Economics • Economic BasicsHard
What does the 'Euler's Theorem' on distribution state in the context of marginal productivity theory?
A. Total output is exhausted exactly when every factor of production is paid according to its average physical product under decreasing returns to scale
B. Total output is completely distributed among factors of production according to their marginal products if and only if the production function exhibits constant returns to scale✓ Correct Answer
C. Factor payments exceed total revenue under increasing returns to scale
D. Marginal cost equals average revenue only when fixed costs are zero
💡 Solution & Explanation
Euler's theorem for homogeneous functions states that if a production function exhibits constant returns to scale, multiplying each factor input by its marginal product and summing them yields the exact total output. If returns are increasing or decreasing, the summation will fail to exhaust or will exceed total output. This theorem provides the mathematical foundation for marginal productivity theory in neoclassical economics. Leonhard Euler originally formulated this mathematical principle.
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