The answers are a) This function allows the marginal products of labor and capit

Question

The answers are

a) This function allows the marginal products of labor and capital to rise before they fall eventually. For the standard Cobb Douglas production function, the marginal products fall from the beginning. This function also allows for the variable elasticity of substitution, unlike the usual Cobb-Douglas model.

b) If B4 = B5 = 0, then E^0 = 1. This is the standard model.

What I need is why the result of answer B, and a better explanation of a.

Full answer please

The following is known as the transcendental production function (TPF), a generalization of the well-known Cobb-Douglas production function: where Y= output, L = labor input, and K-capital input. After taking logarithms and adding the stochastic disturbance term, we obtain the stochastic TPF as Where 0In 1 a. What are the properties of this function? b. For the TPF to reduce to the Cobb-Douglas production function, what must be the values of 4and 5?

Explanation / Answer

1. As mentioned, this is a gebeealized version of Cobb-douglas function. The presence of exponentaial term ensures that it dominates the other terms L to the power beta2 and other term initially, when you calculate marginal products.

2. Inorder to reduce to coub douglas function, exponentaial term should be equal to 1,THEN It reduces to CD function. For E^0=1, beta4*l + beta 5* k=0

As l and kcannot be zero, the other two must be zero.

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