Mathematical Methods in Economics

Chapter 2: Maximization under Constraints

Helmut Rainer

© Klaus Schmidt, 2001 / Till Stowasser, 2014 / Helmut Rainer, 2015

LMU, summer term 2022

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Lecture 5

2 / 28
Recap
Lagrange with non-negativity constraints

maxzc.tn ,
⼈)

Xnixzsubjeitgcxn.xnib.in theoptimumglxn.xz.ir b

o.lalhowsxitobeterointheopt.im
Xn ≥ 。

um 、

⼈ ≥

3 / 28
graphical.ly
2 0
X 0 X 2 .

ts ㄨ n n
i =
Xl GOVnersol-t.im z

1※
-

…… … … 。

1505
Xncornersolutiontorxz.io
, > o

^ X = o
z

4 / 28
Firstrrdevconditionsl.it
(x X27 - ⼊
Cgcxn XD b )
lnconxni0.tn
n

齻
-
, ,
,

⼆
t ⼊ ≤
g ⼀ 0
、 ,
ㄩ = 0 ⼈
Xn >

0. LI
~

gz
⼆
Zz ⼀ ⼊ E 0

lni-glxr.tn ⼗ b = 0
.

*, ≥

oxzzospeeialcase.Xnl.in
L.no/IXn=0.XzL2=Xz(tz-XSz)=O.
⼆
X-nl.tn ⼀
⼊
917 ⼆ 0

5 / 28
2.7 Example: Monopoly with Two Production Plants
Model setup
A monopoly produces a homogeneous product in production
plants with linear costs:

c1 = 5q1 and c2 = 6q2

The inverse demand function is

100 ≠ (q1 + q2 )

The profit function is

p-p.q-thewsttnnction.li
fi(q1 , q2 ) = [100 ≠ (q1 + q2 )](q1 + q2 ) ≠ 5q1 + 6q2

No constraints; only NNCs q1 > 0 and q2 > 0

noneg-ativ.ly wnstaints
6 / 28
Optimization problem

mextvcqn.hr?-no0lqrnt9D-l9n.t9vi-59s-o9v.9n.92S.t.9n30andqzz
,
0
.

⼆
F o C

H
ㄤ
n
= 1 0 0
-
2 1 9, ⼗ 9 v) -5 ≤ 0
.
Possimesowt.io ns

92 7 6 ≤ 0
2 l h + 1) h ^
lz
-

=
ㄤz = 1 0 0 -
o = o
.

7 92 0
97 ^
2 2
= o
97 3 0

- … … … '

4) 9ns

oiqzso.gr
9 1
元
n =
0

ㄤ z =
0
:

7 / 28
 Finding the correct solution candidate
9 = 0 11 9 2 = o
.
1

5 95

ocontradictim.icannotbeasolution.hn
ㄤn = 1 0 0 -

≤ 。 ≤

^
7 0 9 2
7 0
,

不 ⼆
1 0 0 t 2 1 97 + 92 ) 5 = 0

1
-

contadictimimosoluthn.iq
5 = 6
元2 ⼆
nootziq.tn )
-
6 =。

0
,
= o
^
9 2
3
.

*
4 7 ㄤn 2 47 5
1
ㄤn = 2
92 5 E 0 92 = 1 00 -

7 0 =
i
-
-
0 - -

. o
,

ㄤ2 6

EowntradictionINotthesowti.nl
=
1 2
0 0
92 o 1
-
-
=
.

8 / 28
.gs o
n
92 = 0
,

*
ㄤ 2 5 5

1
91 7
0 -
= 1 0
= 87
-

=
n o
4 . .

6
2
元 2 7 0 0 -
2 97
-
< o .

1 0 0 -
2 -

47 5 .
-
6 E 0

1 ≤ o

AUFVCaresatistiedilqnt.az#7=L47,5,0)isamaximum.

9 / 28
2.9 Kuhn-Tucker Method

Lagrange æ Lagrange with NNCs æ Kuhn-Tucker

Now we also relax the second restriction of the standard Lagrange
theorem.
utilitymaximitativnpnble.mn
With the so-called Kuhn-Tucker theorem we can also solve
2 .
B

optimization problems with multiple constraints...

... and also find out which of these constraints are binding at
the optimum and which are not.
Watch out: the NNCs are also part of the Kuhn-Tucker method!

11 / 28
Example of multiple constraints

x2

constra.int

n.bothconstraintsarebinding.Bonlywnstra.t
•
cmstra.int 2

isbinding.pl
2

x1

constraintnisbind.mg
12 / 28
Modified maximization problem
We are now able to solve complex maximization problems of the
following form:
max z(x1 , . . . , xn )
x1 ,...,xn

under the constraints and NNCs:

c o n s t r a i n t s i n e q u a l i t fo r m j n o e c s a r i w b i r d .t n
m

gj (x1 , . . . , xn ) Æ bj ’ j œ {1, . . . , m}

xi Ø 0 ’ i œ {1, . . . , n}
where j œ {1, . . . , m} denotes the number of constraints.
g.
The Lagrange function that is to be maximized is extended by
the additional constraints:
m
ÿ
max L(x1 , . . . , xn , ⁄1 , . . . , ⁄m ) = z(x) ≠ [⁄j [gj (x) ≠ bj ]]
x1 ,...,xn
j=1

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n­
y­
t­
g­
Kuhn-Tucker theorem
To solve this maximization problem, the following theorem is
applied:

Theorem (2.4 – Kuhn-Tucker theorem)

If xú maximizes the function z(x) under the constraints gj (x) Æ bj and
xi Ø 0, then there exists a real numbers vector ⁄ú = (⁄1 , . . . , ⁄m ) such
that for all i œ {1, . . . , n} and j œ {1, . . . , m}

Li (xú , ⁄ú ) Æ 0, xiú Ø 0, xiú · Li (xú , ⁄ú ) = 0 7 F 0C

↑ ↑ ↑

and
( Lj (x , ⁄ ) Ø 0, ⁄j Ø 0, ⁄j · Lj (x , ⁄ ) = 0 )
ú ú ú ú ú ú 6 Foc

↑ ↑ ↑

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Intuition behind this theorem
First, identify the differences to the Theorem 2.3 (Lagrange with
NNCs).
What could be behind the softened condition that ⁄új may now
also be greater equal to zero?
What restriction do you think implicitly applied to the Lagrange
theorem?
The key to the intuition of this theorem is again behind the
complementary slackness condition for Lj and is analogous to
the one for Li : “⁄új · Lj (xú , ⁄ú ) = 0”.
Either the Lagrange parameter ⁄j is positive. In this case,
Lj (xú , ⁄ú ) = 0 must hold, which mathematically means nothing
else than that the constraint is binding (standard Lagrange case):
Lj (xú , ⁄ú ) = ≠gj (xú ) + bj = 0. This makes sense since ⁄j
measures the willingness to pay (WTP) to relax the constraint.
Since the constraint is binding, the WTP should be positive.
Or the constraint is not binding (Lj (xú , ⁄ú ) > 0). In this case,
⁄j = 0 must hold. This also makes sense: if the constraint is
non-binding, it is economically irrelevant and there is no positive
WTP to relax it. The constraint may thus be ignored (ex post).
15 / 28
Application of theorem: procedure
The procedure is also analogous to Lagrange.
But: there are more case distinctions now. Especially if there are
several constraints that hold with inequality, it becomes very
costly to determine all candidates for an optimal solution.
In these cases a good economic intuition is very important to
anticipate which constraints and which NNCs will be binding and
which will be not.
In practice, you will simply ignore those constraints that you
suspect are not binding.
If the obtained solution satisfies all ignored constraints, everything
is fine.
If not, you will have to try again.

16 / 28
Example: 2 NNCs and 2 constraints yield 16 solution candidates
candidate 1: x1 > 0, x2 > 0, ⁄1 > 0, ⁄2 > 0 (Lagrange)
candidate 2: x1 > 0, x2 > 0, ⁄1 > 0, ⁄2 = 0
candidate 3: x1 > 0, x2 > 0, ⁄1 = 0, ⁄2 > 0
candidate 4: x1 > 0, x2 = 0, ⁄1 > 0, ⁄2 > 0
candidate 5: x1 = 0, x2 > 0, ⁄1 > 0, ⁄2 > 0
candidate 6: x1 > 0, x2 > 0, ⁄1 = 0, ⁄2 = 0
candidate 7: x1 > 0, x2 = 0, ⁄1 > 0, ⁄2 = 0
candidate 8: x1 = 0, x2 > 0, ⁄1 > 0, ⁄2 = 0
candidate 9: x1 > 0, x2 = 0, ⁄1 = 0, ⁄2 > 0
candidate 10: x1 = 0, x2 > 0, ⁄1 = 0, ⁄2 > 0
candidate 11: x1 = 0, x2 = 0, ⁄1 > 0, ⁄2 > 0
candidate 12: x1 > 0, x2 = 0, ⁄1 = 0, ⁄2 = 0
candidate 13: x1 = 0, x2 > 0, ⁄1 = 0, ⁄2 = 0
candidate 14: x1 = 0, x2 = 0, ⁄1 > 0, ⁄2 = 0
candidate 15: x1 = 0, x2 = 0, ⁄1 = 0, ⁄2 > 0
candidate 16: x1 = 0, x2 = 0, ⁄1 = 0, ⁄2 = 0
17 / 28
Graphical location of the 16 candidates

x2
maxtLXn.xzjs.tv

gnlxn.ie?Ebn9zLXn,Xz)EbIXn3oX,gzegnXz30,isviolated.6.3
'
˙

3
n

9 2
8 s
4
.
2

8 时 为
x1
9
7 5 ↓
X
, snisviol.at d.

18 / 28
Example 1:
max z(x1 , x2 ) = x12 + x1 + 4x22
x1 ,x2

under the constraints

2x1 + 2x2 6 1
x1 > 0

xzf.no egativeconstraint7sohntioncandidateslaqre.ge
x2 > 0

1
n_n

☆ 的

19 / 28
 9 Kuhn-Tucker conditions
2 2
L = X1 + X + 4 X2 -

⼊ ( 2加 t 2X 2 -

1 )
n

Foc :

1
^ ) l n = 2 ㄨn t n - 2 ⼊ E 0
.

27 ⼆
Lz 8
xz-ZAEO.ws Know that Xn ≥ 0

(4)
Hence 2 ⼊ 7 7 0
……… …
1
n )
.

Theretore.weknowilso.lt?Xn3oandS0Lx=O!57XnLn=0'
Thewnstraintmustbind.it
>
ㄨ v 3 0
-
2ㄨ n - 2ㄨ z t n = 。

le.ae 了 以 0th 3 possiblesoluti.ms

7) ㄨ n = o
z

8) ⼊ ≥
0

g) ⼊ L⼊ ⼆ 0
.
20 / 28
 Finding the right solution candidate
d) Xn 7 0 1\ X2 7 0

H_gxn_lzxn.tn
ㄨ

¥
2
2X 0 ㄨ
L 1 =
n t n - 2⼊ ⼆
z =

8 ㄨ ⼊
h
o
2
4
=
=
z
-
) + = o
,

⽓
⾔
*

=_= 示
× 1
以 i-zxn-zxz.tn ⼆ 0
, ㄨ
2

⼊
*
⼆号 .

H
27 Xn ⼆ 0 ⼋ X 7 0
2
E
.

* *
⼈ =
. ⼊ = 2

L = n
-
2 ⼊ ≤ 0 .

n
*
3
osatistiea.LI
2⼊ ≤ o
7 ≤
-
-

. =

8 ⼆ ㄨz -
2 ⼊ ⼆ 0 .

X # =
o , Xz
*
⼆ 专 ,
⼊
*
= 2 .

L ⼊ ⼆ -
2 X + 1 = 0
z

21 / 28
3)

ornersomtimfrrxz.us

l
0

⽓
X -
*
#
o n 2
1

x ⼊ = 1
= .

2⼊ 0
L1 = 2 0 nt n
-
= *
E
-
2 ⼊ o .
-

2 4 0 .

h = -
2 ⼊ E

satistied.la
0 .

*
*
ㄨT
-2 ㄨ
⽓
⼆
+1 ⼆ 0 ⼊ = ^
x
ˋ
= = 0
1 , .

,
n

22 / 28
Example 2:
max 10x1 ≠ 0.5x12 + 8x2 ≠ 0.75x22
x1 ,x2

under the constraints

x1 + x2 6 20
x1 > 0
x2 > 0

24 / 28
 9 Kuhn-Tucker conditions

Xftgxz-o.75xi-xlxntxz-201.PL
L Xn -0,5
=
~

ㄟ
⼆
10 - X -
⼊ E 0
n
.

2) h = 8 -
n , 5 X 2 -
⼊ E 0 .

37 lxi-Xn-Xz.tw 3 0 .

xz

f
4) Xn 3 0 .

5, … 。

6) Xnln ⼆ 0 2 . .tn

7) xzh.io ˙
5

4.eh.tn
8 ) ⼊ ≥ 。

6
9) ⼊ L
⼊
⼆ 0 .

xn

25 / 28
Finding the right solution candidate
n 3 Xn s o
,
X2 3 0 、
⼊ 7 0 .

H TXzxn-z.tn
L ⼆
X ⼀
⼊ = o no
-
x- = 8 - 1,
n o ,
-

,
5 ㄨ z
h =
8 -

n , 5 xz
⼀
⼊ = o .

-
2 -
1, 5 X 2 X + 20 = 0
-
z
Xz t
.

X 20 0
L ⼆ - - = .

⼊ y

t
笑
x 丝
⼼⽓
=

5 ,

h = n o
-
x, ⼤ ⼊ ⼆ 。

⼊ ⼆
70.x

14
⼊
⼆号 ⼀

学 -_- ontradict.io n
⼊ 3 0

isosolutionncannotbtanoptimu.mn
.

26 / 28
 0
2) Xn ⼆
o ,
X
z = o . ⼊ ⼆ 、

L-inoeohigeo.lwntradictnncannotbeasoh.tt on eithen

ersowtihntorxn.LT
3) n
= o , Xz > 0
, ⼊ , o.com

no-XEO.LV
1
×
2 : 20 .

8-n.5xz.no .
⼊ 2
8 - 3 o =
- 2 2

L⼊
⼆ - X + 20 o
z = .

contradictim.no
tasolut.im ,

27 / 28
 wrnersomtontorxr.hn
4)

so.ly
> 0 ㄨ = 0 ,
, z

k
⼆
1 0 - X 1
-
⼆ 0
* *
Xn = w ⼊ =
-
1 0 .

n = 8 -
⼊ ≤ 0
wntradict.tn

X
1 1
W ⼆ 0
以 =
notasolut.tn
- -

5) Xn ⼆ 0 .
X2 3 0 ,
⼊ ⼆
0 .

ln

tasolutioneither.oscornersowtionforxz.no
=
1 0 ≤ o.no

tbinding.X.JO , x z =
0 , ⼊ 2 =o

lz = 8 E 0
notsolu.tl 0m

28 / 28
a) X ⼊ ⼆ 0
770
0
, xz >
, ,

L 1
:
1 0 - 义1 =0
*

l
X n = 1 0 .

h 8 5 X 2
⼆号
= -
= 0
n , ,
*
ㄨ
2
,

xt xtewlxt.li/yt)-trcxy*,xz*,N)- uo,f.o),optimumi
以
⼆

-
28 / 28