Topic 7

Constrained Optimisation

M.SC. (ECONOMICS)

MATHS AND STATISTICS

SEPTEMBER, 2017

Anuj Pratap Singh Trinity College Dublin

 Optimisation with Equality Constraint

Unconstrained Optimisation, as discussed in previous lectures, allowed the firm to chose any

values of ‘Q1’ and ‘Q2’ as per the optimisation conditions without any limitations.

If the firm begins to face a production quota such as ‘Q1+Q2=500’, then in such a scenario, the

choice of ‘Q1’ shall be dependent upon the choice of ‘Q2’.

Higher ‘Q1’ shall mean lower ‘Q2’, and simultaneously it would be required to stay within the

limits of the combined allocated quota of 500.

The new optimum values reached constitute Constrained Optimum, which, in general, may be

different from the unconstrained optimum.

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 Effects of a Constraint

If we consider a consumer’s Utility function (U) as: 𝑈 = 𝑥1 𝑥2 + 2𝑥1

𝜕𝑈 𝜕𝑈
The partial derivatives 𝑈1 ≡ and 𝑈2 ≡ are positive for all
𝜕𝑥1 𝜕𝑥2
levels of 𝑥1 and 𝑥2 , hence to maximise U without any constraint the
consumer should purchase infinite amount of both goods, which
does not hold any practical relevance.
If a consumer holds a sum of $60 and if the price of goods is $4 and
$2, then the budget constraint can be written as: 4𝑥1 + 2𝑥2 = 60.
(Class Example)

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 Lagrange-Multiplier

The Lagrange method allows to convert a constrained-extremum problem into a

form in which First Order Condition of the free extremum can be still applied.

The previous problem could be written as follows in a Lagrangian function:

𝑍 = 𝑥1 𝑥2 + 2𝑥1 + 𝜆(60 − 4𝑥1 − 2𝑥2 )

The ‘𝜆’ is called the Lagrange Multiplier.

In general, given an objective function z=f(x,y) s.t. constraint g(x,y)=c; we can write
the Lagrangian function as: 𝑍 = 𝑓 𝑥, 𝑦 + 𝜆 𝑐 − 𝑔 𝑥, 𝑦 .

‘Z’ is thus regarded as the function of 𝜆, x, and y with necessary conditions as the
partial derivatives of ‘Z’ as 𝑍𝜆 , 𝑍𝑥 , 𝑍𝑦 .

(Class Example)

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 The Second Derivative Bordered Hessian

Similar to the case of unconstrained optimisation, it is possible to express the second-order conditions for

extremum in determinantal form for constrained optimisation.

In place of a Hessian Determinant, in a constrained setup, we form a Bordered-Hessian.

Adding the constraint g(x,y)=c into the previous optimisation problem, it is implied that 𝑔𝑥 𝑑𝑥 + 𝑔𝑦 𝑑𝑦 = 0,

since ‘c’ is a constant.

In the present case we are concerned for the sign-definiteness or semi-definiteness of 𝑑2𝑧 not for all possible

values of dx and dy but for those values which satisfy the constraint 𝑔𝑥 𝑑𝑥 + 𝑔𝑦 𝑑𝑦 = 0.

Hence the sufficient S.O.C are:

𝑚𝑎𝑥𝑖𝑚𝑢𝑚 − 𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑑𝑒𝑓𝑖𝑛𝑖𝑡𝑒 𝑠. 𝑡. 𝑑𝑔 = 0

𝑞 𝑜𝑟𝑑2𝑧
𝑚𝑖𝑛𝑖𝑚𝑢𝑚 − 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑑𝑒𝑓𝑖𝑛𝑖𝑡𝑒 𝑠. 𝑡. 𝑑𝑔 = 0

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 ..cont’d

Therefore, we can state that:

0 𝛼 𝛽
𝑛𝑒𝑔𝑎𝑡𝑖𝑣𝑒 𝑑𝑒𝑓𝑖𝑛𝑖𝑡𝑒 𝑠. 𝑡. αu+βv=0 >0
𝑞 𝑖𝑠 𝑖𝑓𝑓 𝛼 𝑎 ℎ
𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑑𝑒𝑓𝑖𝑛𝑖𝑡𝑒 𝑠. 𝑡. αu+βv=0 <0
𝛽 ℎ 𝑏
The determinant used in the above criterion is the discriminant of the
original quadratic form, with a border placed on the top and left. The
bordered discriminant is symmetric.
𝑍𝑥𝑥 𝑍𝑥𝑦 𝑎 ℎ
The discriminant shown above consist of the Hessian ( )
𝑍𝑥𝑦 𝑍𝑦𝑦 ℎ 𝑏
and the border is composed of 𝑔𝑥 and 𝑔𝑦 .
0 𝑔𝑥 𝑔𝑦
In all the Bordered Hessian can be written as: 𝑔𝑥 𝑍𝑥𝑥 𝑍𝑥𝑦 denoted as
𝑔𝑦 𝑍𝑥𝑦 𝑍𝑦𝑦
𝐻
(Class Example)

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 Topic 8
Constrained Optimisation with Inequality
Constraints

M.SC. (ECONOMICS)

MATHS AND STATISTICS

SEPTEMBER, 2017

Anuj Pratap Singh Trinity College Dublin

 Non-Negative Constraints

Taking a single variable case:

To Maximise: 𝜋 = 𝑓(𝑥1 ) subject to 𝑥1 ≥ 0 shown in figure.

In case (a) if a local maxima of ‘𝜋’ exist in the interior of the feasible region, such as
point ‘A’ then we have an interior solution.

In case (b), the local maximum can also occur on a vertical axis where ‘x=0’. Here
we have a boundary solution and the F.O.C remains valid, i.e. 𝑓′(𝑥1 ) = 0.

As a third possibility, the local maxima can occur at point ‘C’ and ‘D’ because to
qualify as a maximum, the point should be higher than the neighbouring points in
the feasible region. This can be categorised by 𝑓′(𝑥1 ) = 0 and 𝑓′(𝑥1 ) < 0, however
the condition such as 𝑓′(𝑥1 ) > 0 should be ruled out due to the fact that a maximum
can never occur if the curve is upward-sloping.

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 ..cont’d

The main conclusion from the previous discussion is that for a value of 𝑥1 to give a local maximum of 𝜋 it must

satisfy one of the following conditions:

Point A: 𝑓′(𝑥1 ) = 0 and 𝑥1 > 0

Point B: 𝑓′(𝑥1 ) = 0 and 𝑥1 = 0

Point C&D: 𝑓′(𝑥1 ) < 0 and 𝑥1 = 0

These conditions can be combined into following:

𝑓′(𝑥1 ) ≤= 0 , 𝑥1 ≥ 0 and 𝑓′(𝑥1 ). 𝑥1 = 0

The first two conditions are straightforward, however the third condition requires at least one of either ‘𝑥1 ’ or

‘𝑓′(𝑥1 )’ to be equal to zero, so that there product is also zero.

This feature is called the Complementary Slackness condition.

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 Complementary Slackness

The condition 𝑓′(𝑥1 ) ≤= 0 , 𝑥1 ≥ 0 and 𝑓′(𝑥1 ). 𝑥1 = 0 taken together constitute the

F.O.C for a local maximum where the choice variable must be non-negative.

These condition however can be deemed as necessary conditions for a global

maximum as it should be a local maximum and should also satisfy the conditions
for a local maximum.

Now with a multivariate case such as:

Maximise: 𝜋 = 𝑓(𝑥1 , 𝑥2 , 𝑥3 , 𝑥4 . . ) subject to 𝑥𝑗 ≥ 0 where (j=1,2,3,4..), the classical F.O.C

(𝑓1 , 𝑓2 , 𝑓3 , 𝑓4 . . ) must be modified with the following:

𝑓′(𝑥𝑗 ) ≤= 0 , 𝑥𝑗 ≥ 0 and 𝑓′(𝑥𝑗 ). 𝑥𝑗 = 0 𝑓𝑜𝑟 (𝑗 = 1,2,3,4. . ), where 𝑓′(𝑥𝑗 ) is the partial

𝝏𝝅
derivative 𝝏𝒙 .
𝒋

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 Kuhn-Tucker Theorem

With Kuhn-Tucker optimization, we maximize objective functions subject to inequality constraints. In

particular, we solve problems such as:
max 𝑢(𝑥, 𝑦) 𝑠𝑢𝑏𝑗𝑒𝑐𝑡 𝑡𝑜 𝑝𝑥 + 𝑞𝑦 ≤ 𝑚

To solve such type of problem we set up the usual Lagrangian and impose two conditions:
𝜆 ≥ 0 𝑎𝑛𝑑 𝜆. 𝑚 − 𝑝𝑥 − 𝑞𝑦 = 0

The first condition says that ‘𝜆’ which is the marginal utility of income is either positive or zero, which makes
sense because an extra income does not make anyone worse off.

The second condition is the Complementary Slackness which says that either both ‘𝜆 and 𝑚 − 𝑝𝑥 − 𝑞𝑦 ’ is
equal to zero, or either of them is equal to zero.

If ‘𝜆 > 0’ then there is positive marginal utility of income which would mean that the entire income shall be
consumed and so ‘ 𝑚 − 𝑝𝑥 − 𝑞𝑦 = 0’. By contrast, if ‘𝜆 = 0’ then we can either have ‘𝑚 > 𝑝𝑥 + 𝑞𝑦 or 𝑚 = 𝑝𝑥 +
𝑞𝑦’. Hence it could be said either some income will be left unspent or a person shall spend his entire income,
get satiated and derive no further utility from extra income.

(Class Example)

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