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Consider the Following Cobb-Douglas Production Function Yi=AKiβ1Liβ2euiY _ { i } = A K _ { i } ^ { \beta _ { 1 } } L _ { i } ^ { \beta _ { 2 } } e ^ { u _ { i } }

Question 50

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Consider the following Cobb-Douglas production function Yi=AKiβ1Liβ2euiY _ { i } = A K _ { i } ^ { \beta _ { 1 } } L _ { i } ^ { \beta _ { 2 } } e ^ { u _ { i } }
(where Y is output, A is the level of technology, K is the capital stock, and L is the labor force), which has been linearized here (by using logarithms) to look as follows:
yi=β0+β1ki+β2li+uiy _ { i } = \beta _ { 0 } ^ { * } + \beta _ { 1 } k _ { i } + \beta _ { 2 } l _ { i } + u _ { i }
Assuming that the errors are heteroskedastic, you want to test for constant returns to scale. Using a t -statistic and "Approach #2," how would you proceed.

Correct Answer:

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Under constant returns to scale, 11ec791...

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