9. Consider the following Cobb- Douglas production function for the bus transpor

Question

9. Consider the following Cobb- Douglas production function for the bus transportation system in a particular city: Q= ?L ^?1 F^?2 K^?3. Where L is the labor input in worker hours; F is the fuel input in gallons; K is the capital input in number of buses; and Q is the output measured in millions of bus miles. Suppose that the parameters (?1, ?2, ?3) of this model were estimated using annual data for the past 25 years. The following results were obtained: ?= 0.0012; ?1= 0.45; ?2= 0.20; ?3= 0.30 e. Discuss some of the methodological and measurement problems one might encounter using time-series data to estimate the parameters of this model.

Explanation / Answer

Following problems can be there with the model under discussion. 1. First of all, the life of the buses is not considered, as a new bus is more efficient than an old one. 2. The function may be applied only at single given city. Because of the following reasons. 1) The level of the roads may differ 2) The condition of roads may differ 3) How far the signals and bus stops are These factors cause the increased fuel consumption of the vehicles and increasing cost that in turn reduces the productivity. 3. During different parts of the year, the function may not be true. This is so because in different periods of the year the traffic is more on road than the other days. It again increases fuel consumption. 4. Finally the model does not include the efficiency parameters to depict the impact of fuel consumption and also to know the impact of the age of vehicles.

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