A NOTE ON THE COBB-DOUGLAS FUNCTION

In class, we spoke of production functions, which were combinations of inputs that

generated a given level of output (Q). The Cobb-Douglas function is arguably the most
commonly used Production function, with a functional form given by:

Q = A Kα Lβ ………. (1)

Where K is capital and L is labor and A is a constant, which statistically corresponds to

the residual, but in economic terms, is a measure of technical progress. α and β are parameters
that are estimated . Equation (1) is a non-linear equation, which needs to be linearized. Hence
we take logarithms of both sides:

log Q = log A + α log k + β log L……… (2)

Equation (2) is log linear equation. The coefficients α and β, directly give the input
elasticities. In other words, they answer the question: how much does a one unit change in
labor (or capital) change the output. That is one of the biggest advantages of the Cobb-Douglas
production function besides its ease of estimation.

It is clear from equations (1) and (2) that the relationship with returns to scale is as
follows:

Increasing returns to scale if α +β > 1

Constant Returns to scale if α + β = 1

Decreasing Returns to Scale if α + β < 1.

This direct correlation with returns to scale, is yet another advantage of the Cobb-Douglas
function.