Eulers Theorem for Profit

Assume the production function is homogeneous of degree . Then:

F (K , L) = F (K , L). The production function then exhibits, respectively, constant or
decreasing returns to scale if alpha is, also respectively, = 1, < 1.
Differentiate the equation F (K , L) = F (K , L), with respect to . Then:
KFK (K , L) + LFL (K , L) = 1 F (K , L)

(1)

KFK (K , L) + LFL (K , L) = F (K , L)

(2)

Set = 1.

Therefore if the profit function is: F (K , L) wL rK , and the firm has maximized profit so
that the FOCS hold: w = FL (K , L), and r = FK (K , L), then the equation becomes:
F (K , L) KFK (K , L) LFL (K , L)

(3)

F (K , L) F (K , L) , using the results from equation 2

(4)

Then profit is: (1 )F (K , L), and therefore profit is positive if < 0 (DRS), profit is zero
if = 0 (CRS).
Steve Raymond ()

August 2, 2013

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