Topic:4 Attributes of Production function Homogeneity of production function:

There are occasions throughout this book when we use the rules of indices and definitions of bn. For the moment, we concentrate on one specific application where we see these ideas in action. The output, Q, of any production process depends on a variety of inputs, known as factors of production. These comprise land, capital, labour and enterprise. For simplicity we restrict our attention to capital and labour. Capital, K, denotes all manmade aids to production such as buildings, tools and plant machinery. Labour, L, denotes all paid work in the production process. The dependence of Q on K and L may be written Q = f K, L! which is called a production function. "nce this relationship is made e#plicit, in the form of a formula, it is straightforward to calculate the level of production from any given combination of inputs.
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For e#ample, if Q = 100 K 3 L2 , then the inputs K = $% and L = &'' lead to an output
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Q = 100(27) 3 (100) 2

= &'' (! &'! = (''' "f particular interest is the effect on output when inputs are scaled in some way. )f capital and labour both double, does the production level also double, does it go up by more than double or does it go up by less than double* For the particular production function,
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Q = 100 K 3 L2

we see that, when K and L are replaced by $K and $L, respectively,

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Q = 100(2 K ) 3 (2 L) 2 ( 2 K ) = 2 .K
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and (2 L) 2 = 2 2 .L2

The second term, 100 K 3 L2 , is +ust the original value of Q, so we see that the output is

multiplied by

26 .

,oreover, because -./ is less than &, the scale factor is smaller than $. )n fact, my calculator gives double.

2 = &.%0 to $ decimal places! so output goes up by +ust less than

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)t is important to notice that the above argument does not depend on the particular value, $, that is taken as the scale factor. 1#actly the same procedure can be applied if the inputs, K and L, are scaled by a general number 2reek letter pronounced 3lambda4!. 5eplacing K and L by K and L respectively in the formula 2ives Q = 6 .100 K 3 .L2
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Q = 100( K ) 3 .( L ) 2

6e see that the output gets scaled by 6 , which is smaller than since the power, -./, is less than &. 6e describe this by saying that the production function e#hibits decreasing returns to scale.

)n general, a function Q = f K, L! is said to be homogeneous if n f K, L! = f K, L! for some number, n. This means that when both variables n K and L are multiplied by we can pull out all of the s s as a common factor, . The power, n, is called the degree of homogeneity. )n the previous e#ample we showed that
f (K , L ) = 6 f ( K , L) and so it is homogeneous of degree -./. )n general, if the
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degree of homogeneity, n, satisfies: n 7 &, the function is said to display decreasing returns to scale n = &, the function is said to display constant returns to scale n 8 &, the function is said to display increasing returns to scale.