Consider a standard Cobb-Douglas production function: Y =ALL 1K^2, where Y is output, L is labor input, K is capital input, A is the level of...

(0.25)

where the numbers in parentheses are the standard errors of the estimates.

(a) In the above estimated linear regression equation, what are the OLS estimates (b1 and b2) of β1 and β2? Suppose that Cov(b1,b2) = −0.03. Construct the t-test to test the constant returns to scale hypothesis above. Interpret the result of this test. 

(b) Construct the t-test to test the null hypothesis that β1 ≥ β2. Interpret the result of this test.