A Note on Homogeneous and Homothetic Functions

The following result about the slope of a level curve is often useful to economists. The result provides another reason for working with homogeneous functions and motivates the use of homothetic
functions (to be defined at the end of the handout).
Result: Consider the function y = f (x1 , x2 ) and let f (x1 , x2 ) = c, where c is a constant,
denote a level curve of f . Suppose that f is homogeneous of degree k (HOD(k)) and
C1 . Then the slope of the level curve is a function of the ratio x2 /x1 . In symbols,
x2
dx2
=g
dx1
x1


It follows that if we let x2 /x1 = t, where t is a constant, then the slope of the level curve
is also constant and equal to the number g(t).
A simple example is the case where f is Cobb-Douglas. Consider the function f (x1 , x2 ) = Ax1 x1
2
where A > 0 and 0 < < 1. This function is HOD(1). Then either by taking differentials of the
equation for the level curve or simply by applying the implicit function theorem, we get
f1 (x1 , x2 )

dx2
x2
=
=
dx1
f2 (x1 , x2 )
1 x1


Therefore, the slope of a level curve of f is a function of the two variables x1 and x2 . But in
accordance with the above result we can further say the slope is a function of the ratio of the two

z.) As a result, if we hold the ratio

variables. (What is g? Letting z = xx21 , we have g(z) = 1

t.
constant, say, set it equal to t, the slope is constant and equal to 1
What is the interpretation of this result? Suppose f is a production function. Then the absolute value of the slope is the marginal rate of substitution (MRS) between inputs and the above
result says: if we change both inputs by the same proportion (e.g., we double the amount of each
input), the MRS will not change.
This result can be obtained by first taking into account the following result:
Eulers Theorem: If f is C1 , then it is homogeneous of degree k iff
x1 f1 (x1 , x2 ) + x2 f2 (x1 , x2 ) = kf (x1 , x2 )

(1)

So, the theorem says two things: (a) if f is HOD(k), then summing up the (values of the) firstorder derivatives of f with the variables as weights gives the value of the function multiplied by
the degree of homogeneity k; (b) if (1) holds, then f is HOD(k). (The theorem generalizes to n
variables and has several uses in economics.)
Now assume f is C2 and differentiate (1) above w.r.t. to x1 to get
f1 + x1 f11 + x2 f21 = kf1
Taking into account Youngs theorem (f12 = f21 ) and collecting terms gives
x1 f11 + x2 f12 = (k 1)f1
1

which according to Eulers theorem means that the function f1 (i.e., the first-order derivative of f
w.r.t. to x1 ) is homogeneous of degree k 1. It is easy to show that the same is true for f2 . In
summary, we have
fi (tx1 , tx2 ) = tk1 fi (x1 , x2 ), where i = 1, 2
(2)
Now we can obtain the result at the beginning of the handout by letting t = 1/x1 (with x1 > 0) in
(2)
fi ((1/x1 )x1 , (1/x1 )x2 ) = (1/x1 )k1 fi (x1 , x2 )
or equivalently
fi (x1 , x2 ) = xk1
1 fi (1, x2 /x1 ) for i = 1, 2
Using this, substitute in the expression for the slope to obtain the result:
x2
f1 (x1 , x2 )
xk1 f1 (1, x2 /x1 )
f1 (1, x2 /x1 )
dx2
=
= 1k1
=g
=
dx1
f2 (x1 , x2 )
f2 (1, x2 /x1 )
x1
x1 f2 (1, x2 /x1 )


homothetic functions: Is the slope of the level curve a function of the ratio only for homogeneous functions? NO. Any strictly increasing function of a HOD(k) function has this property. Such
functions, i.e, positive monotonic transformations of homogeneous function, are called homothetic
functions. (The textbook has a more general definition but this loose one suffices for our purposes.)
As an example, take the logarithmic transformation of the Cobb-Douglas function given previously:
w(x1 , x2 ) = lnf (x1 , x2 ) = lnA + lnx1 + (1 )lnx2
(where xi > 0). The function w is clearly not homogeneous. But it is homothetic. It is easy to
verify that the slope of a level curve of w is a function of the ratio x2 /x1 , as expected. (In this case,
the expression for the slope is identical to that found for f .) In microeconomics, when you hear Is
the function homothetic? it means Is the slope the level curve a function of the ratio? (assuming
the slope exists of course, i.e., the function is differentiable...)
Examples:
(1) Is the function f (x1 , x2 ) = x1 + x2 homothetic? Yes, because it is HOD(1).
(2) Is the function f (x1 , x2 ) = x21 + x1 x2 homothetic? Yes, because f is HOD(2).
2
2
(3) Is the function whose level curve has slope dx
= 2x1x+x
homothetic? Yes, because
dx1
1
dx2
x2
= 2
dx1
x1
the end