Consider the following Cobb Douglas production function of a certain Latin American country. expressed in its stochastic form as:
Q = акмр» еме
Where. Q - Output: K- Capital input: L- Labour input: M- Raw material: u - Stochastic
disturbance term; e-Base of natural logarithm and t- linear trend (t-1.2...32). Utilize the Cobb
Douglas Data set to answer the questions that follow.
a) Express the above non-linear production function into a linear model
(3 Marks)
b) Assuming the CLRM assumptions hold, estimate the parameters of the model you have
expressed in (a) using the OLS estimation method and comment on your findings (10 Marks)
c) Are the signs of the estimated parameters in accordance with theoretical or prior expectations!
(6 Marks)
d) Verify whether the hypothesis of constant returns to scale is satisfied and state the meaning or
the result you obtained. (NB. Remember to dearly spect your hypothesis) (4 Marks)
e Estimate another model with only Capital input and Labour input and thereafter conduct an
omitted variable test for Raw material in the model (NB. Remember to comment on your
results)
(7 Marks)