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:
“The spiritual kinship between Lincoln and Whitman was founded upon their Americanism, their essential Westernism. Whitman had grown up without much formal education; Lincoln had scarcely any education. One had become the notable poet of the day; one the orator of the Gettsyburg Address. It was inevitable that Whitman as a poet should turn with a feeling of kinship to Lincoln, and even without any association or contact feel that Lincoln was his.”
—Edgar Lee Masters (1869–1950)
“Then the justice,
In fair round belly with good capon lined,
With eyes severe and beard of formal cut,
Full of wise saws and modern instances;
And so he plays his part.”
—William Shakespeare (1564–1616)