Microeconomics

Naturally production processes are very complex, so you might have to aggregate inputs in 2 categories, capital and labor. These are things you should keep in mind when choosing your specification: Does this production process exhibit increasing, decreasing or constant returns to scale? Does your production process require both inputs to be used in a fixed ratio? Can you substitute capital and labor for each other at a fixed ratio? Will the rate at which you can substitute them depend on how much you are already using? In other words, do you think your production process should be described by a Leontief production function, perfect substitutes production function or Cobb-Douglas production function? Does your production process have a higher marginal product of labor or marginal product of capital?