CONOMICA

Microeconomics

A Rational Production Function

Ctlin Angelo Ioan1, Alin Cristian Ioan2

Abstract: The article deals with a rational production function of two factors with constant scale
return. It was determined the compatibility conditions with the axioms of production function
resulting inequality of a single variable.
Keywords: production function; marginal productivity; average productivity
JEL Classification: C80

1. Introduction
In what follows we shall presume there is a certain number of resources,
supposedly indivisible needed for the proper functioning of the production process.
We define on R2 the production space for two resources: K capital and L -
labor as SP=(K,L)K,L0 where xSP, x=(K,L) is an ordered set of resources
and we restrict the production area to a subset DpSP called domain of
production.
It is called production function an application Q:DpR+, (K,L)Q(K,L)R+
(K,L)Dp.
For an efficient and complex mathematical analysis of a production
function, we impose a number of axioms both its definition and its scope.
1. The domain of production is convex;
2. Q(0,0)=0 (if it is defined on (0,0));
3. The production function is of class C2 on Dp that is it admits partial derivatives
of order 2 and they are continuous;

1
Associate Professor, PhD, Danubius University of Galati, Faculty of Economic Sciences, Romania.
Address: 3 Galati Blvd, Galati, Romania, Tel.: +40372 361 102, Fax: +40372 361 290.
Corresponding author: catalin_angelo_ioan@univ-danubius.ro.
2
University of Bucharest, Faculty of Mathematics and Computer Science, Address: 4-12 Regina
Elisabeta Blvd, Bucharest 030018, Romania,. E-mail: alincristianioan@yahoo.com.
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4. The production function is monotonically increasing in each variable;

5. The production function is quasiconcave that is: Q(x+(1-)y)min(Q(x),Q(y))
[0,1] x,yRp.
From a geometric point of view, a quasiconcave function having the property of
being above the lowest value recorded at the end of a certain segment. The
property is equivalent to the convexity of the set Q-1[a,) aR, where Q-1[a,)=
{xRpQ(x)a}.

2. The Main Indicators of Production Functions

Consider now a production function: Q:DpR+, (K,L)Q(K,L)R+ (K,L)Dp.
Q
We call marginal productivity relative to an input xi: x i = and represents the
x i
trend of variation of production to the variation of xi.
Q
We call average productivity relative to an input xi: w x i = the value of
xi
production at a consumption of a unit of factor xi.
We call partial marginal substitution rate of factors i and j the opposite change
in the amount of factor j as a substitute for the amount of change in the factor i in
x
the case of a constant level of production and we have: RMS(i,j)= i .
x j

Q
x x
We call elasticity of output with respect to an input xi: x i = i = i and
Q w xi
xi
represents the relative variation of production to the relative variation of the factor
xi.

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Considering now a production function Q:DpR+ with constant return to scale that
1 K
is Q(K,L)= Q(K,L), let note = . It is called the elasticity of the marginal
L
RMS(K , L)

rate of technical substitution = .
RMS(K , L)

3. A Rational Production Function
Consider now a production function Q:DpR2R+, (K,L)Q(K,L)R+
(K,L)Dp with constant return to scale:
PK, L
QK, L K,L0
R K, L
where P and R are homogenous polynomials in K and L, deg P=n, deg R=n-1, n2.
Because the function is elementary follows that it is of class C on the definition
domain.
K
Let note also: .
L
In what follows we put the question of determining the conditions so that the
axioms 4 and 5 to be verified.
We now have:
P R P R
RP RP
Q K K ,
L L
Q

K R2 L R2
Because of homogeneity, we have:
P P
K K L L nP
R R
K L n 1R
K L
that is:

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P
P nP K K

L L



n 1R K R
R
K
L L

P R 2P 2R
Note now: = , = , = , = . We have:
K K K 2 K 2
P nP K
L L
R n 1R K

L L

2P

n 1 K
LK L
2 P n n 1P 2n 1K K 2

L2 L2

2R

n 2 K
LK L
2 R n 1n 2R 2n 2K K 2

L2 L2
After many computations, we obtain:
Q R P

K R2
Q K Q Q PR KR PK
=
L L K K LR 2

2 Q R P R 2R P
=
K 2 R3

2Q R 2 2R PR 2 2 P
=K
KL LR 3

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2Q R 2 2R PR 2 2 P
= K2
L 2
L2 R 3
Q Q
The conditions that: 0, 0 become:
K L
R P
R2 0
PR KR PK
0
LR 2
Considering now the bordered Hessian matrix:
Q Q
0
K L
B Q 2Q 2Q
H (Q) =
K K 2 KL

Q 2Q 2Q

L KL L2
and the minors:
Q
K = Q = R P
0 2 2
B1 =
Q 2Q K R4
K K 2

Q Q
0
K L
2 2
Q 2Q 2Q Q Q 2 Q Q 2 Q Q 2 Q
B2 = =2 =
K K 2 KL K L KL L K 2 K L2
Q 2Q 2Q
L KL L2
P2
2 5
LR

R 2 2R PR 2 2 P
it is known that if B1 <0, B2 >0 the function is quasiconcave. Conversely, if the
function is quasiconcave then: B1 0, B2 0. Therefore, a sufficient condition for
the validity of axiom 5 is:

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R P 2
4
0
2 R

P R 2 2R PR 2 2 P 0
L2 R 5

From these two sets of conditions we obtain finally:
R P
2
0
R
PR KR PK
2
0
2 LR

P R 2 2R PR 2 2 P 0
L2 R 5
or, more simple (taking inot account that Q,K,L0):

R P 0

PR K R P 0
2R P R P R
0
R
Theorem 1
A function Q:DpR2R+, (K,L)Q(K,L)R+ (K,L)Dp with constant
return to scale:
PK, L
QK, L K,L0
R K, L
is a production function if:

R P 0

PR K R P 0
2R P R P R
0
R

P R 2P 2R
where: = , = , = , = .
K K K 2 K 2
Because P and R are homogenous, we have:

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K K
PK, L Ln P ,1 Ln S , R K, L Ln 1 R ,1 Ln 1 T
L L
with the obviously notations: S P,1 , T R ,1 .
n
If PK, L a i K i Ln i we have:
i 0

P n n
= ia i K i1Ln i Ln 1 ia i i1 Ln 1S'
K i1 i 1

2P n n
= ii 1a i K i2 Ln i Ln 2 ii 1a i i1 Ln 2S"
K 2
i 2 i 1

R 2R
Analogously: = Ln 2 T' , = Ln 3T"
K K 2
We obtain therefore that the conditions of the above theorem become:

S' T T' S 0

S T S' T T' S 0
2T' S' T T' S T T" S S" T
0
T

S
If we note for simplify: V we finally have:
T

V' 0

V V' 0
V" 0

PK, L Ln S
Because QK, L n 1 LV we easily see that:
R K, L L T

QK, L V QK, L
V = = wL , = = w K therefore:
L K

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Theorem 2
A function Q:DpR2R+, (K,L)Q(K,L)R+ (K,L)Dp with constant
return to scale:
PK, L
QK, L K,L0
R K, L
is a production function if:
w L ' 0

w K ' 0
w " 0
L
K
where and w L , w K are the average productivity relative to L and K
L
respectively.
Because P(K,L)= Ln S , R(K,L)= Ln 1T we find that:

P R 2P 2R
= = Ln 1S' , = = Ln 2 T' , = = Ln 2
S" , = = Ln 3T"
K K K 2 K 2
Q R P S' T T' S
= = V'
K R2 T
2

Q PR KR PK S T S' T T' S
= = V V'
L LR 2 T
2

The main indicators for this function are:

Q
the marginal productivity relative to L: L = = V V'
L
Q
the marginal productivity relative to K: K = = V'
K

= V
Q
the average productivity relative to L: w L =
L
Q V
the average productivity relative to K: w K = =
K

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the partial
marginal substitution rate of factors K and L:
K V'
RMS(K,L)= =
L V V'

K V'
the elasticity of output with respect to K: K = =
wK V

L V V'
the elasticity of output with respect to L: L = =
wL V

the elasticity of the marginal rate of technical substitution

RMS(K , L)
V V"
= =
RMS(K , L) V' V V'

4. Example
Let now, the function of production: Q:DpR2R+, (K,L)Q(K,L)R+
(K,L)Dp with constant return to scale:
4K 2 2KL L2
QK, L
L
K,L, K
KL 2
4 2 2 1 V 4 2 2 1
We have: V = , w K = = ,
1 2
4 2 2 1 2 2 2 1 4 2 8 3
w L = V = , w K ' = , w L ' = ,
1 2 1 12
2

w L " =
2
.
13
The conditions from the theorem 2 become:
4 2 8 3
0
1
2

2 2 2 1
0
1
2 2

2
13 0

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which are equivalent with:

1 3
, 2 2 ,

R
1

1 L
that is, with 0: 0, or K .
2 2
The graph of the production function is:

Figure 1
5. Conclusions
Rational production functions may occur in the process of determining specific
method of least squares (leading to relatively simple systems solved) based on
concrete data. Conditions compatibility axioms production function were
K
simplified by using the factor , generating inequalities of a single variable.
L

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6. References
Arrow, K.J. & Enthoven, A.C. (1961). Quasi-Concave Programming. Econometrica, vol.29, no.4, pp.
779-800.
Chiang, A.C. (1984). Fundamental Methods of Mathematical Economics. McGraw-Hill Inc.
Harrison, M. & Waldron, P. (2011). Mathematics for Economics and Finance, Routledge.
Ioan, C.A. & Ioan G. (2011). n-Microeconomics. Galati: Zigotto.
Pogany, P. (1999). An Overview of Quasiconcavity and its Applications in Economics. Office of
Economics, U.S. International Trade Commission.
Simon, C.P. & Blume, L.E. (2010). Mathematics for Economists. W.W.Norton & Company.
Stancu, S. (2006). Microeconomics. Bucharest: Economica.

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