One of the end of chapter question in the schwesser book says “the assumption of constant returns to scale implies that the % change in TFP is Zero” - this relates to the explaintion of rearranging the the CD funtion to state the pecentage change in real total economic output.
Seems a bit confusing b/c isn’t TFP one of the variables in the change in real output (ΔA / A)?
Can anyone explain what is meant by this assumption?
The constant returns to scale assumption has nothing to do with TFP. It’s the assumption that α + β = 1 in the Cobb-Douglass production function.
I wrote an article on this that may be of some help here: http://financialexamhelp123.com/cobb-douglas-production-function/
Is constant returns to scale a ‘rule’ of the cobb-douglass production function or is just a stance that CFAI seems to take?
I haven’t seen a instance (in the CFAI text) where alpha = .7 and beta = .5…
In the special case of a Cobb-Douglass function it should be a rule.