Cobb Douglas

Production Function

Production Function
A production function describes a mapping from quantities of
inputs to quantities of an output as generated by a production
process.
Definition: A standard production function which is applied to
describe much output two inputs into a production process
make. It is used commonly in both macro and micro

examples.

Cobb Douglas
Production Function
is an econometric model that shows relation between scale of
production and scale of inputs essential to the production
These essential inputs are: labour and capital (in agricultural
research the area of farming is considered to be the third input).

Cobb Douglas Production Function

For capital K, labor input L, and constants b0, b1, and b2, the CobbDouglas production function is:

Qt b0 Kt Lt e
b1

where:
Qt production
Kt capital
Lt labour
b0, b1, b2 parameters of production function
Et error term

b2

Cobb Douglas Production Function

Log-linearization simplifies the function,

meaning just that taking logs of both
sides of a Cobb-Douglass function
gives one better separation of the
components.

ln Q ln b0 b1 ln K b2 ln L t

Cobb Douglas Production Function

To obtain the estimators, OLS in

matrix notation should be used.
ln b0
b (ln K ln L T ln K ln L) 1 ln K ln L T ln Q
1
b2

To interpret your result and to make

futher analysis of characteristics of
production function, antilog for
constant term should be calculated.

Cobb Douglas Production Function

ln b0
b (ln K ln L T ln K ln L) 1 ln K ln L T ln Q
1
b2

where

n
n
ln K ln L T ln K ln L ln K
i 1
n
ln L
i 1

ln
L

i 1
i 1

n
n
2
(ln
K
)
ln K ln L

i 1
i 1
n
n

2
ln K ln L (ln L)

i 1
i 1
n

ln K

Cobb Douglas Production Function

ln b0
b (ln K ln L T ln K ln L) 1 ln K ln L T ln Q
1
b2

where

ln Q
n i 1

ln K ln L T ln Q ln Q ln K
i 1

ln Q ln L
i 1

Cobb Douglas Production Function

t

Qt

Kt

Lt

864,00

13,5

359

1081,20

17,4

453

1092,80

18,7

431

4
5

1194,10
1225,60

23,3
24,4

423
424

6
7
8

1284,60
1409,70
1502,70

24,2
28,6
31,2

471
486
511

1597,40

34,1

535

10
11

1634,80
1783,00

33,2
35,1

574
601

12

1786,90

38,5

600

13
14

1900,40
1972,80

41,4
41,1

634
690

15
16

2022,50
2075,40

42,2
43,3

707
747

17

2094,90

43,2

780

18

2105,20

44,4

820

19

2135,60

44,6

846

20

2178,60

46,7

891

21

2201,20

49,1

910

22

2213,30

50,2

925

23

2246,80

52,6

965

24

2283,60

55,6

973

25

2298,50

55,7

992

26

2312,20

56,6

1020

27

2346,60

58,5

1045

28

2372,00

64,1

1067

29
30

2392,00
2412,60

64,5
67,3

1080
1098

Qt b0 Kt Lt e
b1

b2

where:
Qt production, in thousand zloty
Kt capital, in million zloty
Lt labour, the number of employees
b0, b1, b2 parameters to be estimated
Et error term
Log-linearization

ln Q ln b0 b1 ln K b2 ln L t

Cobb Douglas Production Function

2500
2000
1500
1000
500
0
-500

Cobb Douglas Production Function

ln Q

ln K

ln L

6,7616

2,6027

5,8833

6,9858

2,8565

6,1159

6,9965

2,9285

6,0661

7,0851
7,1112

3,1485
3,1946

6,0474
6,0497

7,1582
7,2511
7,3150

3,1864
3,3534
3,4404

6,1549
6,1862
6,2364

7,3761

3,5293

6,2823

7,3993
7,4861

3,5025
3,5582

6,3526
6,3986

7,4882

3,6507

6,3969

7,5498
7,5872

3,7233
3,7160

6,4520
6,5367

7,6121
7,6379

3,7424
3,7682

6,5610
6,6161

7,6473

3,7658

6,6593

7,6522

3,7932

6,7093

7,6665

3,7977

6,7405

7,6864

3,8437

6,7923

7,6968

3,8939

6,8134

7,7022

3,9160

6,8298

7,7173

3,9627

6,8721

7,7335

4,0182

6,8804

7,7400

4,0200

6,8997

7,7460

4,0360

6,9276

7,7607

4,0690

6,9518

7,7715

4,1604

6,9726

7,7799
7,7885

4,1667
4,2092

6,9847
7,0012

224,8900 109,5541 196,3710

ln b0
b (ln K ln L T ln K ln L) 1 ln K ln L T ln Q
1
b2

n
n
ln K ln L T ln K ln L ln K
i 1
n
ln L
i 1

ln
L

i 1
i 1

n
n
(ln K ) 2 ln K ln L

i 1
i 1
n
n

2
ln K ln L (ln L)

i 1
i 1

ln
Q

i 1
n

ln K ln L T ln Q ln Q ln K
i 1

ln Q ln L
i 1

ln K

Cobb Douglas Production Function

8
7,8
7,6
7,4
7,2
7
6,8

Cobb Douglas Production Function

t

ln Q

ln K

ln L

(ln K)2

(ln L)2

6,7616

2,6027

5,8833

6,7740

34,6135

15,3125

17,5983

39,7805

6,9858

2,8565

6,1159

8,1594

37,4041

17,4699

19,9548

42,7246

6,9965

2,9285

6,0661

8,5763

36,7977

17,7647

20,4894

42,4415

26

7,7460

4,0360

6,9276

16,2894

47,9911

27,9597

31,2627

53,6605

27

7,7607

4,0690

6,9518

16,5570

48,3271

28,2869

31,5786

53,9508

28

7,7715

4,1604

6,9726

17,3093

48,6172

29,0091

32,3328

54,1875

29
30

7,7799
7,7885

4,1667
4,2092

6,9847
7,0012

17,3611
17,7170

48,7863
49,0174

29,1030
29,4694

32,4162
32,7829

54,3403
54,5289

824,6147

1474,7894

ln K ln L ln Q ln K ln Q ln L

224,8900 109,5541 196,3710 404,9582 1288,8030 721,0205

Matrix
ln K ln LTln K ln L

Inverse matrix
(ln K ln LTln K ln L)-1

30
109,5541 196,3710
109,5541
405,0
721,0205
196,3710 721,0205 1288,803
48,594141 9,3788139 -12,651115
9,3788139 2,4416899 -2,7950239
-12,65112 -2,795024 3,4920629

Cobb Douglas Production Function

t

ln Q

ln K

ln L

(ln K)2

(ln L)2

6,7616

2,6027

5,8833

6,7740

34,6135

15,3125

17,5983

39,7805

6,9858

2,8565

6,1159

8,1594

37,4041

17,4699

19,9548

42,7246

6,9965

2,9285

6,0661

8,5763

36,7977

17,7647

20,4894

42,4415

26

7,7460

4,0360

6,9276

16,2894

47,9911

27,9597

31,2627

53,6605

27

7,7607

4,0690

6,9518

16,5570

48,3271

28,2869

31,5786

53,9508

28

7,7715

4,1604

6,9726

17,3093

48,6172

29,0091

32,3328

54,1875

29
30

7,7799
7,7885

4,1667
4,2092

6,9847
7,0012

17,3611
17,7170

48,7863
49,0174

29,1030
29,4694

32,4162
32,7829

54,3403
54,5289

824,6147

1474,7894

ln K ln L ln Q ln K ln Q ln L

224,8900 109,5541 196,3710 404,9582 1288,8030 721,0205

Vector
ln K ln LTln Q

224,8900
824,6147
1474,7894

ln b0
b (ln K ln L T ln K ln L) 1 ln K ln L T ln Q
1
b2

Estimators
ln b 0
4,512016
b1
0,582928
b2
0,130709

Cobb Douglas Production Function

Estimated linear form

ln Q = 4,51+ 0,583*ln K + 0,131*ln L

b0=

e4,51202 =

91,105257

Cobb-Douglass production function

Q = 91,105*K0,583*L0,131

Cobb Douglas Production Function

2
2
fitted ln Q ln Q - fitted ln Q (ln Q - fitted ln Q) (ln Q - mean ln Q)

ln Q

6,7616

6,7982

-0,0366

0,0013

0,5399

6,9858

6,9765

0,0093

0,0001

0,2606

6,9965

7,0120

-0,0155

0,0002

0,2498

26

7,7460

7,7702

-0,0243

0,0006

0,0623

27

7,7607

7,7926

-0,0319

0,0010

0,0699

28

7,7715

7,8486

-0,0771

0,0060

0,0757

29
30

7,7799
7,7885

7,8538
7,8808

-0,0740
-0,0923

0,0055
0,0085

0,0804
0,0853

224,8900

224,8900

0,0000

0,061

2,377

mean ln Q

7,4963

ln Q ln Q
n

Se

i 1

n k 1

0,061
0,048
30 2 1

)2
(ln
Q

ln
Q
i
i
i 1
n

2
(ln
Q

ln
Q
)
i
i 1

0,061

0,026
2,377

R 2 1 0,026 0,974

Cobb Douglas Production Function

The analysis of production function consists of

examinating such characteristics as:
Elasticity of production
Returns to scale

Total product
Average product
Marginal product

Marginal rate of substitution

Cobb Douglas Production Function

Elasticity of production

Capital elasticity of production average change in production (in %)

associated with a 1% increament in capital, with the labour held constant;

EQ / K b1

Labour elasticity of production average change in production (in %)

associated with a 1% increament in labour, with the capital held constant

EQ / L b2

Cobb Douglas Production Function

Cobb-Douglass production function

Q = 91,105*K

0,583

*L

0,131

Capital elasticity of production

(b1) 0,583%.
Labour elasticity of production
(b2) 0,131%,

Cobb Douglas Production Function

Cobb-Douglass production function

Q = 91,105*K

0,583

*L

0,131

If capital increases 1 % and labour

will be unchanged, the production
will increase 0,583%.
If labour increases 1%, the
production will increase 0,131%,
holding capital constant.

Cobb Douglas Production Function

Returns to scale
Fixed income in relation to production scale constant returns
to scale, outputs increase as fast as inputs

b1 b2 1
Increasing returns to scale outputs increase faster than
inputs

b1 b2 1
Decreasing returns to scale outputs increase slower than
inputs

b1 b2 1

Cobb Douglas Production Function

If labour increases 4% and capital

increases 2,5%, the production will
increase 1,98%
Q
[%] b1 [%] b2 [%] 0,583 2,5[%] 0,131 4[%] 1,98[%]
Q

If labour decreases 3% and capital

decreases 1,8%, the production will
decrease 1,44%
Q
[%] b1 [%] b2 [%] 0,583 (1,8)[%] 0,131 (3)[%] 1,44[%]
Q

Cobb Douglas Production Function

Total product total scale of production calculated on

given quantity of each input
Assume K=45 mln zl, L=900 employees

QT 91,105 45 0,583 900 0,131 91,105 9,2 2,4378 2043 ,28

If the company employes 900 people and its capital
is 45 mln zl, the total production is equal 2 043 280
zloty

Cobb Douglas Production Function

Average product production calculated on 1 unit of

input:

Average product related to capital

Q( A) K

QT

Average product related to labour

Q( A) L

QT

Cobb Douglas Production Function

Average product production calculated on 1 unit

of input:

Average product related to capital

Q( A) K

QT 2043,28

45,406
K
45

If capital is equal 45 mln zl and

labour 900 people, production of
45 406 z can be reached from one
unit of input (1 mln zl).

Cobb Douglas Production Function

Average product production calculated on 1 unit

of input:

Average product related to labour

Q( A) L

QT
2043,28

2,27
L
900

If capital is equal 45 mln zl and

labour 900 people, production of
2 270 z can be reached from one
unit of input (1 person).

Cobb Douglas Production Function

Marginal product shows how will respond the scale

of production if we change quantity of one input
and others stay unchanged

Marginal product related to capital

Q( M ) K b0 b1 K

b1 1

b2

Marginal product related to labour

b2 1

Q( M ) L b0 b2 K L
b1

Cobb Douglas Production Function

Marginal product shows how will respond the scale

of production if we change quantity of one input
and others stay unchanged

Marginal product related to capital

Q( M ) K b0 b1 K

b1 1

b2

Q( M ) K 91,105 0,583 450,5831 9000,131 26,472

If capital increases 1 unit (1 mln zl over 45 mln zl) and
labour is constant the production will increase 26 472 z

Cobb Douglas Production Function

Marginal product shows how will respond the scale

of production if we change quantity of one input
and others stay unchanged

Marginal product related to labour

b2 1

Q( M ) L b0 b2 K L
b1

Q( M ) L 91,105 0,131 45

0,583

0,1311

900

0,297

If labour increases 1 person (over 900) and capital is

constant the production will increase 297 z

Cobb Douglas Production Function

Marginal rate of substitution shows how will

respond the scale of production if we change
quantity of one input and others stay unchanged

Marginal rate of substitution related to capital

MS K / L

b1
LK 1
b2

Marginal rate of substitution related to labour

MS L / K

b2
KL1
b1

Cobb Douglas Production Function

Marginal rate of substitution shows how will

respond the scale of production if we change
quantity of one input and others stay unchanged

Marginal rate of substitution related to capital (substitute

capital for labour)

MS K / L

b1
0,583
1
LK
900 45 1 89
b2
0,131

1 unit of capital (1 mln of capital) can be substituted for the

employment level increased by 89 employees without
changing the production scale.

Cobb Douglas Production Function

Marginal rate of substitution shows how will

respond the scale of production if we change
quantity of one input and others stay unchanged

Marginal rate of substitution related to labour (substitute

labour for capital)

MS L / K

b2
0,131
1
KL
45 900 1 0,011
b1
0,583

1 unit of labour (1 person) can be substituted for the capital

level increased by 0,011 mln z without changing the
production scale.