Optimization Techniques

MULTIVARIATE OPTIMIZATION

In this section we first introduce the concept of the partial derivative, which is indicated by the
symbol  (as compared to d for the derivative). Partial derivative is its derivative with respect to
one of those variables, with the others held constant (as opposed to the total derivative, in which
all variables are allowed to vary).

Maximizing a Multivariate Function

To maximize or minimize a multivariable function, we must set each partial derivative equal to
zero and solve the resulting set of simultaneous equations for the optimal value of the independent
or right-hand variables.

Example:
π = 80𝑋 − 2𝑋 2 − 𝑋𝑌 − 3𝑌 2 + 100𝑌 (2-4)

we set  π/  X and  π/  Y equal to zero and solve for X and Y.

Specifically

 π/  X = 80𝑋 − 2𝑋 2 − 𝑋𝑌 = 0
 π/  X = 80(1)(𝑋)1−1 − 2(2)(𝑋)2−1 − (1)(1)(𝑋)1−1 𝑌 = 0
 π/  X = 80 − 4𝑋 − 𝑌 = 0

 π/  Y = −𝑋𝑌 − 3𝑌 2 + 100𝑌
 π/  Y = −𝑋(1)(1)(𝑌)1−1 − 3(2)(𝑌)2−1 + 100(1)(𝑌)1−1 = 0
 π/  Y = −𝑋 − 6𝑌 + 100 = 0

Multiplying the first of the above expressions by −6, rearranging the second and adding, we get

80 − 4𝑋 − 𝑌 = 0 (−6)
100 − 𝑋 − 6𝑌 = 0
−480 + 24X + 6Y = 0
100 − X – 6Y = 0
−380 + 23X =0
Therefore, X = 380/23 ≈ 16.52.
Substituting into the first expression of the partial derivative set equal to zero, and solving
for Y, we get
80 – 4X –Y=0
80 – 4(380/23) – Y = 0
Y= ≈ 13.92

−𝑋 − 6𝑌 + 100 = 0
−6𝑌 = −100 + 16.52
−6𝑌 −83.48
=
−6 −6
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Therefore, Y = 80 – 66.08 ≈ 13.92.

Thus, the firm maximizes π when it sells 16.52 units of commodity X and 13.92 units of
commodity Y. Substituting these values into the π function, we get the maximum total profit of the
firm

π = 80 X − 2 X 2 − XY − 3Y 2 + 100Y
π = 80(16.52) − 2(16.52)2 − (16.52)(13.92) − 3(13.92)2 + 100(13.92)
= 𝑃ℎ𝑝1,356.52

CONSTRAINED OPTIMIZATION

Most of the time, managers face constraints in their optimization decisions. For example, a firm
may face a limitation on its production capacity or on availability of skilled personnel and crucial
raw materials. It may also face legal and environmental constraints. In such cases we have a
constrained optimization problem, i.e., the maximizing or minimizing of an objective function
subject to some constraints. Constrained optimization problems can be solved by substitution or
by the Lagrangian multiplier method.

Constrained Optimization by Substitution

A constrained optimization problem may be solved by first solving the constraint equation for one
of the decision variables, and then substituting the expression for this variable into the objective
function that the firm seeks to maximize or minimize.

For example, suppose that the firms seek to maximize its total-profit function given by
π = 80 X − 2 X 2 − XY − 3Y 2 + 100Y (2-4)

but faces the constraint that the output of commodity X plus the output of commodity Y must be
12. That is,
X + Y = 12 (2-5)

To solve this optimization problem by substitution, we can solve the constraint function for X,
substitute the value of X into the objective function (π) that the firm seeks to maximize, and then
apply the procedure for maximizing an unconstrained objective function shown in the previous
section. Specifically, solving the constraint function for X, we get

X = 12 – Y

Substituting the above constraint expression for X into the objective profit function, we obtain

π = 80𝑋 − 2𝑋 2 − 𝑋𝑌 − 3𝑌 2 + 100𝑌
π = 80(12 − 𝑌) − 2(12 − 𝑌)2 − (12 − 𝑌)𝑌 − 3𝑌 2 + 100𝑌
π = 960 − 80𝑌 − 2(144 − 24𝑌 + 𝑌 2 ) − 12𝑌 + 𝑌 2 − 3𝑌 2 + 100𝑌

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π = 960 − 80𝑌 − 288 + 48𝑌 − 2𝑌 2 − 12𝑌 + 𝑌 2 − 3𝑌 2 + 100𝑌

π = −4𝑌 2 + 56𝑌 + 672
To maximize the above (unconstrained) profit function, we find the first derivative of π with
respect to Y, set it equal to zero, and solve for Y. That is,

𝜋 = −4𝑌 2 + 56𝑌 + 672

𝑑𝜋
= −8𝑌 + 56 = 0
𝑑𝑌
𝑑𝜋 56 8𝑌
= =
𝑑𝑌 8 8

Therefore, Y = 7.
Substituting the constraint function, we get X = (12 – Y) = (12 – 7) = 5. Thus, the firm
maximizes total profits when it produces 5 units of commodity X and 7 units of commodity Y (as
compared with X = 16.52 and Y = 13.92 when the firm faced no output constraints). With X = 5
and Y = 7
π = 80𝑋 − 2𝑋 2 − 𝑋𝑌 − 3𝑌 2 + 100𝑌
𝜋 = 80(5) − 2(5)2 − (5)(7) − 3(7)2 + 100(7)
𝑃ℎ𝑝868

as compared with Php1,356.52 found earlier in the absence of any output constraint.

Constrained Optimization by the Lagrangian Multiplier Method

When the constraint equation is too complex and cannot be solved for one of the decision variables,
in such cases we may resort to the Lagrangian multiplier method. The first step in this method
is to form a Lagrangian function. This is given by the original objective function that the firm
seeks to maximize or minimize plus  (the Greek letter lambda that is conventionally used for the
Lagrangian multiplier) times the constraint function set equal to zero, the Lagrangian function can
also be treated as an unconstrained optimization problem, and its solution will always be identical
to the constrained optimization problem.

As an illustration, we show how the constrained profit maximization problem that was
solved in the previous section by substitution can be solved by the Lagrangian multiplier method.

To do so, we first set the constraint function (that is, X + Y = 12) equal to zero and obtain

0 = −X − Y + 12

We then multiply this form of the constraint function by  and add it to the original profit function
we seek to maximize (i.e., to π = 80X – 2X2 – XY – 3Y2 + 100Y) to form the Lagrangian function
(Lπ). That is,

𝐿𝜋 = 80𝑋 − 2𝑋 2 − 𝑋𝑌 − 3𝑌 2 + 100𝑌 + 𝜆(−𝑋 − 𝑌 + 12) (2-6)

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The above Lagrangian function (Lπ) can be treated as an unconstrained function in three unknowns:
X, Y, and λ. Now, the solution that maximizes L also maximizes π.

To maximize Lπ, we set the partial derivative of Lπ with respect to X, Y, and λ equal to zero, and
solve the resulting set of simultaneous equations for the values of X, Y, and λ. Finding the
partial derivative of Lπ with respect to X, Y, and λ, and setting them equal to zero, we get

𝐿𝜋 = 80𝑋 − 2𝑋 2 − 𝑋𝑌 − 3𝑌 2 + 100𝑌 + 𝜆(−𝑋 − 𝑌 + 12)

𝝏𝑳𝝅
= 𝟖𝟎 − 𝟒𝑿 − 𝒀 − 𝝀 = 𝟎 (𝟐 − 𝟕)
𝝏𝑿

𝝏𝑳𝝅
= −𝑿 − 𝟔𝒀 + 𝟏𝟎𝟎 − 𝝀 = 𝟎 (𝟐 − 𝟖)
𝝏𝒀

𝝏𝑳𝝅
= −𝑿 − 𝒀 + 𝟏𝟐 = 0 (𝟐 − 𝟗)
𝝏𝝀

Note that Equation 2-9 is equal to the constraint imposed on the original profit function of the firm.
Indeed, Lagrangian functions (2-6) was specifically set up so that when the partial derivative of Lπ
with respect for λ (the Lagrangian multiplier) is set equal to zero, not only the constraint of the
problem is satisfied but the Lagrangian function (Lπ) reduces to the original unconstrained profit
function (π), so that the optimal solution of both functions is identical.

To find the value of X, Y, and λ that maximizes Lπ and π, we solve simultaneously Equations 2-7,
2-8, and 2-9. To do this, subtract Equations 2-8 from 2-7 and get

80 − 4𝑋 − 𝑌 − 𝜆 = 0
100 − 𝑋 − 6𝑌 − 𝜆 = 0 (−1)
−20 – 3X + 5Y = 0 (2-10)

Multiplying Equations 2-9 by −3 and adding it to Equation 2-10, we obtain

−𝑋 − 𝑌 + 12 = 0 (−3)
−3𝑋 + 5𝑌 − 20

3X + 3Y − 36 = 0
−3X + 5Y – 20 = 0
8Y – 56 = 0
8𝑌 56
= =𝒀=𝟕
8 8

−𝑋 − 𝑌 + 12 = 0
−𝑋 − 7 + 12 = 0
−𝑋 + 5 = 0

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𝑿=𝟓

Therefore, Y = 7 and X = 5, so that π = Php868 (as the previous section). Finally, substituting the
values of X = 5 and Y = 7 into either Equations 2-7 or 2-8 we get the value of λ. That is,
Let us use Equation 2-7

𝟖𝟎 − 𝟒𝑿 − 𝒀 − 𝝀 = 𝟎
𝟖𝟎 − 𝟒(𝟓) − 𝟕 = 𝝀
𝟖𝟎 − 𝟐𝟎 − 𝟕 = 𝝀
𝟓𝟑 = 𝝀
𝝀 = 𝟓𝟑

The value of λ has an important economic interpretation. It is the marginal effect of the objective-
function solution associated with a 1-unit change in the constraint. In the above problem, this
means that a decrease in the output capacity constraint from 12 to 11 or an increase to 13 units will
reduce or rise, respectively, the total profit of the firm (π) by about Php53.

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