Consider the following Cobb-Douglas production function for bus service in a typical metropolitan area: Where Q =
Question:
Consider the following Cobb-Douglas production function for bus service in a typical metropolitan area:
Where
Q = output in millions of passenger miles,
L = labor input in worker hours,
K = capital input in bus transit hours, and
F = fuel input in gallons.
Each of the parameters of this model was estimated by regression analysis using monthly data over a recent three-year period. Results obtained were as follows:
= 1.2; = 0.28; = 0.63; and = 0.12
The standard error estimates for each coefficient are:
= 0.4; = 0.15; = 0.12; = 0.07
A. Estimate the effect on output of a 4 percent decline in worker hours (holding K and F constant).
B. Estimate the effect on output of a 3 percent reduction in fuel availability accompanied by a 4 percent decline in bus transit hours (holding L constant).
C. Estimate the returns to scale for this production system.
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