Homogenous Function

def. Homogenous production function

$$f(xz,xK,xN)=x^{\lambda }f(z,K,N)$$

• $z$: Productivity

• $K$: Capital

• $N$: Labor i.e. if the inputs are multiplied by $x$, the output is multiplied by $x^{\lambda }$. ⇒ We say: ”$f$ is a homogenous function of degree $\lambda$”

• This implies we have increasing returns to scale

• Monotonic Transformation of a homogenous function is also homogenous.