15 Kuhn -Tucker conditions There is a systematic approach to inequality-constrained

maximisation—a.k.a. concave programming or nonlin-

ear programming.
Consider a version of the consumer problem in which
1
quasilinear utility x12 + 14 x2 is maximised subject to To be explicit the full set of restrictions for the 2 good
consumer problem is not p1x1 + p2x2 = m but
x1 +x2 = 1. Mechanically applying the Lagrange mul-
tiplier/common slopes technique produces p1x1 + p2x2 − m ≤ 0
−x1 ≤ 0
−x2 ≤ 0
5
The aspect I emphasise is that the constraints are in-
4
equalities. We have seen how the Lagrange multiplier
3 method for dealing with one equality constraint ex-
x1
2 tends naturally to the case of several constraints. If
1
we wish to maximise f (x) subject to g(x) = b and
h(x) = c, we work with the Lagrangian
-5 -4 -3 -2 -1 0 1 2
x2
L(x, λ, µ) = f (x) − λ [g(x) − b] − µ [h(x) − c]
Negative quantity!
with a multiplier for each constraint. (See Dixit 24ff)

The tangency solution violates an unspoken economic The inequality constrained optimisation problem (SH
requirement x2 ≥ 0. 682) is:
 • Maximise the objective function f (x) where f : The method of Kuhn-Tucker multipliers is a variation
Rn → R on the Lagrange multiplier method. If all the con-
straints are binding then the Lagrange method will
produce the same results as KT.
• subject to the constraints gj (x) ≤ 0 where gj :
Rn → R and j = 1, ..., m. The Kuhn-Tucker approach involves forming the La-
grangean in more or less the usual way
m
X
Terminology: The set of points satisfying the L = f (x) − λj gj (x)
j=1
constraints is called the constraint set, admissible set
or feasible set. If at the optimum x∗, gj (x∗) = 0 then with the same derivative with respect to the choice
the j-th constraint is binding ; if not, it is slack. If variables conditions
at least one constraint is binding then x∗ is on the ∂L
= 0, i = 1, ..., n or ∇L = 0.
boundary of the feasible set; if none are binding x∗ is ∂xi
an interior point. However the further conditions specify the interac-
tion between the multipliers and the constraints. The
complementary slackness conditions state
Example 15.1 In the consumer problems we have seen
the budget constraint is binding—all income is spent— λj ≥ 0 f or all i
because the consumer is never satiated. The con- λj = 0 whenever gj (x∗) < 0
straint −x2 ≤ 0 may be binding as in the situation If the constraint is slack the corresponding multiplier
pictured at the beginning of this section. is zero.
Solving this assortment of equalities and inequalities
in the n + m unknowns (choice variables and multipli- c = 2 : x∗ = 0 c = 0 : x∗ = 0
ers) is messier than the Lagrange method for equality
constrained problems.

To see how it works, consider a transparent case

c = −1 : x∗ = −1

Example 15.2 Maximise the (strictly concave) func-

To do the Kuhn-Tucker analysis, form the Lagrangean
tion y = 1 − x2 subject to x ≤ c. The optimal x∗ can
either be interior (< c) or on the boundary (= c) of L = 1 − x2 − λ(x − c).
the feasible set—which will depend on the value of c.
The K-T conditions are
The pictures show c = 2, 0, −1.
∂L
= −2x − λ = 0 ⇒ λ∗ = −2x∗
∂x
λ ≥ 0
λ = 0 if (x∗ − c) < 0
 ∂ (1−x2)
Remark 15.1 The conditions ∂L ∂x = ∂x −λ = 0
and λ ≥ 0 imply that the derivative at the maximum
cannot be negative. It is obvious that the derivative
cannot be negative at a maximum because a reduction
in x (this is always feasible) would then raise the value
of the objective.
Now for the three examples, c = −1, 0 and 2.
• c = −1 : there are 2 possibilities: x∗ = −1 or
x∗ < −1. The latter is impossible for it would
imply that λ∗ = 0 and hence x∗ = 0, a contra-
diction. So x∗ = −1.
• c = 0 : there are 2 possibilities: x∗ = 0 or x∗ < 0.
As before the latter is impossible. All the condi-
tions are satisfied when x∗ = 0.
• c = 2 : there are 2 possibilities: x∗ = 2 or x∗ < 2.
The former is impossible for it makes −2x∗ and
hence λ∗ negative.
Remark 15.2 Often the Kuhn-Tucker conditions are
used not for finding a solution but for providing infor-
mation about a solution. For example in the general
problem of maximising a strictly concave function sub-
ject to x ≤ c, the conditions imply that at a maximum
the slope cannot be negative.
16 Kuhn -Tucker theorem
There are lots of propositions linking the Kuhn-Tucker
conditions to the existence of a maximum. The con-
ditions can be interpreted as necessary conditions for
a maximum (compare the treatment of Lagrange mul-
tipliers in 8.2). Or, making strong assumptions about
f and gj , as sufficient conditions. That line is taken
in the next theorem.
Theorem 16.1 ( Kuhn-Tucker sufficiency) Consider the
inequality constrained optimisation problem with con-
cave objective and convex constraints: i.e. to max-
imise f (x) (where f : Rn → R) subject to the con-
straints gj (x) ≤ 0 where gj : Rn → R and j =
m
P
1, ..., m. Define L = f (x) − λj gj (x) and let x∗
j=1
be a feasible point. Suppose we can find numbers
λj such that ∇L(x∗) = 0, λj ≥ 0 f or all i and
λj = 0 whenever gj (x∗) < 0.
Then x∗ solves the maximisation problem
Proof. Since f is concave the supporting hyperplane
theorem takes the form
f (x) ≤ f (x∗) + ∇f (x∗)(x − x∗).
Using ∇L(x∗) = 0, we can write this as
X Remark 16.2 This theorem can be extended to apply
f (x) ≤ f (x∗) + λj ∇gj (x∗)(x − x∗).
The aim is to show that the sum term on the right is
not positive.
The multipliers associated with slack constraints will
be zero so we need only attend to the binding con-
straints gj (x∗) = 0. In such cases, since gj is convex
we have
0 ≥ gj (x) ≥ 0 + ∇gj (x∗)(x − x∗).
P
Because the λj are nonnegative, λj ∇gj (x∗)(x−x∗)
is not positive—as required.
Remark 16.1 Like Lagrange multipliers these Kuhn-
Tucker multipliers can be interpreted as measures of
the sensitivity of the maximum value to changes in the
constraint (10.2) but we won’t go into the details. See
SH 696.
to quasi-concave objective functions. Dixit 97ff dis-
cusses the extension.
17 Quasi-linear utility again 1. Because the objective function is strictly increasing
in x1 and x2 the budget constraint is binding —so λ0 >
0.
Return to the quasi-linear utility case and now incor-
porate all the inequality constraints and include prices
and income 2. The constraint −x1 ≤ 0, cannot bind for then
1
1 1 x− 2 would be infinitely large. So λ1 = 0.
Maximise u(x) x2
= 1 + αx2, α > 0 2 1
s.t. p1x1 + p2x2 − m ≤ 0,
3. The other constraint may or may not bind. Putting
−x1 ≤ 0,
this information about the budget constraint and λ1 =
−x2 ≤ 0.
0 into the Kuhn-Tucker conditions:
The Lagrangean L is
∂L 1 −1
1 = x1 2 − λ0p1 = 0,
x 2 +αx 2 −λ0(p1x1 +p2x2 −m)−λ1 (−x1 )−λ2 (−x2 ) ∂x1 2
1
∂L
The Kuhn-Tucker conditions are = α − λ0p2 + λ2 = 0,
∂x2
∂L 1 − 12 (p1x1 + p2x2 − m) = 0,
= x1 − λ0p1 + λ1 = 0
∂x1 2
λ2(−x2) = 0.
∂L
= α − λ0p2 + λ2 = 0
∂x2 Consider the possibility x2 = 0 : from the budget
λ0, λ1, λ2 ≥ 0 constraint we get
λ0(p1x1 + p2x2 − m) = 0 m
x1 =
λi(−xi) = 0, i = 1, 2. p1
and so
It is reasonable that the consumer always consume
à !− 1
∂L 1 m 2 some of the first good because marginal utility w.r.t.
= − λ0p1 = 0
∂x1 2 p1 it approaches infinity as x1 → 0 while marginal utility
à !1 w.r.t. the other good is constant at α.
1 1 2
λ0 =
2 p1m
∂L = 0
Putting this value into ∂x
2
à !1
∂L 1 1 2 18 Dynamic optimisation
=α− p2 + λ2 = 0
∂x2 2 p1m
But as λ2 ≥ 0 it must be the case that when x2 = 0,
In dynamic optimisation a time-path is chosen. Sim-
α satisfies
à !1 ple dynamic optimisation problems can be treated by
1 p22 2
the same methods as the static optimisation prob-
α≤
2 p1m lem. However dynamic problems have special features
So small values of α produce a corner solution. which often suggest a different treatment.

The interior solution x1, x2 > 0 is associated with

Example 18.1 Consider a simple T -period problem where
larger values of α and corresponds to the case λ1 =
a given stock b0 is consumer over T periods (formally
λ2 = 0.)
a variation on the consumer problem with logarithmic • One difference between static and dynamic opti-
utility) misation is that dynamic equations appear natu-
T
X rally in the latter.
max U(x) = δ t−1 ln xt
x
t=1

T • A second difference is that multiple constraints

X
s.t. xt = b0 (f ixed) (*) (one for each time period) are routine.
t=1
Form the Lagrangean
Example 18.2 (continues Ex. 18.1) In complicated prob-
T
X T
X
L(x, λ) = δ t−1 ln xt − λ( xt − b0) lems it is usually convenient to specify a ‘budget con-
t=1 t=1 straint’ for each time period. Thus the constraint (*)
and go through the usual steps to obtain a solution would appear as:
that involves
bt = bt−1 − xt, t = 1, ..., T ; b0 f ixed (**)
xt = δxt−1 for t = 2, ..., T
This law of motion describes how the available choco-
This kind of dynamic equation is called a difference
late stock evolves: the bars of chocolate left over at
equation and is characteristic of the discrete time for-
the end of period t equals the bars available at the end
mulation. If the problem were formulated in continu-
ous time a differential equation would appear at this of t − 1 less what has been consumed in period t. (*)
point. In more complicated problems diagonalising collapses these dynamic equations into one constraint
T
P
methods are used for investigating the properties of xt = b0, eliminating the b1, b2, ..., bT .
the solution. t=1
The Lagrange method extends to multiple constraints 18.1 Maximum principle
by introducing a multiplier for each constraint. Thus
here
T T
The maximum principle is widely used in Macroeco-
X X
L(x, λ) = δ t−1 ln xt − λt(xt − bt − bt−1). nomics, usually in its continuous time form. I will go
t=1 t=1 through a discrete time version to suggest where the
There are 2T equations to solve: T of the form Lt = 0 coninuous time forms come from.
and T making up (**).
A fairly general formulation covering the chocolate
Just as there is a sequence {x1, ..., xT } there is a se-
stock example and extensions to include production
quence of multipliers {λ1, ..., λT }. The usual algebra
and investment involves the choice variables c(1), ..., c(T );
produces conditions like
these symbols are easier on the eye than c1 etc.
xt λ
= δ t−1 .
xt−1 λt
The notation reflects the terminology of control the-
We already know that xt = δxt−1 and it turns out ory. There is a state variable s governed by an equa-
that λt is the same for all time periods.
tion of motion or state equation. The problem is to
choose a control variable sequence c to maximise a
• A third difference between static and dynamic value function. This may involve one or both of the
optimisation is the existence of specialised tech- state variable and the control variable.
niques for treating the latter—including (Pontrya- T
X
gin’s) maximum principle and dynamic program- max V (s, c) = v(s(t), c(t))
c
ming. t=1
 These conditions can be obtained as first order con-
s.t. s(t + 1) − s(t) = f (s(t), c(t)) (***) ditions involving a new function H (Hamiltonian) de-
for t = 1, ..., T and with s(1) and s(T + 1) fixed at fined for all t by
s1 and sT +1 respectively. (Other end conditions are H(s(t), c(t), λ(t)) ≡ v(s(t), c(t)) + λ(t)f (s(t), c(t).
possible.) Differentiating w.r.t. c(t) and s(t)
∂H
The Lagrangian is = 0, t = 1, ..., T
∂c(t)
T
X ∂H
L = v(s(t), c(t)) λ(t) − λ(t − 1) = − , t = 2, ..., T
∂s(t)
t=1
XT
− λ(t) [s(t + 1) − s(t) − f (s(t), c(t))]
t=1 18.1.1 In continuous time
In optimal control the λ’s are called co-state variables.
In the more usual continuous time formulation the
Differentiating w.r.t. c(t) and s(t) (writing partial problem is to choose the time path of consumption
derivatives using subscripts) the first order conditions c(t) to maximise
are ZT
V = v(s(t), c(t))dt
vc(t) + λ(t)fc(t) = 0, t = 1, ..., T
o
vs(t) − λ(t − 1) + λ(t) + λ(t)fs(t) = 0, t = 2, ..., T ds
s.t = f (s(t), c(t))
dt
The first order conditions for a maximum are condi- is the control variable. The choice of labels may not
tions on the partial derivatives of H, seem very natural—you control the chocolate stock by
consuming chocolate. In this example the state vari-
H(t, s(t), c(t), λ(t)) = v(t, s(t), c(t))+λ(t)f (t, s(t), c(t))
able does not appear in the objective function.
The first order conditions are
∂H
= 0 The Hamiltonian is
∂c
dλ ∂H H(t, k(t), x(t), λ(t)) = ln x(t)e−ρt − λ(t)x(t)
= − .
dt ∂s
The first order conditions are
. ∂H
Example 18.3 Logarithmic chocolate in continuous time. k = = −x(t)
Choose a consumption path x(t) to maximise ∂λ
. ∂H
λ = − =0
ZT ∂k
U(x(t)) = ln x(t)e−ρtdt ∂H e−ρt
= − λ(t) = 0
0 ∂x x(t)
subject to (writing k for the stock) .
The second condition λ= 0 is so simple because k
.
k = −x does not appear in the Hamiltonian; it implies that
k(0) = given λ(t) is constant So from the third condition
k(T ) = f ree x(t) ∝ e−ρt
In this case the chocolate stock is the state variable—its The time path of consumption is exponentially declining—
derivative appears in the constraint—and consumption and so is the chocolate stock.
THE END