Cobb-douglas - diminishing returns

[hei.so]

I always thought that capital and labour will experiencing diminishing returns and therefore to increase growth permanently, you have to increase TFP (technology). But this paragraph in the textbook states:

“Note that the exponents on the K and L variables in the Cobb–Douglas production function sum to one, indicating constant returns to scale—that is, there are no diminishing marginal returns if both inputs are increased proportionately.”

Also, is TFP subject to diminishing returns as well? Because theoretically if K, L and TFP increase then growth would be constant.

OR does the CD function exhibit constant returns to scale until the economy reaches the steady state and that is when it exhibits diminishing returns to scale?

[S2000magician]

@hei.so

I always thought that capital and labour will experiencing diminishing returns and therefore to increase growth permanently, you have to increase TFP (technology). But this paragraph in the textbook states:

“Note that the exponents on the K and L variables in the Cobb–Douglas production function sum to one, indicating constant returns to scale—that is, there are no diminishing marginal returns if both inputs are increased proportionately.”

There is no reason that the Cobb-Douglas function has to have constant returns to scale; that’s simply the version that CFA Institute has chosen to use.

@hei.so

Also, is TFP subject to diminishing returns as well?

No.

@hei.so

OR does the CD function exhibit constant returns to scale until the economy reaches the steady state and that is when it exhibits diminishing returns to scale?

In the form that CFA Institute uses, it always has constant returns to scale.

I wrote an article on Cobb-Douglas that may be of some help: http://financialexamhelp123.com/cobb-douglas-production-function/