Intermediate

Microeconomics
Vivekananda Mukherjee
Department of Economics, Jadavpur University
Lecture 41
 Summary
 
Properties of Long run production function:

 𝑥2 •  For differentiable production functions:

and for

Diminishing marginal productivity holds for

each factor of production

0
 • For a differentiable production
𝑥 
2 function:
 𝑞 2
Diminishing MRTS
 𝑞 1
𝑞  0
0  𝑥1
0
  𝑥1
 Economies of Scale

Elasticity of scale:
. (IRS); (CRS); (DRS)
 Returns to Scale
CRS 𝐶(𝑞)
  TC
 𝑥2
𝐶  ( 1 ) 𝑞

𝐶(1)
 

0
2𝑥
  2 𝐶(1)
 
𝑥  20 1  𝑞  𝑞
 𝐶 ( 𝑞 ) =𝐶 ( 1 ) 𝑞
𝑞
  1=2 𝑞 0
𝑞  0
0 0
 𝑥1 2  𝑥 1   𝑥1
0
𝐶(1)
 
AC = MC

 𝑞
 IRS
𝐶(𝑞)
 
 𝑥2
𝐶  ( 1 ) 𝑞
TC
𝐶(1)
 

0
2𝑥
  2 𝐶(1)
 
𝑥  20 1  𝑞  𝑞
′ ′′
𝐶
  ( 𝑞 ) >0 , 𝐶 ( 𝑞 ) < 0
𝑞
  1> 2 𝑞 0
𝐶′(0)
 
𝑞  0
0 0
 𝑥1 2  𝑥 1   𝑥1
0

AC
MC
 𝑞
 DRS
𝐶(𝑞)
 
 𝑥2
𝐶  ( 1 ) 𝑞
TC
𝐶(1)
 

0
2𝑥
  2 𝐶(1)
 
𝑥  20 1  𝑞  𝑞
′ ′′
𝐶
  ( 𝑞 ) >0 , 𝐶 ( 𝑞 ) > 0
𝑞
  1< 2 𝑞 0
MC
𝑞  0 AC
0 0
 𝑥 2 𝑥
1  1   𝑥1
0

𝐶′(0)
 

 𝑞
How to recognize the return associated with a long run
production function i.e. whether E>1, E=1 or E<1 ?
•Answer:
  By checking degree of homogeneity of a long run production
function.

A production function is homogeneous of degree if

where

It can be proved that

If , is linear homogeneous. Since , a linear homogeneous production

function shows CRS.
 Proof:
• 
since
since

.
Checking ‘Return to scale’ of long run production function

•Example
 

Cobb Douglas Production function:

Therefore,
If IRS; if CRS; if DRS.
Exercise
•Check
  the return to scale of the following long run production
functions:
Some further properties of homogeneous production functions
•[a]  for
Proof: We know,
LHS

.
RHS

Therefore, which implies .

The marginal product function of a differentiable long run production function,

homogeneous of degree , is also a homogeneous production function, but with degree
of homogeneity .
 Properties (contd.)…….
 𝑥2  [b] MRTS at MRTS at for all
values of .
Proof: MRTS at
from [a], .
Therefore,
0
MRTS at .
2𝑥
  2
𝑥  20

  𝑞1
𝑞  0
0 0
 𝑥1 2  𝑥 1   𝑥1
0
Properties (contd.)
•[c]  [Euler’s Theorem]
Proof: We know,
LHS

[from [a]]

RHS
.

Therefore, , which implies, .

Homothetic Production Function
•  production function is homothetic if it can be written as an increasing
A
transformation of a linear homogeneous function.
where is linear homogeneous,
and

Elasticity

Even though a production function shows CRS, its positive monotonic transformation can
show a different return to scale.
Example: If has E = 2.
 Homothetic Production Function (Contd.)
 𝑥2

 
0
2𝑥
  2
𝑥  20

  𝑞1
𝑞  0
0 0
 𝑥1 2  𝑥 1   𝑥1
0