Home Assignment

Vivek Sundar M
(1301109)
1. Use the data set of a firm to model a Cobb-Douglas
production function. Take logs of the data to make the
production function log linear. Use appropriate econometric
techniques to derive the estimates of the production function.
(The firm data set is given in the class.)
2. Go to the following web site and download Gretl
econometric package @ http://gretl.sourceforge.net/win32/
Run the above exercise using the package and verify your
answer.

13.11.20
 Cobb Douglas Production
Function
Y = CLa Kb
Y= output level
If a+b =1 : Constant returns to scale
If a+b>1: Increasing returns to scale
If a+b<1: Decreasing returns to scale
C=Constant
L=Labour
K=Capital

We run OLS, by taking Natural Log

both sides.
Ln(Y) = Ln(C)+ aLn(L) +
 Result of normal OLS: Shows Autocorrelation

Capital 0.15
Residual Plot 0.1 Labour Residual Plot
0.05
0.2 Residuals
0
Residuals 0 4.9 5 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8
-0.05
4.2 4.4 4.6 4.8 5 5.2 5.4 5.6
-0.2 -0.1

X Variable 2 X Variable 1
 Checking for AR1, AR2, AR3, AR4
Regressed between Ut and Ut-1 Ut-2 Ut-3 Ut-
4
Found that the relationship exists only
upto period 2.
For periods 3 & 4 the p value was very less
as shown.
Thus I regressed once again, but this time
between Ut and Ut-1 Ut-2
The results are summarized below.

The values in blue refer to and

 Correction for AR1 & AR2
The following equation when regressed would yield the
correct values of C, a and b

Where 1 = 0.85 and 2 =

-0.54

This regression can be written as

 Final Results
The regression yield the following result. In the Cobb Douglas
function,

a= 1.37
b= .42
C= antilog (intercept/(1-1 -2 )=.025
It can also be seen that auto correlation has been
removed. The residual plots with the new regression
can be seen.

Labour Residual Plot Capital Residual Plot

0.1
0.1
0.05 0.05
Residuals 0 Residuals 0
3.3 3.4 3.5 3.6 3.7 3.8 3.9 4 2.9 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9
-0.05 -0.05

-0.1 -0.1

X Variable 1 X Variable 2
Question 2: Using Gretl
After taking Natural Logarithms, the data was the
result was the following.
Model 1: Cochrane-Orcutt, using observations 1930-1967 (T = 38)
Dependent variable: logY
rho = 0.846147
Statistics based on the rho-differenced data:
Coefficient Std. Error t-ratio p-value
const 2.47378 0.499048 -4.9570 0.00002 ***
logL 1.03133 0.155189 6.6456 <0.00001 ***
logK 0.548266 0.104155 5.2639 <0.00001 ***

Mean dependent 5.699067 S.D. dependent var 0.461324

var
Sum squared resid 0.025999 S.E. of regression 0.027255
R-squared 0.996710 Adjusted R-squared 0.996522
F(2, 35) 220.0439 P-value(F) 1.51e-20
rho 0.347417 Durbin-Watson 1.171436

But it is important to note that Gretl corrected only

AR1 and not AR2.