Answer to Question #200009 in Microeconomics for aman

Question

Q = L^β1F^β2B^β3 Where L = labour input in worker hours F = fuel input in gallons B = capital input in number of buses Q = output measured in millions of bus miles. β1 = 0.45, β2 = 0.20 and β3 = 0.30

a.  Suppose that capital input (number of buses) is decreased by 3 percent next year (which, certain older buses are taken out of service). Assuming that the other inputs are held constant, determine the approximate percentage change in output.

b.  What type of returns to scale appears to characterise the transportation system (ignore the issue of statistical significance)?

c.  Discuss some of the methodological and measurement problems one might encounter in using time-series data to estimate the parameters of this model.  

Answer 1

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