There are two sectors Y1 and Y2.

Composite output is given by CES form -

Form of Composite good

Each sector employs Capital and Labor in combination through Cobb-Douglas Production Technology.

The paper mentions that elasticity of substitution between products will be less than one if and only if the (short-run) elasticity of substitution between labor and capital is less than one. They donot provide any motivation behind it. Why should this be true? - Any technical or non-technical explanation will be useful.


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