What does it mean that a production function is homogeneous of degree r?If a production function is homogeneous of degree r=0.5,can we conclude that it has decreasing returns to scale?
If a production function is homogeneous of degree 1, it means that if we multiply all the inputs by a constant number to the power 1 or 1 , the output will also be that constant number times output or Y.
For eg. If Y=X+Z
Then multiplying X and Z by will give us X+Z= (X+Z)= Y
If we could transform the equation similar to above except with a power more than 1, then the function will be said to be homogenous but with a degree of that number greater than 1.
If the production function is homogeneous of degree r=0.5, then it is said that the function inhibits the decreasing returns to scale. Degree 1 corresponds to constant returns whereas degree greater than 1 means increasing returns to scale.
Get Answers For Free
Most questions answered within 1 hours.