The 'Cobb-Douglas' production function is most closely

Solution

The Cobb-Douglas production function takes the form Y = AL^αK^β, where Y is output, L is labor, K is capital, and α & β are output elasticities. Under the assumptions of perfect competition and profit maximization (where factors are paid their marginal product), a unique property emerges: α represents the share of total national income that is paid to labor (wages), and β represents the share paid to capital (profits/interest). This makes it a fundamental model for analyzing the functional distribution of income between the factors of production, labor and capital, and how their relative shares (α/β) might change over time.