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For example, if i have elasticity of substitution equal to 5 and 0.6 what does it imply about the capital to labor ratio? When it is 5 does it imply that it is easier to replace labor with capital. As a result, the capital labor ratio goes up? For 0.6 it is vice-versa?

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  • $\begingroup$ "As a result, the capital labor ratio goes up?" It depends on the relative prices of capital and labor. $\endgroup$ – Giskard Mar 27 '16 at 20:17
  • $\begingroup$ But if elasticity of substitution is 5 doesnt this imply that capital to labor ratio is high and capital share of national income is higher than labor share of national income? $\endgroup$ – Justin Mar 27 '16 at 21:34
  • $\begingroup$ This does not appear anywhere in your question and has nothing to do with my statement? I am guessing your professor/example assumes a Cobb-Douglas production function otherwise I have no clue what you mean. $\endgroup$ – Giskard Mar 27 '16 at 21:38
  • $\begingroup$ As far as I know, Cobb-Douglas production is necessary to have constant elasticity of substitution. I am trying to understand its deeper meaning. What is the difference between having 5 or 0.6 as elasticity of substitution? So I am trying to relate to capital and labor shares or some other implications. $\endgroup$ – Justin Mar 27 '16 at 21:43
  • $\begingroup$ Well you did not say that the elasticity was constant, so I thought you meant it has this definite value given specific $K$ and $L$. Here is some info on constant elasticity: en.wikipedia.org/wiki/Constant_elasticity_of_substitution $\endgroup$ – Giskard Mar 27 '16 at 21:51

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