Economics 2301

Lecture 28

Multivariate Calculus
Homogeneous Function

A function y  f(x1,x2 , ,xn ) is homogeneou s of degree k if,

for any number s where s  0
s k Y  f ( sx1 , sx2 ,  , sxn )
Cobb-Douglas Function

We have the Cobb - Douglas Production Function

Y  K  L
Increase the inputs by a factor s
Y1  δ sK  sL   s α  β δK α Lβ  s α  βY
α β

Our Cobb - Douglas function is homogeneou s of degree    .

If     1, we have decreasing returns to scale.
If     1, we have constant returns to scale.
If     1, we have increasing returns to scale.
Euler’s Theorem

 Homogeneity of degree 1 is often

called linear homogeneity.
 An important property of
homogeneous functions is given by
Euler’s Theorem.
Euler’s Theorem

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

that is homogeneou s of degree k ,
ky  x1 f1(x1,x2 , ,xn )    xn f n(x1,x2 , ,xn )
for any set of values (x1,x2 , ,xn ), where f i(x1,x2 , ,xn )
is the partial derivative of the function w ith respect to
its ith argument.
Proof Euler’s Theorem

Definition homogeneou s function s K y  f ( sx1 , sx2 , , sxn )

Take the partial derivative of the above with respect to s
ksk 1 y  x1 f1 ( sx1 , sx2 , , sxn )    xn f n ( sx1 , sx2 ,, sxn )
Letting s  1, we get Euler' s Theorem
ky  x1 f1 ( x1 , x2 ,, xn )    xn f n ( x1 , x2 , , xn )
The converse of this theorem holds. If the above is true,
then the original function is homogeneou s of degree k .
Division of National Income
Suppose that the national production function is
Y  K  L1  which is homogeneou s of degree 1, therefore
Y Y
Y K L
K L
Now under perfect competitio n, capital and labor are paid
respective ly their real return and real wage. This implies

wL 
Y
L
 
L  1   K  L  L  1   Y

and rK 
Y
K
 
K  K  1 L1  K  Y .

Hence, Y  rK  wL  Y  1   Y
Properties of Marginal
Products

For our national income accounting production function,

Y
 βαK β 1 L1 β which is homogeneou s of degree zero.
K
Likewise for the marginal product of Labor,
Y
 1  β αK β L β . We can write the marginal products as
L
1 
Y L
 βαK β 1 L1 β     and
K K

Y K
 1  β αK β L β   1    
L L
Arguments of Functions that are
Homogeneous degree zero
Any function f(x1,x2 , ,xi , ,xn ) that is homogeneou s
of degree zero can be written as
 x1 x2 xn 
f  , , ,1, ,  for any i  1,2,..., n.

 xi xi xi 
Proof : Since the function is homogeneou s of degree 0,
s 0 f(x1,x2 , ,xi , ,xn )  f(sx1,sx2 , ,sxi , ,sxn )
1
Let s  , then
xi
x x x 
f(x1,x2 , ,xi , ,xn )  f  1 , 2 , ,1,  , n 
 xi xi xi 
QED
First Partial Derivatives of
Homogeneous Functions

If the function, f  x1 , x2 ,, xn  is homogeneou s of degree k ,

then each of ists first partial derivative s
f x1 , x2 ,, xn 
fi  for any i  1,2,, n, is homogeneou s
xi
of degree k-1.
Proof of previous slide

We know f sx1 , sx2 ,  , sxn   s k f  x1 , x2 ,  , xn 

f sx1 , sx2 ,  , sxn  f sx1 , sx2 ,  , sxn  d sxi 
 
xi  sxi  dxi
 sf i sx1 , sx2 ,  , sxn  and
s k f  x1 , x2 , , xn 
 s k f i  x1 , x2 ,  , xn  setting the two equal
xi
sf i sx1 , sx2 ,  , sxn   s k f i  x1 , x2 ,  , xn  or
f i sx1 , sx2 ,  , sxn   s k 1 f i  x1 , x2 ,  , xn 
Which implies the derivative is homogeneou s of degree k-1.
Homothetic function

A homothetic function is a montonic transform ation of

a homogeneou s functin. This if y  f(x1,x2 , ,xn ) is a
homogeneou s function, then z  g(y) is a homothetic
function if the function g(y) is strictly monotonic, that
is g'(y)  0 for all y or if g'(y)  0 for all y.
Example homothetic function

let y  x z  which is homogeneou s of degree    .

Let w  ln (y)   ln( x)   ln( z )
now  ln( sx )   ln( sz )   ln( x)   ln( z )      ln( s)
 w      ln( s)  s k w
except whe n are original function is homogeneou s of
degree ?.
Therefore, while homogeneou s functions are homothetic ,
not all homothetic functions are homogeneou s.