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.