Question

Suppose you have a Cobb-Douglas function with a capital elasticity of output (α) of 0.28 and a labor elasticity of output (β) of 0.84. What statement is correct?

1) There are increasing returns to scale
2) If the amount of labor input (L) is increased by 1
3) If the amount of capital input (K) is decreased by 1
4) The sum of the exponents in the Cobb-Douglas function is 1.12.
5) All of the above

Answer 1

The correct statement is option 3) If the amount of capital input (K) is decreased by 1.

Step-by-step explanation:

The capital elasticity of output (α) in a Cobb-Douglas function measures the responsiveness of output to changes in the amount of capital input (K), while the labor elasticity of output (β) measures the responsiveness of output to changes in the amount of labor input (L).

Based on the given values of α = 0.28 and β = 0.84, the correct statement is option 3) If the amount of capital input (K) is decreased by 1. This is because the capital elasticity of output is less than 1, indicating that a decrease in capital input would result in a less than proportional decrease in output.