Answer to Question #278988 in Economics for Frank

Question

Consider a firm operating in a competitive output market. The firm produces output (Y) with input factors labour (L) and capital (K). Let 𝑤 and 𝑟 be the real prices of both inputs, respectively, so normalising the price of output to 1. The firm has a CES production function given by: 𝑌 = 10(0.2𝐾 ^1/3 + 0.8𝐿 ^1/3 ) ^3.

What is the definition of the elasticity of substitution? - And what is the value of the elasticity of substitution in this example

Answer 1

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