A is a positive constant (Called Total Factor Productivity). The CobbDouglas production function is then given byY AKLwhere A,, and are positive constants. Denote aggregate output by Y, the input of capital by K, and the input of labour by L. The basic form of the Cobb-Douglas production function is as follows: Q (L,K) A L K. A functional form, named after its originators, that is widely used in both theoretical economics and applied economics as both a production function and a utility function. But we can argue also that if the individuals i are somewhat homogenous (regarding income, tastes, and priorities, for example, the people of the same socioeconomic stratum) we might be able to proceed with the estimation of the function to model the consumer behavior toward the goods. The Formula of Cobb-Douglas production function.
The general form of a Cobb-Douglas function over two goods is. One could argue that each individual i has a different utility function to maximize, and also that the elasticities for each good are different across individuals. The Cobb-Douglas functional form was first proposed as a production function in a macroeconomic setting, but its mathematical properties are also useful as a utility function describing goods which are neither complements nor substitutes.
#Cobb douglas production function how to#
However, some assumptions must be noted: 1) We’re assuming that our sample (or subsample) containing the set of individuals i tend to have a similar utility function, 2) the estimation of the elasticity for each good, would also be a generalization of the individual behavior as an aggregate. December 2000 One problem when estimating a Cobb-Douglas production function with micro data is how to deal with the observations that show positive output.
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