Formal Example
The Cobb-Douglas functional form has constant returns to scale when the sum of the exponents adds up to one. The function is:
where and . Thus
But if the Cobb-Douglas production function has its general form
with then there are increasing returns if b + c > 1 but decreasing returns if b + c < 1, since
which is greater than or less than as b+c is greater or less than one.
Read more about this topic: Returns To Scale
Famous quotes containing the word formal:
“It is in the nature of allegory, as opposed to symbolism, to beg the question of absolute reality. The allegorist avails himself of a formal correspondence between “ideas” and “things,” both of which he assumes as given; he need not inquire whether either sphere is “real” or whether, in the final analysis, reality consists in their interaction.”
—Charles, Jr. Feidelson, U.S. educator, critic. Symbolism and American Literature, ch. 1, University of Chicago Press (1953)
“That anger can be expressed through words and non-destructive activities; that promises are intended to be kept; that cleanliness and good eating habits are aspects of self-esteem; that compassion is an attribute to be prized—all these lessons are ones children can learn far more readily through the living example of their parents than they ever can through formal instruction.”
—Fred Rogers (20th century)