V. N. Murti and V. K. Sastri investigated the production characteristics of various Indian industries, including cotton and sugar. They specified Cobb–Douglas production functions for output (Q) as a double-log function of labor (L) and capital (K):

lnQ_i = β₀ + β₁lnL_i + β₂lnK_i + ε_i

and obtained the following estimates (standard errors in parentheses):

a. What are the elasticities of output with respect to labor and capital for each industry?

b. What economic significance does the sum (­β̂₁ + ­β̂₂) have?

c. Murti and Sastri expected positive slope coefficients. Test their hypotheses at the 5-percent level of significance.

Transcribed Image Text:

B1 0.92 (0.03) Industry Cotton R? 98 0.97 0.12 (0.04) 0.33 (0.17) Sugar 0.59 (0.14) 2.70 .80