Recall the Cobb-Douglas production function for an industry is: Y_t = AL^beta_1_
ID: 1207690 • Letter: R
Question
Recall the Cobb-Douglas production function for an industry is: Y_t = AL^beta_1_t K_beta_2_t where A is total factor productivity, where Y_t is output of the industry at date t, L_t is labor input to the industry at date t, K_t is capital stock of the industry at date t, and beta_1 and beta_2 are elasticity parameters. Suppose you estimate the following regression: delta log Y_t = beta_0 + beta_1 delta log L_t + beta_2 delat log K_t + mu_t where delta is the difference operator. How would you interpret beta_1 in this model? Could it be regarded as an estimate of technological change? Justify your answer.Explanation / Answer
Since B1 is the estimated coefficient for L (labor), it implies that when labor is changed by 1%, then output increases by B1%.
(Since the model is log-log model, it will be interpreted in percentage form)
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