![]() This is unrealistic because no economy is always fully employed.ģ. But the full use of the available capital can be made only in periods of full employment. ![]() In the C-D production function, the problem of measurement of capital arises because it takes only the quantity of capital available for production. It is, therefore, not possible to generalize this function to more than two inputs.Ģ. The C-D production function considers only two inputs, labour and capital, and neglects some important inputs, like raw materials, which are used in production. The C-D production function has been criticised by Arrow, Chenery, Minhas and Solow as discussed below:ġ. Thus, on the OS scale line OQ = QP = PR which shows that when capital and labour are increased in equal proportions, the output also increases in the same proportion. It shows that the isoquants 100, 200 and 300 are equidistant. OS is the scale line or expansion path joining these points. Another method is to take the scale line or expansion path connecting the equilibrium points Q, P and R. OC 3 and OL 3 are three times larger than ОС 1, and OL 1, respectively. Similarly, if the output is to be raised three-fold to 300, the units of labour and capital will have to be increased three-fold. ОС is exactly double of ОС 1 and of OL 2 is double of OL 2. If the output were to be doubled to 200, the inputs of labour and capital would have to be doubled. To produce 100 units of output, ОС, units of capital and OL units of labour are used. Labour input is taken on the horizontal axis and capital on the vertical axis. The C-D production function showing constant returns to scale is depicted in Figure 20. Similarly, В is the percentage increase in Q that would result from a 1 per cent increase in C, while holding L as constant. The coefficient of labourer in the C-D function measures the percentage increase in (Q that would result from a 1 per cent increase in L, while holding С as constant. Which shows constant returns to scale because the total of the values of L and С is equal to one: (3/4 + 1/4), i.e.,(a + β = 1).
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