Question

List (and explain) two reasons why economists like the Cobb-Douglas function so much?

Answer 1

The Cobb-Douglas production function mainly explains the relationship between the physical capital and labor and the amount of output that can be produced by these two inputs. It is expressed as follows:

Q = AK^α L^β

In the above equation, Q, represents the output, K represents the capital and L represents the labor and α, β are positive parameters. This equation tells that the labor and capital are directly dependent on output and ‘A’ is residual which explains the technological change.

Economists use Cobb-Douglas production function because of the following reasons:

(1) It helps the economists to determine the relative share of labor and capital in the output.

(2) Cobb-Douglas production function has been used widely in empirical studies of manufacturing industries and in inter-industry comparisons and suits to nature of various industries.