2
$\begingroup$

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.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.