Homogeneous and Homothetic Function

DC-1
Semester-II
Paper-IV: Mathematical methods for Economics-II
Lesson: Homogeneous and Homothetic Function
Lesson Developer: Sarabjeet Kaur
College/Department: P.G.D.A.V College, University of Delhi

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 Homogeneous and Homothetic Function

Contents

1. Learning Outcomes
2. Tools of Comparative Static Analysis
2.1 Chain Rule

2.1.a Chain rule with Multivariable Function

2.1.b Chain rule with ‘n’ variables

2.2 Directional derivative

2.3 Implicit Differentiation

2.2.a Implicit Differentiation with three or more variables

2.2.b Implicit functional theorem

2.3 Homogenous and Homothetic Functions

2.3.a Homogenous Functions

2.3.b Homothetic Functions

2.3.c Partial derivatives of homogenous functions

2.3.d Euler’s theorem

3. Exercise

4. References

1. Learning Outcomes

After completing of the present chapter, you should able to:-

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 Homogeneous and Homothetic Function

1. Chain Rule of Differentiation

2. Implicit function Differentiation
3. Implicit function Theorem
4. Homogeneous and Homothetic Functions.
5. Euler’s Theorem

2. Tools of Comparative Static Analysis

In economic analysis, the theory represents certain association between the independent variables
and the dependent variables. It is harder to solve clearly by transmuting the equations to ones
that reveal the dependent/endogenous variables as functions of the independent/exogenous
variable of the given data. When there is change in exogenous variable then endogenous variable
also change, to determine this change; the method of implicit differentiation is applied. This
technique of finding rates of change of endogenous variables, as exogenous variables change, is
known in economic as comparative statistics.

2.1Chain Rule:

One of the most important techniques of differentiation is chain rule. The chain rule is a rule of
differentiating compositions of functions. Composition of function signifies the function of
another variable. These are functions of one or several variables in which the variables
themselves functions of the another basic variables.

If a function consists of two variables and both are function of common variable ‘t’, e.g.

y= f(x1 (t),x2 (t))

then according to chain rule, differentiation y w.r.t. ‘t’ is

= + .

Example: y=3x1 + 5x2 with x1=t2 and x2=4t3

Applying chain rule gives

=2t; =12t2

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 Homogeneous and Homothetic Function

=3 and =5

= +

=3.(2t)+ 5.(12 t2)

=6t + 60t2

2.1.a Chain rule with Multivariable Function:

If x and y are both multivariable functions; i.e. x = x(u,v) and y=y(u,v); have first order partial
derivatives at the point (u,v) and suppose z = f (x, y) is differential at point (x(u,v); y(u,v)) then
f(x(u,v); y (u,v)) has first order partial derivatives at (u,v) given by:

= +

and

= +

Example:

;
Let z= where x(u,v) =

and y (u,v)=1/v, find and

= 2xy and = x2

=v1/2 u -1/2 and =

u1/2 v-1/2

=0 and = -1.v-1-1 = -v-2

= +

.
= (2xy) ( ) + x2.0

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 Homogeneous and Homothetic Function

= . 2xy. .

Putting values of x and y.

=
. xy. .

= (uv)1/2. . ..

= eu.

= . + .

=(2xy ). . + x2 .
( )

= (xy. - )

= ( – )

= ( –

= (0)

=0

2.1.b Chain rule with ‘n’ variables:

The chain rule can also be extended to a number of variables, which is a function of other
variables:

Z=f (x1…….xn) with

X1= x1 (t1……..tm)

X2= x2(t1……….tm)

Xn= xn (t1………..tm) then

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 Homogeneous and Homothetic Function

= . + . +…….+ .

2.2 Directional Derivatives

For a function z=f(x,y), the partial derivative with respect to x gives the rate of change of f in the
x0 direction and the partial derivative with respect to y gives the rate of change of f in the y0
direction. How do we compute the rate of change of f in an arbitrary direction? The rate of
change of a function of several variables in the direction u is called the directional derivative in
the direction u. Here u is assumed to be a unit vector.

If z=f (x,y), the partial derivatives f'1 (x,y) and f'2 (x,y) Choose a particular point (xo,yo) in the
domain. Any nonzero vector (h,k) is then a direction in which we can move away from (xo, yo)
in a straight line to points of the form.

(x,y) = (x(t)) = (xo+th, yo+tk)

Given the point (xo, yo) and the direction (h, k) ≠ (o,o), define the directional function g by

g(t) = f(xo+th, yo+tk) …..(1)

By using the chain rule, the derivative of this directional function can be calculated as

g'(t)=f'1 (x,y) + f'2 (x,y)

= f'1 (xo+th, yo+tk)h+f'2 (xo + th , yo + tk )k …….(2)

If t=0 then

g'(0)=f'1(xo, yo)h +f'2(xo,yo)k …….(3)

For the case when the vector (h,k) has length 1, the derivative of f in the direction (h,k) is called
the directional derivative of f in the direction (h,k) at (xo,yo). It is denoted by Dh,k f(x0,y0). Hence,
the directional derivative of f(x,y) at (x0,y0) in the direction of unit vector (h,k) (where h2+k2=1)
is

Dh,k f(x0,y0) = f1(x0,y0) h+ f2(x0+y0)k

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 Homogeneous and Homothetic Function

Any move from (x0,y0) to (h,k) changes the value of f by approximately Dh,k f(x0,y0). The vector
(f1(x0,y0), f2(x0,y0)) is called as gradient of the function f (x,y) at (x 0,y0). Therefore, it is the
scalar product of gradient with vector (h,k).

Now, differentiating (2) with respect to t, we get second derivative of the directional function g.
i.e,

gˈˈ(t)= f1ˈ(x,y)h + f2ˈ(x,y) (4)

where x= x0 +th, and y= y0 +tk. Again, applying the chain rule, the above equation becomes:

f1ˈ(x,y)= (x,y) + (x,y) = (x,y)h+ (x,y)k

f1ˈ(x,y)= (x,y) + (x,y) = (x,y)h+ (x,y)k

Suppose, f12ˈˈ= f21ˈˈ,then equation (4) becomes:

gˈˈ(t) = (x,y)h2 + 2 (x,y).hk + (x,y) k2

again x= x+ t.h and y= y+t.k. Assuming t=0 and (h,k) has length 1, then above equation
becomes:

D2f(x,y)= (x,y)h2 + 2 (x,y).hk + (x,y) k2

Example: If f(x,y) = xy.

Compute the first and second directional derivatives of f at (xo yo) in the directions:

(a) (h,k)=(1 , 1/ ) and

(b) (h,k)= (1 , -1/ ).

Solution: We have

f'1 (x,y)=y, f'2 (x,y)=x, f'11 (x.y)=0.

f'12 (x,y)= f'21 (x,y)=1, f'22 (x.y)=0.

Thus, if (h,k)=(1/ .1/ ), then

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 Homogeneous and Homothetic Function

Dh.k f(xo.yo) = y0 + x0 = (xo+yo)

and

f(xo.yo)= 0( )2+ 2 +0( )2 =1

If (h,k) = ( , - ); then

Dh.k f(xo,yo) = y0 + x0 = (yo- xo)

and

f(xo.yo)= = -1

2.3 Implicit Differentiation

An application of chain rule to determine the derivative of a function defined implicit.

Suppose that x and y are related to each other with the relation; F(x,y)=0 where y = f(x) is a
differentiable function of x. Find by using chain rule method.

Consider a function:

Z= f (x,y) = F (x, f(x))

then

=FX (x,y) + FY (x,y)

Because Z=F(x,y)=0 for all x.

Fx(x,y). +FY (x,y) =0

Now, if Fy (x,y) ≠0 and =1 then

=- where Fx (x,y)=∂z/∂x and Fy(x,y)=∂z/∂y.

Example:

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 Homogeneous and Homothetic Function

Find dy/dx given

y3 + y2-5y-x2+4=0.

Solution:

Define a function

F(x,y)=y3+y2-5y-x2+4.

Fx (x,y)= =-2x.

Fy(x,y)=(∂Fy(x,y))/∂y=3y2+2y-5

2.3.a Implicit Differentiation of three or more variables:

Let’s assume that there is an implicit function consists of three variables; i.e, F (x,y,v) = 0.

The above equation becomes .dx+ .dy+ .dv=0.

In order to get derivative hold one of the variable constant. Suppose v is constant then dv=0 and
0= ∂z/∂x.dx+ .dy., rearrange the equation we get as in two
variable case, because one variable was constant, so this difference is partial. So notations have
to change. Therefore,

∂y/∂x=(-∂z/∂x)/(∂z/∂y)

∂y/∂x=(-fx)/fy.

In general, the partial derivations of an implicit function F(x1,x2,….xn,z) are given by

∂z/∂xi=-(∂F(∂xi))/(∂F(∂z)) (i=1,2…n); asumming ∂F/∂z≠0

Example:

x- 2y- 3z+ z2= -2.

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 Homogeneous and Homothetic Function

Let F (x,y,z) = x- 2y- 3z+ z2and c= -2.

Fx= ∂v/∂x=1, Fz = 2z -3

Fy= -2.

∂z/∂x= zˈx= - (-FX)/(-FZ) and zˈy=(-Fˈy)/ (-Fˈz)

= [Fˈz ≠0, so assuming that z≠3/2]

= = .

Example: Given the demand function

Q2= 4850 – 5P2 +1.5P1 + 0.1 Y

Where Y= 10,000, P2= 200 and P1= 100. Find the income elasticity of demand and cross
elasticity of demand for first commodity.

Solution:

(a) Income elasticity of demand is given by:

ey= /

= ( )

Given the demand function: Q2 = 4850 – 5P2 +1.5P1 + 0.1 Y

= 0.1 ……..(1)

Q2= 4850- 5(200) + 1.5(100) +0.1 (10000) = 5000……..(2)

Putting the values of 1 and 2, hence;

ey= 0.1(10000/5000) = 0.2

Since the value of ey<1, therefore the good is income elastic.

(b) Cross elasticity of demand is given by:

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 Homogeneous and Homothetic Function

ec = ( )

given Q2= 4850 – 5P2 +1.5P1 + 0.1 Y

= 1.5

ec= 1.5 ( ) = 0.03

2.3.b Implicit functional theorem (for 2 variables): Let F(x,y)=0 be an implicit function with
continuous first derivatives, which is satisfied at some point, (x0, y0) and is defined in some
neighborhood of this point. If Fy≠0 at this point, then there is a function y=f(x) defined in some
neighborhood of x=xo corresponding to the relationship defined by F(x,y)=0 such that:

(i) yo=f(xo) and

(ii) fˈ(xo)=-Fx/Fy.

Statement: Let F (x1, x2……xn,y)=0 be an implicit function with continuous first derivatives
which is satisfied at some point, (x1, x2…….xn, y) is defined at some neighborhood of this point.
If Fy≠0 at this point, then there is a function y=f(x1, x2…..xn) defined in some neighborhood of
x=xo=(x1, x2…..xn) such that

(i) yo=f(xo)
(ii) fi(xo)=-Fxi/Fy.

Example: The Cobb-Douglas production function: 50 K0.3 L0.7 = Q, where Q is a given level of
output, K is the amount of capital and L is the amount of labor. The isoquant associated with the
function reflects the levels of capital and labor that yield a constant level of output.
a. Use the Implicit Function Theorem to derive an equation for the slope of an isoquant
associated with the production function.
b. When K = 6 and L = 2, what is the slope of a line tangent to this isoquant? What is the
slope of the line when K = 3 and L = 14?
c. Find the MRTS for both examples in part (b).

Solution: Given the production function 50 K0.3 L0.7 = Q

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 Homogeneous and Homothetic Function

a. Slope of Isoquant = =- =-

=-

b. when K=6 and L=2 then slope becomes:

Slope of Isoquant= - = . = -7

When k=3 and L=14 then

Slope = - = .

c.i) MRTS= =7

ii) MRTS=

Note: The marginal rate of technical substitution (MRTS) is the rate at which the two production
inputs can be substituted if output is held constant. It is the absolute value of the slope of the
isoquant.

Example: Compute σk,L = for the Cobb-Douglas function F(K,L) = AKaLb

Solution: The marginal rate of substitution between K and L is

σk,L = = =

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 Homogeneous and Homothetic Function

Example: The implicit function U  AB shows what combinations of apples (A) and bananas
(B) provide the levels of utility U. Find the derivative of the implicit function to determine the
MRS of apples for bananas (MRSAB).
Solution: Given the utility function:
U=

Slope of IC = =-

MRS A,B=

Note: The absolute value of the slope of the indifference curve is the marginal rate of substitution
(MRS), which measures the rate at which one good can be substituted for another, while
maintaining the same level of utility.

2.3 Homogeneous and Homothetic Functions

2.3.a. Homogeneous Functions
A function is called as a homogeneous function of any degree ‘n’ if; when each of its elements is
multiplied by any number t > 0; then the value of the function is multiplied by tn. For instance, a
function is homogeneous of degree 1 if, when all its elements are multiplied by any number t > 0,
the value of the function is multiplied by the same number t.
i.e, f(x1; :::; xn) is homogenous of degree k if for all t > 0
f(tx1; :::; txn) = tkf(x1; :::; xn)
To explain the concept of homogenous function, take an example, Q=f(k,L), where K,L and Q
are variables. When independent variables (K,L) changes, there must be change in the dependent
variable. In other words, if K and L are both increases by some factor ‘t’ then Q also changes by
some factor. If t=2 (a doubling of K and L), then Q also doubles, then the function is
homogenous of degree 1.

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 Homogeneous and Homothetic Function

Effect on Q when K and L are Economist view Mathematician view

aboth doubled
Q is exactly doubled CRTS Function is homogenous of
degree=1
Q is more than doubled IRTS Function is homogenous of
degree>1
Q is less than doubled DRTS Function is homogenous of
degree<1

2.2.b Homothetic Functions:

If f(x1, x2,…..,xn) is a function of n variables defined in domain D. then f is called homothetic if

X,y € K, f(x)=f(y) , t>0→ F)tx)=f(ty)

If utility function is
u(x; y) = xy,
is a homogenous function of degree 2. Then the monotonic transformations
g1(z) = z + 1;
g2(z) = z2 + z;
g3(z) = log z
generate the following homothetic (but not homogenous) functions
v1(x; y) = xy + 1;
v2(x; y) = x2y2 + xy;
v3(x; y) = log x + log y:
Example
For the function f (x1, x2) = Ax1ax2b, test the homogeneity of function.
Solution:

f (tx1, tx2) = A(tx1)a(tx2)b

= Ata+bx1ax2b

= ta+b f (x1, x2),

so that f is homogeneous of degree a + b.

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 Homogeneous and Homothetic Function

Example: Given the function, check whether function is homogeneous functions or not

Multiplying by some factor α

f( αx, αy,αz) = (αx)5 (αy)2 (αz)3

= α10 x5 y2 z3

= α10 f( αx, αy,αz)

Hence, this function is homogenous of degree 10.

2.3.c Partial derivatives of homogeneous functions

If f be a differentiable function of n variables that is homogeneous of degree k. Then each of its

partial derivatives f 'i (for i = 1, ..., n) is homogeneous of degree k − 1.
The homogeneity of f means that
f (tx1, ..., txn) = tk f (x1, ..., xn) for all (x1, ..., xn) and all t > 0.

Now differentiate both sides of this equation with respect to xi, to get
t f 'i(tx1, ..., txn) = tk f 'i(x1, ..., xn),

and then divide both sides by t to get

f 'i(tx1, ..., txn) = tk−1 f 'i(x1, ..., xn),

so that f 'i is homogeneous of degree k − 1.

1.2.4 Euler’s theorem

If the function z = f(x,y) is a homogeneous of degree ‘n’ then according to Euler’s theorem:

x. + y. = n.f(x,y)

If Z=f(x1,x2,x3,…..,xn), then according to this theoem:

x1. + x 2. + x 3. +…………+ xn. = nf(x1,x2,x3,….,xn)

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 Homogeneous and Homothetic Function

Example:
Use Euler’s theorem to determine the degree of homogeneity of the following functions

1). f(x,y)= 2x2+xy-y2

=fx(x,y)= 4x+y

=fy(x,y)= x-2y

According to Euler’s theorem:

x +y = nf(x,y)

= x(4x+y)+y(x-2y)

=4x2+xy+xy-2y2

=4x2+2xy-2y2

=2(2x2+xy-y2 )

The degree of homogeneity is 2.

Example:
Use Euler’s theorem to determine the degree of homogeneity of the following function
f(L,K)=ALαKβ

= αALα-1 β

= βALα β-1

By Euler’s theorem

L +K = nf(L,K)

= L.(αALα-1 Kβ) + K.(βALαKβ-1)

=αALα Kβ+ βALαKβ

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 Homogeneous and Homothetic Function

=(α+β) (ALαK β)

=(α+β) f(L,K)

The degree of homogeneity is α+β

Example: Suppose that f (x1, ..., xn) is homogeneous of degree r. Show that each of the
following functions h(x1, ..., xn) is homogeneous, and find the degree of homogeneity.

a. h(x1, ..., xn) = f (x1m, ..., xnm) for some number m.

b. h(x1, ..., xn) = [ f (x1, ..., xn)]p for some number p.

Solution:

a. We know that f (x1, ..., xn) is homogeneous of degree r, therefore

f ((tx1)m, ..., (txn)m) = f (tmx1m, ..., tmxnm)
= (tm)r f (x1m, ..., xnm)
= tmrh(x1, ..., xn),
hence h is homogeneous of degree mr.
b. We have h(tx1, ..., txn) = [ f (tx1, ..., txn)]p
= [tr f (x1, ..., xn)]p
= trp[ f (x1, ..., xn)]p
= trph(x1, ..., xn),
Therefore, h is homogeneous of degree rp.

Example: Solve the following:

a. Is the function (x3 − y3)/(x1/2 + y1/2) homogeneous of any degree? (If so, which
degree?)
b. Is the function x3y3 + x1/2 homogeneous of any degree? (If so, which degree?)
c. A consumer's (differentiable) demand function for some good is f (p1, ..., pn, w),
where pi is the price of the ith good, and w is the consumer's wealth. This function
f is homogeneous of degree 0. Is there any necessary relationship between
∑i=1n(pi f i'(p1, ..., pn, w)) and w f n+1'(p1, ..., pn, w)?

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 Homogeneous and Homothetic Function

Solution: a. Given the function (x3 − y3)/(x1/2 + y1/2)= ((tx)3 − (ty)3)/((tx)1/2 + (ty)1/2)

= t5/2(x3 − y3)/(x1/2 + y1/2)

Therefore, the function is homogenous of degree 5/2.

b .Given the function x3y3 + x1/2 = (tx)3(ty)3 + (tx)1/2 = tkx3y3 + x1/2 .

Hence, function is not homogeneous of any degree.

Suppose, to the contrary, it is homogeneous of degree k. Then for some value of k we

have (tx)3(ty)3 + (tx)1/2 = tkx3y3 + x1/2 for all t and all (x, y). In particular, taking t = 4
we have 4096x3y3 + 2x1/2 = 4k(x3y3 + x1/2) for all (x,y), and hence 2 = 4k (taking (x, y)
= (1, 0)) and 4098 = 2(4k) (taking (x, y) = (1, 1)), which are inconsistent.

c .Given the function, f (p1, ..., pn, w); which is homogeneous of degree 0

then according to Euler's theorem we have

∑i=1npi f i'(p1, ..., pn, w) + w f 'n+1(p1, ..., pn, w) = 0. (Note that f has n + 1 arguments.)

Example: Consider the production function Q=AKαLβ.

a. Using Euler's Theorem, prove that this production function exhibits constant returns to
scale when + = 1.
b. What condition on + is necessary for increasing returns to scale? For decreasing
returns to scale?

Solution: Given Cobb-Douglas Production Funtion:

Q=AKαLβ

= α A Kα-1Lβ

= β A KαLβ-1

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 Homogeneous and Homothetic Function

According to Euler’s theorm:

K +L = K.α A Kα-1Lβ + L. β A KαLβ-1

= (α+β) (A KαLβ)

= (α+β). Q

a. If (+) = 1, then K +L = Q . If the value of K and L doubled, i.e., 2K and 2L, then

output also doubles; then there is a constant return to scale in the production.

b. If (+) is not equal to 1, then K +L =(α+β). Q. Doubling the value of K and L in

the right hand side adds up to 2(+)Q. If (+) > 1, the output more than doubles, i.e,
there are increasing returns to scale. If (+) < 1, the output is less than double, or the
decreasing returns to scale in production.
Note: A proportional increase in all the values of inputs in a production function increases the
scale of production. If there are constant returns to scale, then output will increase equi-
proportionally to the increase in all inputs. If there are increasing returns to scale, an increase in
all inputs will lead to a more than proportionate increase in output. If there are decreasing
returns to scale, then output will increase less than proportionately with an increase in all inputs.
Example: Consider the following Cobb-Douglas production function, which is homogeneous of
degree 1 in capital and labor Q  50K 0.4 L0.6 . The value of the output (Q) includes the payment

made to the labor, i.e., the wages paid to the labor (wL), which is equal to .L in a competitive

labor market. Also, the value of the output includes the payment made to the capital suppliers

(rK), which is equal to .K. Show that the sum of the total factor payments (wL + rK) equals

the value of the output, i.e., wL + rK = Q, such that wL + rK =  Q + (1-) Q, where  = 0.6.
Solution: Given the production function

Q= 50 K0.4 L0.6

= 0.4(50 K0.4-1 L0.6)

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 Homogeneous and Homothetic Function

= 0.6(50 K0.4 L0.6-1)

K +L = K.0.4(50 K0.4-1 L0.6)+ L.0.6(50 K0.4 L0.6-1)

Given, (Kr)= K and Lw= L

Therefore,

rK+wl= K +L = K.0.4(50 K0.4-1 L0.6)+ L.0.6(50 K0.4 L0.6-1)

= 0.4 Q + 0.6 Q= (1-α).Q + αQ

= αQ+ (1-α) Q (given α=0.6)

Hence proved.

Example: Given the following production function; find out the elasticity of substitution:

z = A(aK−ρ + bL−ρ)−m/ρ (where A,b,and ρ constants) and ρ ≠ 0 with ρ> -1.

Solution: partial differentiation the function z = A(aK−ρ + bL−ρ)−m/ρ with respect to L and K
respectively,

zˈL= A(-m/ρ) (aK-ρ + bL-ρ)(-m/ρ)-1b(-ρ)L-ρ-1

zˈK= A(-m/ρ) (a K-ρ + bL-ρ)(-m/ρ)-1a(-ρ)K-ρ-1

therefore,

MRTSK,L = RK,L=

= (RK,L)1/( ρ+1)

Hence,

σK,L= ElRk,L( = .

Example: Without solving the equation, show that 2x2+5xy+y2=19 defines an implicit function

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 Homogeneous and Homothetic Function

y(x) for which y(2)=1, and find dy/dx when x=2. Express the answer in geometrical terms.

Solution: Putting x=2 and y=1 in given function 2x2+5xy+y2=19, we see that equation satisfied,

2(2)2 + 5(2)(1)+ (1)2 =19.

Using implicit differentation, we get

=- = - 13/12

When (x,y)=(2,1). In geometrical terms, this means that the slope of the contour 2x 2+5xy+y2=c
which passes through point (2,1) is -13/12 at that point.

Example: The function g is defined by

g(x, y) = f (x, y) − aln(x + y),

where a is a constant and f satisfies the condition

x f 'x(x,y) + y f 'y(x,y) = a for all (x, y).

Show that g is homogeneous of degree 0.

Solution: Given g(x, y) = f (x, y) − aln(x + y),

Therefore, according to Euler’s theorm,

xg'x(x,y) + yg'y(x,y) = x( f 'x(x,y) − a/[x + y]) + y( f 'y(x,y) − a/[x + y])

= xf 'x(x,y) − ax/[x + y] + y f 'y(x,y) − ay/[x + y])

= xf 'x(x,y) + y f 'y(x,y) − ax/[x + y] − ay/[x + y]

Given, x f 'x(x,y) + y f 'y(x,y) = a , therefore the equation becomes…

xg'x(x,y) + yg'y(x,y) = a- a(x/[x + y] + y/[x + y])

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 Homogeneous and Homothetic Function

= a – a(1)

=0

for all (x,y). Thus by Euler's theorem g is homogeneous of degree 0.

Example: The twice-differentiable function f (x, y) is homogeneous of degree k, and its second
derivatives are continuous. Show that

x2 f "11(x, y) + 2xy f "12(x, y) + y2 f "22(x, y) = k(k − 1) f (x, y) for all (x, y).

Solution: We know that f is homogeneous of degree k which means that f '1 and f '2 are
homogeneous of degree k − 1. Thus by Euler's theorem applied to f '1 and to f '2 we have,

x f "11(x, y) + y f "12(x, y) = (k − 1) f '1(x, y) for all (x, y)

x f "21(x, y) + y f "22(x, y) = (k − 1) f '2(x, y) for all (x, y).

Multiply first equation by x times and second equation by and y times.

x2 f "11(x, y) +x y f "12(x, y) = (k − 1) x f '1(x, y) for all (x, y)

x y f "21(x, y) + y2 f "22(x, y) = (k − 1) y f '2(x, y) for all (x, y).

Now the sum up the above two equations

x2 f "11(x, y) + 2xy f "12(x, y) + y2 f "22(x, y) = (k − 1)[x f '1(x, y) + y f '2(x, y)] for all (x, y)

(given that f "12(x, y) = f "21(x, y), by Young's theorem).

Finally, the term in brackets on the right-hand side of this equation is equal to k f (x,y) by
Euler's theorem, yielding the required result.

Example: A firm uses two inputs to produce a single output. Its production function f is
homogeneous of degree 1. An implication of the homogeneity of f , which you are not asked to
prove, is that the partial derivatives f 'x and f 'y with respect to the two inputs are homogeneous

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 Homogeneous and Homothetic Function

of degree zero. Use Euler's theorem to find an expression for the cross partial derivative
f "xy(x, y) in terms of x, y, and f "xx(x, y).

Solution: Given f 'x is homogeneous of degree 0, therefore according to Euler’s theorem an

expression for the cross partial derivative is :

x f "xx(x, y) + y f "xy(x, y) = 0,

so that f "xy(x, y) = −(x/y) f "xx(x, y).

3. Exercise:

1. Given Q=440-8P +0.05 Y, where P=15 and Y=12,000. Find the income and price
elasticity of demand.
2. Given Q1= 110-P1+0.75 P2-0.25 P3+0.0075 Y. At P1=10, P2=20, P3=40, and Y=10,000,
Q1=170. Find the different cross elasticities of demand.

3. Determine whether each function is homogeneous and, if so, of what degree.

f(x,y) =

f(x,y,w)= 3x2y -

4.Test the degree of homogeneity of a function given below:

a ) z = 10x + 5y

b) z = x2 + 5xy + 12 y2

c) z= x0.3 + y0.4

d) z = 10 x5 + 10x2y3 +y5

5. Assume the demand for sugar is a function of income (Y), the price of sugar (Ps) and the
price of saccharine (Pc), a sugar substitute, as follows:
Qd  f (Y , Pc , Ps )  0.05Y  10 Pc  5Ps2 .

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 Homogeneous and Homothetic Function

a. Find the partial derivatives of this demand function.

  Qd Y 
b. Find the elasticity of demand with respect to income    when Y = 10,000, Ps =
  Y Qd 
5 and Pc = 7.
  Qd Ps 
c. Find the own-price elasticity of demand    when Y = 10,000, Ps = 5 and Pc = 7.
  Ps Qd 

  Qd Pc 
d. Find the cross-price elasticity of demand    when Y = 10,000, Ps = 5 and Pc = 7.
  Pc Qd 

6. Consider the production function y = f(x1,x2) = x1 x2 defined over the domain x1 > 0 and
x2 > 0. Also, consider the functions g(y) = ln(y) and j(y) = y2.

a. Is f(x1,x2) a homogeneous function? If so, of what degree?

b. Is g(y) a homothetic function? Is g(y) a homogeneous function in the arguments x1 and
x2? If so, what is its degree?
c. Is j(y) a homothetic function? Is j(y) a homogeneous function in the arguments x 1 and
x2? If so, what is its degree?
7. Consider the production function y= f(x1,x2)= .
a. Determine whether the production function is homogeneous. If so, of what degree?
b. Find out the partial derivatives of the function and show that they are also homogeneous.
c. Show that x1f1(sx1, sx2)+ x2f2(sx1, sx2) = ksk-1f(x1,x2).

Solution:

1. Income elasticity of demand=0.652 and price elasticity of demand= -0.13.

2. ep1 = -0.0889; ep2 =0.133 and ep3 = -0.0889.
3.a. homogeneous of degree 1
b.not homogeneous
4. a. homogenous of degree 1

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 Homogeneous and Homothetic Function

b. homogenous of degree 2
c. not homogenous
5. Answers:
 Qd  Qd  Qd
a.  0.05;  10;   10 Ps
Y  Pc  Ps
b. 1.12
c. - 0.56
d. 0.16
5. Answers:
a. homogeneous of degree 2
b. homothetic; not homogeneous in x1 and x2
c. homothetic; homogeneous of degree 4 in x1 and x2
6. Answers:
d. homogeneous of degree 2
e. homothetic; not homogeneous in x1 and x2
f. homothetic; homogeneous of degree 4 in x1 and x2
7. Answers:
a. homogeneous of degree 7/12 (i.e., k=1/12)

b. f1(x1,x2) = f1(x1,x2) is homogeneous of degree k-1, i.e., -5/12;

and take the partial derivative of the production function with respect to x2 and show that
f2(x1,x2) is homogeneous of degree -5/12.
c. Apply Euler's Theorem.
4. References:
1. K. Sydaster and P. Hammond, Mathematics for Economic Analysis, Person Educational
Asia, Delhi, 2002.
2. M. Hoy et.al, Mathematics for Economics, PHI Learning Private Limited, Delhi, Second
Edition, 2001.
3. J.E. Draper and J.S. Klingman, Mathematical Analysis Bussiness and Economic
Applications, Harper & Row Publishers, New York, 1967.
4. Rosser, Mike, Basic Mathematics for Economists Second Edition, London, 2003.

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