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Euler's Theorem and Its Generalization

Euler's Theorem states that for a function F(L,K) that is homogeneous of degree n, the partial derivatives of F with respect to L and K sum to n times F(L,K). This can be generalized to higher order derivatives, with the summation of the products of the higher order partials and their corresponding variables equaling the factorial of n times F(L,K). An example demonstrates this generalization for the function F(L,K)=L^2K^3, which is homogeneous of degree 5.

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259 views6 pages

Euler's Theorem and Its Generalization

Euler's Theorem states that for a function F(L,K) that is homogeneous of degree n, the partial derivatives of F with respect to L and K sum to n times F(L,K). This can be generalized to higher order derivatives, with the summation of the products of the higher order partials and their corresponding variables equaling the factorial of n times F(L,K). An example demonstrates this generalization for the function F(L,K)=L^2K^3, which is homogeneous of degree 5.

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Anonymous Tph9x741
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23/2/2017 Euler's Theorem and Its Generalization

applet-magic.com
Thayer Watkins
Silicon Valley
& Tornado Alley
USA

Euler's Theorem
and Its Generalization

A function F(L,K) is homogeneous of degree n if for any values


of the parameter

F(L, K) = nF(L,K)

The analysis is given only for a two-variable function because


the extension to more variables is an easy and uninteresting
generalization.

Euler's Theorem: For a function F(L,K) which is


homogeneous of degree n

(F/L)L + (F/K)K = nF(L,K).


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23/2/2017 Euler's Theorem and Its Generalization

Proof: Differentiate the condition

F(L, K) = nF(L,K)

with respect to to obtain

(F/L)L + (F/K)K = nn-1F(L,K)

and let equal unity. The result is

(F/L)L + (F/K)K = nF(L,K).

When F(L,K) is a production function then Euler's Theorem


says that if factors of production are paid according to their
marginal productivities the total factor payment is equal to the
degree of homogeneity of the production function times output.
The case of n=1 is an important special case. For that case if
factors of production are paid according to their marginal
productivities then output will exactly cover the factor
payments.
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23/2/2017 Euler's Theorem and Its Generalization

A corollary to Euler's Theorem for production functions is that


the sum of the elasticities of output with respect to factor inputs
is equal to the degree of homogeneity of the production
function; i.e.,

L(F/L)/F + K(F/K)/F = n.

This result is obtained simply dividing through the equation for


Euler's Theorem by the level of output.

Generalizations

The equation that was obtained by differentiating the defining


condition for homogeneity of degree n with respect to the
parameter can be differentiated a second time with respect to
and the value of set equal to unity. The result is:

(2F/L2)L2 + (F2/KL)KL + (2F/LK)LK + (F2/


L2)L2
= n(n-1)F(L,K)

Since the cross derivatives are equal the above can be expressed
as:

(2F/L2)L2 + 2(F2/KL)KL + (F2/L2)K2 = n(n-


1)F(L,K)

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23/2/2017 Euler's Theorem and Its Generalization

For the special case of n=1 the above equation reduces to:

(2F/L2)L2 + 2(F2/KL)KL + (F2/L2)L2 = 0

The process of differentiating with respect to and setting


equal to unity can be continued. The result is:

A Generalization of Euler's Theorem

i=0mC(m i)(mF/KiLm-i)LiKm-i
= n(n-1)(n-2)...(n-m+1)F(L,K)

for m any positive integer less than or equal to n+1 and where
C(m i) are the binomial coefficients m!/(m-i)!i!. In the above
formula a partial derivative of the form (mF/K0Lm) is just
(mF/Lm).

Illustration

Let F(L,K)=L2K3. This is a homogeneous function of degree 5.


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23/2/2017 Euler's Theorem and Its Generalization

Then

F/L = 2LK3 and F/K = 3L2K3


so
(F/L)L + (F/K)K = 2L2K3 + 3L2K3 = 5L2K3

The second derivatives are

(F2/L2) = 2K3
(F2/KL) = (F2/LK) = 6LK2
(F2/K2) = 6L2K

Thus

(2F/L2)L2 + 2(F2/KL)KL + (F2/L2)K2


[1(2) + 2(6) + 1(6)]L2K3
= 20L2K3 = 5(4)L2K3

The third order derivatives are, without distinguishing between


the equal cross derivatives,

(F3/L3) = 0
(F3/KL2) = 6K2
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23/2/2017 Euler's Theorem and Its Generalization

(F3/K2L) = 12LK
(F3/K3) = 6L2

Thus

(F3/L3)L3 + 3(F3/KL2)L2K + 3(F3/K2L)LK2 +


(F3/K3)K3
= [1(0) + 3(6) + 3(12) + 1(6)]L2K3 = 60L2K3
= 5(4)(3)L2K3

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