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The Law of Diminishing Returns and the Generalized CES Production Function

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  • Layson, Stephen K.

    (University of North Carolina at Greensboro, Department of Economics)

Abstract

There are two troubling and largely unrecognized implications of the generalized CES production function when there are increasing returns to scale and the elasticity of substitution (𝜎) exceeds one: (1) under these conditions the CES production function is always inconsistent with the law of diminishing marginal returns to either labor or capital and (2) the marginal product of labor (capital) always approaches infinity as labor (capital) approaches infinity. To avoid these two implications one must restrict the parameter values of the CES production function to either not allow for increasing returns to scale or to require that σ

Suggested Citation

  • Layson, Stephen K., 2013. "The Law of Diminishing Returns and the Generalized CES Production Function," UNCG Economics Working Papers 13-13, University of North Carolina at Greensboro, Department of Economics.
    • Handle: RePEc:ris:uncgec:2013_013
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    References listed on IDEAS

    as
    1. Riley,John G., 2012. "Essential Microeconomics," Cambridge Books, Cambridge University Press, number 9780521827478, October.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    3. de La Grandville, Olivier, 1989. "In Quest of the Slutsky Diamond," American Economic Review, American Economic Association, vol. 79(3), pages 468-481, June.
    4. Keting Shen & John Whalley, 2013. "Capital-Labor-Energy Substitution in Nested CES Production Functions for China," NBER Working Papers 19104, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Generalized CES production function; Increasing returns to scale; Elasticity of substitution; Diminishing marginal returns;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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