Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Aleksander Berentsen
Mathematical Excursus: Optimization Assistant Daniel Müller
(Based on Jehle, Geoffrey A, and Philip J. Reny (2001): Advanced Microeconomic Theory,
2nd Ed., Addison Wesley (S.498-509))
We obtain the solution by setting the partial derivative(s) for the x variables and the constraint
equal to zero.
1 of 6
Advanced Microeconomics WS 09/10 Prof. Aleksander Berentsen
Mathematical Excursus: Optimization Assistant Daniel Müller
x∗ f 0 (x∗ ) = 0.
This condition alone, however, is not sufficient. Let us reconsider case 3: Though the above
x = 0, e
condition is satisfied at e x cannot be a maximum, as f 0 (x∗ ) > 0. We can now formulate
a further condition: The function cannot increase if x increases; i.e.,
f 0 (x∗ ) ≤ 0.
Together with the constraint itself, we have three conditions that characterize the maximum of
the above optimization problem:
1. f 0 (x∗ ) ≤ 0
x∗ f 0 (x∗ ) = 0
2.
3. x∗ ≥ 0.
The respective conditions for a minimum of the same optimization would be:
1. f 0 (x∗ ) ≥ 0
x∗ f 0 (x∗ ) = 0
2.
3. x∗ ≥ 0.
2 of 6
Advanced Microeconomics WS 09/10 Prof. Aleksander Berentsen
Mathematical Excursus: Optimization Assistant Daniel Müller
the solution(s). These conditions are called Kuhn-Tucker conditions 1 . In order to obtain
these conditions, we convert the problem into one with a secondary condition that holds with
equality and nonnegative constraints. We define the variable z as the additional amount by
which g is greater than zero. We can thus rewrite the problem as:
max f (x1 , x2 ) s.t. g (x1 , x2 ) − z = 0
x
z ≥ 0.
We can solve the first half of the maximization using the Lagrangian. We have just seen how we
have to modify the Lagrangian method in order to account for the second half of this problem
- the nonnegativity constraint. First, we form the Lagrangian for:
L = f (x1 , x2 ) + λ g (x1 , x2 ) − z
We now wish to maximize the Lagrangian subject to z ≥ 0. The solution thus has to satisfy the
following first-order conditions:
L1 = f1 + λg1 = 0 (1)
L2 = f2 + λg2 = 0 (2)
Lλ = g (x1 , x2 ) − z = 0 (3)
Lz = −λ ≤ 0 (4)
zLz = z (−λ) = 0 (5)
z ≥ 0. (6)
If we consider conditions 3, 5 and 6, we see that we can eliminate the z-term. If we multiply
condition 5 by −1 and rewrite the other two, we obtain:
z = g (x1 , x2 )
zλ = 0
z ≥ 0.
If we use the first to substitute for z in the other two, we obtain:
λg (x1 , x2 ) = 0
g (x1 , x2 ) ≥ 0.
Hence we obtain the Kuhn-Tucker conditions:
1. f1 + λg1 = 0
2. f2 + λg2 = 0
3. λg (x1 , x2 ) = 0
4. λ ≥ 0, g (x1 , x2 ) ≥ 0.
3 of 6
Advanced Microeconomics WS 09/10 Prof. Aleksander Berentsen
Mathematical Excursus: Optimization Assistant Daniel Müller
2. Value Functions
There are often optimization problems of the following kind:
where x is a choice variable, and a a parameter that is contained in the objective function, the
constraint, or in both. Let us assume that a unique solution exists for a and denote this as
x∗ (a). We can now define a new function v (a) with this that gives the value of the objective
function if x maximizes the objective function f subject to the constraints. v (a) is then the
maximum-value function.
If we evaluate the objective function f (x, a) at the optimum x∗ (a), the value function will be
maximized. We can also define the maximum-value function as follows:
A maximum-value function is also an objective function where the choice variables (x) assume
their maximum value. The maximum value of these choice variables are themselves functions
of the parameter (a). The maximum-value function is thus implicitly only dependent on the
parameters. It is therefore also called the indirect objective function.
Analogously to the maximum-value function one can also construct a minimum -value function.
Examples of this from the lecture are the indirect utility function or the expenditure function.
An example:
The following function is given:
This function has a unique maximum where the following FOC is satisfied:
a1 xa1 −1 − a2 = 0.
4 of 6
Advanced Microeconomics WS 09/10 Prof. Aleksander Berentsen
Mathematical Excursus: Optimization Assistant Daniel Müller
Let L (x, a, λ) be the associated Lagrangian function, and let x∗ (a) and λ∗ (a) be the respective
values that solve the Kuhn-Tucker conditions. It then follows that:
dm (a) ∂L
=
∂a x∗ (a),λ∗ (a)
da
5 of 6
Advanced Microeconomics WS 09/10 Prof. Aleksander Berentsen
Mathematical Excursus: Optimization Assistant Daniel Müller
Literature:
Most current textbooks generally have an additional chapter or an appendix on optimization;
for example:
Jehle, Geoffrey A, and Philip J. Reny (2001): Advanced Microeconomic Theory, 2nd Ed., Ad-
dison Wesley (S.498-509), or
Varian, Hall R. (1992): Microeconomic Analysis, 3rd Ed., W. W. Norton & Company (Chapter
27).
A comprehensive treatment of optimization problems can be found in the Maths standard work:
Chiang, Alpha C. and Kevin Wainwright (2005): Fundamental Methods of Mathematical Eco-
nomics, 4th Edition, McGraw-Hill.
Simon, Carl P. and Lawrence Blume (1994): Mathematics for Economists , W.W. Norton &
Company, Inc.
An introduction to optimization is also offered by the Lecture Notes of Sten Nyberg of Stock-
holm University under: http://people.su.se/∼ snybe/aml01.pdf.
6 of 6