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Topic 4 Homogenous Functions

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20 views12 pages

Topic 4 Homogenous Functions

Uploaded by

micahlineha
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© © All Rights Reserved
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ECN 2311: TOPIC 4

Homogenous Functions
Applications to Production Theory
Returns-to-Scale
 Marginal product describe the change in
output level as a single input level
changes. (e.g Short-run change in
Labour)
 Returns-to-scale describes how the
output level changes as all input levels
change, e.g. all input levels doubled.
(Long-run)
Returns-to-Scale
If, for any input bundle (x1,…,xn),

f (tx1 , tx2 ,, txn )  t. f ( x1 , x2 ,, xn )


then the technology described by the
production function f exhibits constant
returns-to-scale, e.g. doubling all input
levels doubles the output level (t=2).
Returns-to-Scale
If, for any input bundle (x1,…,xn),
f (tx1 , tx2 ,, txn )  tf ( x1 , x2 ,, xn )

then the technology exhibits decreasing


returns-to-scale, e.g. doubling all input levels
less than doubles the output level (t=2).
Returns-to-Scale
If, for any input bundle (x1,…,xn),

f (tx1 , tx2 ,, txn )  tf ( x1 , x2 ,, xn )

then the technology exhibits increasing


returns-to-scale, e.g. doubling all input levels
more than doubles the output level (t=2).
Homogenous Production Function
 Definition: A production function is homogeneous
of degree  if

F(tK, tL) = t F(K,L) for all t.

 i.e multiplying all input levels by the


same factor t, output increases by the

factor t
 If  = 1 CRS
 If  > 1 IRS
 If  < 1 DRS
Homogenous Production Function
 Note: Not all production functions are
homogeneous.
 Exercise: Check whether the following functions
are homogenous and of what degree.

(i) f ( K , L)  L2 K

(ii) f ( L, K )  L1 / 4 K1 / 2

(iii ) f ( L, K )  L1 / 2 K1 / 2

(vi) f ( L, K ) 1 L  K
Euler’s Theorem

For any multivariate function y  f(x1,x2 , ,xn )


which is homogeneou s of degree k , we can write
kf ( x1,x2 , ,xn )  x1 f1    xn f n
, where f i
is the partial derivative of the function w ith respect to
its ith variable

• That is, the sum of the products of each independent


variable and its partial derivative must be equal to k
times the value of the function
Euler’s Theorem: Special case, k=1

f ( x1,x2 ,,xn )  x1 f1    xn f n

 In this case, Euler’s theorem implies that the total


product will just be exhausted if the factors of
production receive the value of their product.

 Example: Assume a two variable linearly


homogenous production function

Q  f ( K , L)
Euler’s Theorem: Special case, k=1

QK K  QL L  Q,

PQK K  PQL L  PQ,


Euler’s Theorem: Special case, k=1

TP  PQK K  PQL L  PQ,


Properties of Cobb-Douglas Production Function
Y=AKL
Euler’s theorem:
MPK K  MPL L  ( )Y

Where  is the degree of homogeneity


(show)
end

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