(where the elasticity of substitution is 𝜎 =

1

1+𝜌
, 𝜌 > −1 ), has as its limits both the Leontief
21 production function and the Cobb-Douglas one. Specifically,

lim 𝑄 = 𝛾 min {𝐾 , 𝐿}
𝜌→∞

and

𝑎 1−𝑎
lim 𝑄 = 𝛾 𝐾 𝐿
𝜌→0

But they never provide the mathematical proof for these results.

Can somebody please provide these proofs?

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our Terms of Service.
Moreover, the above CES function incorporates constant-returns-to-scale (homogeneity of degree
 one), due to the outside exponent being −1/𝜌. If it was, say −𝑘/𝜌 , then the degree of
homogeneity would be 𝑘.

How are the limiting results affected if 𝑘 ≠ 1 ?

mathematical-economics production-function cobb-douglas leontief

edited Nov 30 '14 at 21:16 asked Nov 28 '14 at 22:23

Alecos Papadopoulos Huseyin
28.4k 1 32 94 553 1 7 16

3 This seems to be a homework question with no prior effort of solving it, see:
meta.economics.stackexchange.com/questions/24/… – FooBar Nov 28 '14 at 22:27

1 It is certainly an on-topic subject, but a low-quality question. Even if it is not homework Huseyin, we expect
from you to a) Be careful with your notation (you used 𝜌 and 𝑝 ) and b) Contribute some thoughts and ways
you have tried to solve the problem. We are here to help people who help themselves, and not to offer
professional services pro bono. – Alecos Papadopoulos Nov 28 '14 at 23:04

2 Mathematics do things differently to pretty much the entire rest of the stackexchange network. Only on
math.se can you submit problems for other people to solve without showing effort. Please save that sort of
question for math.se, not here. – 410 gone Nov 29 '14 at 4:31

2 When you say "I need to prove" without any indication of why you need to prove it, people are going to
assume this is homework. – Steven Landsburg Nov 30 '14 at 4:16

1 @Huseyin Now that the question has been re-opened and an answer has been provided, won't you post
your answer for the Cobb-Douglas limit? – Alecos Papadopoulos Dec 2 '14 at 20:18

2 Answers Active Oldest Votes

The proofs I will present are based on techniques relevant to the fact that the CES production
function has the form of a generalized weighted mean.
22 This was used in the original paper where the CES function was introduced, Arrow, K. J.,
Chenery, H. B., Minhas, B. S., & Solow, R. M. (1961). Capital-labor substitution and economic
efficiency. The Review of Economics and Statistics, 225-250.
The authors there referred their readers to the book Hardy, G. H., Littlewood, J. E., & Pólya, G.
(1952). Inequalities , chapter 2.

We consider the general case

𝑘
−𝜌 −𝜌 −
𝑄𝑘 = 𝛾 [𝑎𝐾 + (1 − 𝑎)𝐿 ] 𝜌
, 𝑘 > 0

1
−1
⇒ 𝛾 𝑄𝑘 =
𝑘
𝜌 𝜌
[𝑎(1/𝐾 ) + (1 − 𝑎)(1/𝐿 )] 𝜌

By using1) Limit
our when
site, you acknowledge
𝜌 → ∞ that you have read and understand our Cookie Policy, Privacy Policy, and

Since
our Terms we are
of Service. interested in the limit when 𝜌 → ∞ we can ignore the interval for which 𝜌 ≤ 0 , and
treat 𝜌 as strictly positive
 treat 𝜌 as strictly positive.

Without loss of generality, assume 𝐾 ≥ 𝐿 ⇒ (1/𝐾

𝜌
) ≤ (1/𝐿 )
𝜌
. We also have 𝐾 , 𝐿 > 0 . Then
we verify that the following inequality holds:

𝑘/𝜌 𝑘 −1 𝑘
(1 − 𝑎) (1/𝐿 ) ≤ 𝛾 𝑄 ≤ (1/𝐿 )
𝑘

𝑘
𝑘/𝜌 𝑘 𝜌 𝜌 𝑘
⟹ (1 − 𝑎) (1/𝐿 ) ≤ [𝑎(1/𝐾 ) + (1 − 𝑎)(1/𝐿 )] 𝜌
≤ (1/𝐿 ) (1)

by raising throughout to the 𝜌/𝑘 power to get

𝜌 𝜌 𝜌 𝜌
(1 − 𝑎)(1/𝐿 ) ≤ 𝑎(1/𝐾 ) + (1 − 𝑎)(1/𝐿 ) ≤ (1/𝐿 ) (2)

which indeed holds, obviously, given the assumptions. Then go back to the first element of (1)
and

𝑘/𝜌 𝑘 𝑘
lim (1 − 𝑎) (1/𝐿 ) = (1/𝐿 )
𝜌→∞

which sandwiches the middle term in (1) to (1/𝐿𝑘 ) , so

𝛾 𝑘
𝑘
lim 𝑄𝑘 = = 𝛾𝐿 = 𝛾 [ min{𝐾 , 𝐿}
]
(3)
𝑘
𝜌→∞ 1/𝐿

So for 𝑘 = 1 we obtain the basic Leontief production function.

2) Limit when 𝜌 → 0
Write the function using exponential as

𝑘
−1 𝜌 −1 𝜌 −1
𝛾 𝑄𝑘 = exp − ⋅ ln [𝑎(𝐾 ) + (1 − 𝑎)(𝐿 ) ]} (4)
{ 𝜌

Consider the first-order Maclaurin expansion (Taylor expansion centered at zero) of the term
inside the logarithm, with respect to 𝜌:

𝜌 −1 𝜌 −1
𝑎(𝐾 ) + (1 − 𝑎)(𝐿 )

0 −1 0 −1 0 −2 0 0 −2 0 2
= 𝑎(𝐾 ) + (1 − 𝑎)(𝐿 ) − 𝑎(𝐾 ) 𝐾 𝜌 ln 𝐾 − (1 − 𝑎)(𝐿 ) 𝐿 𝜌 ln 𝐿 + 𝑂(𝜌 )

2 −𝑎 −(1−𝑎) 2
= 1 − 𝜌𝑎 ln 𝐾 − 𝜌(1 − 𝑎) ln 𝐿 + 𝑂(𝜌 ) = 1 + 𝜌[ ln 𝐾 𝐿 ] + 𝑂(𝜌 )

Insert this back into (4) and get rid of the outer exponential,

−𝑘/𝜌
−1 −𝑎 −(1−𝑎) 2
𝛾 𝑄𝑘 = (1 + 𝜌[ ln 𝐾 𝐿 ] + 𝑂(𝜌 ))

In case it is opaque, define 𝑟 ≡ 1/𝜌 and re-write

By using our site, you acknowledge that you have read and understand our Cookie Policy, Privacy Policy, and
our Terms of Service. −𝑎 −(1−𝑎)
−𝑘𝑟

[ ln 𝐾 𝐿 ]
1 2

( )
 [ ]
−1 −2
𝛾 𝑄𝑘 = 1 + + 𝑂(𝑟 )
( 𝑟 )

Now it does look like an expression whose limit at infinity will give us something exponential:

−𝑘
−1 −1 −𝑎 −(1−𝑎)
lim 𝛾 𝑄𝑘 = lim 𝛾 𝑄𝑘 = (exp{ln 𝐾 𝐿 })
𝜌→0 𝑟→∞

𝑘
𝑎 1−𝑎
⇒ lim 𝑄𝑘 = 𝛾 (𝐾 𝐿 )
𝜌→0

The degree of homogeneity 𝑘 of the function is preserved, and if 𝑘 = 1 we obtain the Cobb-
Douglas function.

It was this last result that made Arrow and Co to call 𝑎 the "distribution" parameter of the CES
function.

edited Jun 7 '16 at 19:00 answered Dec 1 '14 at 22:32

Alecos Papadopoulos
28.4k 1 32 94

The regular method of obtaining Cobb-Douglas and Leotief is L'Hôpital's rule.

11 Another methods should be used too. Setting 𝛾 = 1 will be return

1
−
𝑄 = [𝑎𝐾
−𝜌
+ (1 − 𝑎)𝐿
−𝜌
] 𝜌
and

−𝜌 −𝜌 −𝜌
𝑄 = [𝑎𝐾 + (1 − 𝑎)𝐿 ]

By The total derivative via differentials we will have

−𝜌−1 −𝜌−1 −𝜌−1

−𝜌𝑄 𝑑𝑄 = −𝑎𝜌𝐾 𝑑𝐾 − (1 − 𝑎)𝜌𝐿 𝑑𝐿

With some manupulations our main equation will be obtained.

1+𝜌 1+𝜌
𝑄 𝑄
𝑑𝑄 = 𝑎( ) 𝑑𝐾 + (1 − 𝑎)( ) 𝑑𝐿
𝐾 𝐿

Linear Function : lim𝜌→−1 𝑑𝑄 ⇒ 𝑄 = 𝑎𝐾 + (1 − 𝑎)𝐿

Cobb-Douglas Function :

1 1 1
lim 𝑑𝑄 ⇒ 𝑑𝑄 = 𝑎( )𝑑𝐾 + (1 − 𝑎)( )𝑑𝐿
𝜌→0 𝑄 𝐾 𝐿

Taking the Integral from both side would produce

1 1 1
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𝑑𝑄have
= read
𝑎 and
( understand
)𝑑𝐾 + (1our
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𝑎) (Policy, Privacy Policy, and
)𝑑𝐿
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(1 ) 𝐶 (1 )
 𝑎 (1−𝑎) 𝐶 𝑎 (1−𝑎)
𝑄 = 𝐾 𝐿 𝑒 = 𝐴𝐾 𝐿

Leontief Function: lim𝜌→∞ 𝑑𝑄 ⇒ 𝑚𝑖𝑛(𝑎𝐾 , (1 − 𝑎)𝐿)

edited Apr 13 '17 at 12:19 answered Dec 3 '14 at 11:00

Community ♦ Huseyin
1 553 1 7 16

1 (+1) I like especially how the Cobb-Douglas function is obtained. – Alecos Papadopoulos Dec 7 '14 at 23:45

Thanks @AlecosPapadopoulos. but I don't know why somebodies make dislike this post yet? I think this
type of questions may provide brain storm at least to me. – Huseyin Dec 8 '14 at 20:41

1 Strictly speaking Huseyin, they are right: you should have included at least part of your answer in your
question: "here is my way of doing things, is there some other way?" – Alecos Papadopoulos Dec 8 '14 at
20:56

Is taking a differential and integrating "equivalent" to taking a limit? In general, can we take differential and
integrate to find a limit? Or is this a special application? – PGupta Nov 16 '18 at 5:15

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