The quadratic function is also homogeneous, but of the second degree; therefore, there are increasing returns to scale in this case.
Let us now consider the cubic function in (5.6):
Q = aLK + bL2k + cLK2 + dL3k + eLK3
This function is not homogeneous since the first term will be multiplied by λ2, the next two terms will be multiplied by λ 3 and the last two terms will be multiplied by λ 4. Since the first three terms are generally positive while the last two are negative we cannot say anything about the type of returns to scale in general. As we have already seen with the cubic function in (5.8), there are increasing returns to scale to begin with and then decreasing returns.
c. Cobb–Douglas production functions
Finally let us consider the Cobb–Douglas production function in (5.7):
Q=aLb Kc
When inputs are both increased by l, the resulting output is given by:
a(λLb) (λKc) = λ b+c (aLb Kc)
Thus this type of production function featuring constant output elasticities is homogeneous of order (b+c). This in turn tells us about the type of returns to scale that will occur; any increase in inputs of 1 per cent will increase output by (b+c) per cent:
1 If b+c=1 there are CRTS: a 1 per cent increase in inputs will increase output by 1 per cent.
2 If b+c>1 there are IRTS: a 1 per cent increase in inputs will increase output by > 1 per cent.
3If b+c