Output in period t, Q, is produced by the input of capital, K,, skilled labour, S., and unskilled labour, U,, according

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Output In Period T Q Is Produced By The Input Of Capital K Skilled Labour S And Unskilled Labour U According 1 (128.96 KiB) Viewed 20 times

Output in period t, Q, is produced by the input of capital, K,, skilled labour, S., and unskilled labour, U,, according to a Cobb-Douglas production function: Q = AK,“S, U'S (a) [20] Explain how you would estimate the parameters, A,a,ſ,y, if K, S, and U, are exogenous. What assumptions do you need to make about the error term £, ? (b) [20] If, an X% increase in each input causes an X% increase in output, there is said to be constant returns to scale, CRS. What restrictions does CRS put on the parameters? How would you estimate the model subject to the CRS restriction? (c) [20] How would you test the CRS restriction? (d) [20] How would you allow for technical progress and estimate the growth rate of total factor productivity? (e) [20] Suppose that it was argued that while K, and S, are fixed factors, the firm adjusts U, to meet variations in demand for its outputs. What effect would this have on the properties of your estimates? How would you change the model to allow for this?