Convex Functions versus Convex Sets

• Having clarified the meaning of the adjective convex as applied to a

function, we must hasten to explain its meaning when used to
describe a set.
• Generally speaking, to qualify as a convex set, the set of points must
contain no holes, and its boundary must not be indented anywhere.
Let us begin with the geometric characterization of a convex set. Let S be a set of points in
a 2-space. If, for any two points in set S, the line segment connecting these two points lies
entirely in S, then S is said to be a convex set. It should be obvious that a straight line
satisfies this definition and constitutes a convex set.
The disk namely, the “solid” circle, a circle plus all the points within it—is a
convex set, because a line joining any two points in the disk lies entirely in
the disk, as exemplified by ab (linking two boundary points) and cd (linking
two interior points).
However, that a (hollow) circle is not in itself a convex set.
Similarly, a triangle, or a pentagon, is not in itself a convex set, but its solid
version is.
The palette-shaped figure is indented; thus a line segment such as gh does
not lie entirely in the set.
In the key-shaped figure, moreover, we find not only the feature of
reentrance, but also the presence of a hole, which is yet another cause of
nonconvexity.
The concept of convex combination of vectors (points), which is a
special type of linear combination. A linear combination of two vectors
u and v can be written as:
where 𝑘1 and 𝑘2 are two scalars.
When these two scalars both lie in the closed interval [0, 1] and add up
to unity, the linear combination is said to be a convex combination, and
can be expressed as;
In view of the preceding, a convex set may now be redefined as
follows:
A set S is convex if and only if, for any two points u ∈ S and v ∈ S, and
for every scalar θ ∈ [0, 1], it is true that w = θ u + (1 − θ )v ∈ S .
Comparison of a convex set with convex function:
In describing a function, the word convex specifies how a curve or
surface bends itself (valley form).
But in describing a set, the word specifies how the points in the set are
“packed” together—they must not allow any holes to arise, and the
boundary must not be indented.
Economic Applications
Example 1: Problem of a Multiproduct Firm:
Let us assume a two-product firm under circumstances of pure
competition. With pure competition the prices of both commodities
must be taken as exogenous, these will be denoted by 𝑃10 and 𝑃20 ,
respectively. Accordingly, the firm’s revenue function will be;

where Q represents the output level of the ith product per unit of time.
i
The firm’s cost function is assumed to be;
Since |H | = −4 < 0 and |H | = 15 > 0, the Hessian matrix (or d z) is
1 2 2

negative definite, and the solution does maximize the profit.

In fact, since the signs of the leading principal minors do not depend on
where they are evaluated, d z is in this case everywhere negative
2

definite.
Thus, the objective function must be strictly concave, and the
maximum profit just found is actually a unique absolute maximum.
• Example 2: Monopoly
Price Discrimination
For a change of pace, this time let us use three choice variables, i.e.,
assume three separate markets. Also, let us work with general rather
than numerical functions. Accordingly, our monopolistic firm will simply
be assumed to have total-revenue and total-cost functions as follows:
Input Decisions of a Firm