Session6

Constrained Optimization
1. Given a Cobb-Douglas production function 𝑄 = 𝐿0.3 𝐾 0.7 , subject to a cost constraint of
£150 with the price of labor w = 3 and the price of capital r = 15:
a) Find the values of L and K for which production is maximized.
b) What is the maximum level of production possible subject to the constraint?
Solution:
a) We optimize Cobb-Douglas function
𝑄 = 𝑓(𝐿, 𝐾) = 𝐿0.3 𝐾 0.7
The constraint is:
𝐶 = 𝑤𝐿 + 𝑟𝐾 → 150 = 3𝐿 + 15𝐾 → 𝑔(𝐿, 𝐾) = 150 − 3𝐿 − 15𝐾
The Lagrangian of 𝑓 is:
ℒ(𝜆, 𝐿, 𝐾) = 𝑓(𝐿, 𝐾) + 𝜆𝑔(𝐿, 𝐾) = 𝐿0.3 𝐾 0.7 + 𝜆(150 − 3𝐿 − 15𝐾)

1st order conditions:

ℒ𝜆 = 150 − 3𝐿 − 15𝐾 = 0
ℒ𝐿 = 0.3𝐿−0.7 𝐾 0.7 − 3𝜆 = 0 → 𝜆 = 0.1𝐿−0.7 𝐾 0.7 (∗)
0.7
ℒ𝐾 = 0.7𝐿0.3 𝐾 −0.3 − 15𝜆 = 0 → 𝜆 = 15 𝐿0.3 𝐾 −0.3 (∗∗)
0.7 0.3 −0.3 7 15
From (∗) and (∗∗) we get 0.1𝐿−0.7 𝐾 0.7 = 𝐿 𝐾 → 𝐿−1 𝐾 = 15 → 𝐿 = 𝐾 (∗∗∗)
15 7
𝑦𝑖𝑒𝑙𝑑𝑠
Substitute (∗∗∗) into the 1st equation ℒ𝜆 = 0 → 𝐾∗ = 7
𝑦𝑖𝑒𝑙𝑑𝑠
Substitute 𝐾 ∗ into (∗∗∗) → 𝐿∗ = 15
𝑦𝑖𝑒𝑙𝑑𝑠 𝐾 0.7 7 0.7
Substitute 𝐾 ∗ , 𝐿∗ into (∗) → 𝜆∗ = 0.1 ( 𝐿 ) = 0.1 (15)

2nd order conditions:

ℒ𝜆𝜆 = 0, ℒ𝜆𝐿 = −3, ℒ𝜆𝐾 = −15
ℒ𝐿𝜆 = ℒ𝜆𝐿 , ℒ𝐿𝐿 = −0.21 ∙ 𝐿−1.7 𝐾 0.7, ℒ𝐿𝐾 = 2.1 ∙ 𝐿−0.7 𝐾 −0.3
ℒ𝐾𝜆 = ℒ𝜆𝐾 , ℒ𝐾𝐿 = ℒ𝐿𝐾 , ℒ𝐾𝐾 = −0.21 ∙ 𝐿0.3 𝐾 −1.3
ℒ𝜆𝜆 ℒ𝜆𝐿 ℒ𝜆𝐾
∗ ∗ ∗
det(𝐻ℒ (𝜆 , 𝐿 , 𝐾 )) = | ℒ𝐿𝜆 ℒ𝐿𝐿 ℒ𝐿𝐾 |
ℒ𝐾𝜆 ℒ𝐾𝐿 ℒ𝐾𝐾
In the following 2 lines is (𝜆, 𝐿, 𝐾) = (𝜆∗ , 𝐿∗ , 𝐾 ∗ ) = (𝜆∗ , 7,15):

0 −3 −15
= | −3 −0.21 ∙ 15−1.7 70.7 2.1 ∙ 15−0.7 7−0.3 | = 18.02 →
−15 2.1 ∙ 15−0.7 7−0.3 −0.21 ∙ 150.3 7−1.3
Function 𝑄 = 𝑓(𝐿, 𝐾) has its local maximum at (𝐿, 𝐾) = (𝐿∗ , 𝐾 ∗ ) under the given constraint;
i.e. 𝐿 = 𝐿∗ and 𝐾 = 𝐾 ∗ maximizes production under the given constraint.

b) 𝑄 ∗ = 𝑓(𝐿∗ , 𝐾 ∗ ) = 150.3 70.7

2*. A production function is 𝑄 = 12𝐿0.5 𝐾 0.5. Find the values of 𝐿 and 𝐾 that minimize costs
when labor costs £25 per unit (wage rate), capital costs £50 per unit (rent) and when the
production constraint is 240 units of output.
Solution:
We optimize the cost function (𝑤𝐿 + 𝑟𝐾 = 𝐶):
𝐶 = 𝑓(𝐿, 𝐾) = 25𝐿 + 50𝐾
The constraint is this time:
12𝐿0.5 𝐾 0.5 = 240 → 𝑔(𝐿, 𝐾) = 240 − 12𝐿0.5 𝐾 0.5
The Lagrangian of 𝑓 is:
ℒ(𝜆, 𝐿, 𝐾) = 𝑓(𝐿, 𝐾) + 𝜆𝑔(𝐿, 𝐾) = 25𝐿 + 50𝐾 + 𝜆(240 − 12𝐿0.5 𝐾 0.5 )

1st order conditions:

ℒ𝜆 = 240 − 12𝐿0.5 𝐾 0.5 = 0
𝑦𝑖𝑒𝑙𝑑𝑠 25 0.5 −0.5
ℒ𝐿 = 25 − 6𝜆𝐿−0.5 𝐾 0.5 = 0 → 𝜆=𝐿 𝐾 (∗)
6
𝑦𝑖𝑒𝑙𝑑𝑠 50
ℒ𝐾 = 50 − 6𝜆𝐿0.5 𝐾 −0.5 = 0→ 𝜆 = 6 𝐿−0.5 𝐾 0.5 (∗∗)
25 0.5 −0.5 50 𝑦𝑖𝑒𝑙𝑑𝑠
From (∗) and (∗∗) we get 𝐿 𝐾 = 6 𝐿−0.5 𝐾 0.5 → 2 = 𝐿𝐾 −1 → 𝐿 = 2𝐾 (∗∗∗)
6
Substitute (∗∗∗) into the 1st equation:
𝑦𝑖𝑒𝑙𝑑𝑠 𝑦𝑖𝑒𝑙𝑑𝑠
240 = 12(2𝐾)0.5 𝐾 0.5 → 20 = √2𝐾 → 𝐾 ∗ = 10√2
𝑦𝑖𝑒𝑙𝑑𝑠
Substitute obtained value for 𝐾 into (∗∗∗) → 𝐿∗ = 20√2
𝑦𝑖𝑒𝑙𝑑𝑠 25 𝐿 25
Substitute obtained values for 𝐾, 𝐿 into (∗) → 𝜆∗ = √ = √2
6 𝐾 6

2nd order conditions:

ℒ𝜆𝜆 = 0, ℒ𝜆𝐿 = −6𝐿−0.5 𝐾 0.5, ℒ𝜆𝐾 = −6𝐿0.5 𝐾 −0.5
ℒ𝐿𝜆 = ℒ𝜆𝐿 , ℒ𝐿𝐿 = 3𝜆𝐿−1.5 𝐾 0.5, ℒ𝐿𝐾 = −3𝜆𝐿−0.5 𝐾 −0.5
ℒ𝐾𝜆 = ℒ𝜆𝐾 , ℒ𝐾𝐿 = ℒ𝐿𝐾 , ℒ𝐾𝐾 = 3𝜆𝐿0.5 𝐾 −1.5
ℒ𝜆𝜆 ℒ𝜆𝐿 ℒ𝜆𝐾
∗ ∗ ∗
det(𝐻ℒ (𝜆 , 𝐿 , 𝐾 )) = | ℒ𝐿𝜆 ℒ𝐿𝐿 ℒ𝐿𝐾 | =
ℒ𝐾𝜆 ℒ𝐾𝐿 ℒ𝐾𝐾
25√2
In the following 2 lines is (𝜆, 𝐿, 𝐾) = (𝜆∗ , 𝐿∗ , 𝐾 ∗ ) = ( , 20√2, 10√2):
6
−0.5 0.5 0.5 −0.5
0 −6(20√2) (10√2) −6(20√2) (10√2)
|−6(20√2)−0.5 (10√2)0.5 3
25√2
(20√2)
−1.5
(10√2)
0.5
−3
25√2
(20√2)
−0.5
(10√2)
−0.5 |
6 6 =
| 0.5
|
0.5 −0.5 25√2 −0.5 −0.5 25√2 −1.5
−6(20√2) (10√2) −3 6
(20√2) (10√2) 3 6
(20√2) (10√2)

= −127.28 →

The function 𝐶 = 𝑓(𝐿, 𝐾) has its local minimum at (𝐿, 𝐾) = (𝐿∗ , 𝐾 ∗ ) under the given
constraint; i.e. 𝐿 = 𝐿∗ and 𝐾 = 𝐾 ∗ minimizes costs under the given constraint.
3. Suppose a firm has an order for 200 units of its product and wishes to distribute its
manufacture between two of its plants, plant “1”and plant “2”. Let 𝑞1 and 𝑞2 denote the
outputs of plants “1” and “2”, respectively, and suppose the total-cost function is given by
𝐶 = 𝑓(𝑞1 , 𝑞2 ) = 2𝑞1 2 + 𝑞1 𝑞2 + 𝑞2 2 + 200
How should the output be distributed in order to minimize costs?
Solution:
We optimize the cost function 𝐶 = 𝑓(𝑞1 , 𝑞2 ).
The constraint is
200 = 𝑞1 + 𝑞2 → 𝑔(𝑞1 , 𝑞2 ) = 200 − 𝑞1 − 𝑞2
The Lagrangian of 𝑓 is:
ℒ(𝜆, 𝑞1 , 𝑞2 ) = 𝑓(𝑞1 , 𝑞2 ) + 𝜆𝑔(𝑞1 , 𝑞2 ) = 2𝑞1 2 + 𝑞1 𝑞2 + 𝑞2 2 + 200 + 𝜆(200 − 𝑞1 − 𝑞2 )

1st order conditions:

ℒ𝜆 = 200 − 𝑞1 − 𝑞2 = 0
ℒ𝑞1 = 4𝑞1 + 𝑞2 − 𝜆 = 0
ℒ𝑞2 = 𝑞1 + 2𝑞2 − 𝜆 = 0
Subtracting 2nd eq. from the 3rd eq. we get 𝑞2 = 3𝑞1
Substitute 𝑞2 = 3𝑞1 into the 1st equation and then into the 2nd :
𝑞1 ∗ = 50, 𝑞2 ∗ = 150, 𝜆∗ = 𝑞1 ∗ + 2𝑞2 ∗ = 350

2nd order conditions:

ℒ𝜆𝜆 = 0, ℒ𝜆𝑞1 = −1, ℒ𝜆𝑞2 = −1
ℒ𝑞1𝜆 = ℒ𝜆𝑞1 , ℒ𝑞1𝑞1 = 4, ℒ𝑞1𝑞2 = 1
ℒ𝑞2𝜆 = ℒ𝜆𝑞2 , ℒ𝑞2𝑞1 = ℒ 𝑞1𝑞2 , ℒ𝑞2𝑞2 = 2
ℒ𝜆𝜆 ℒ𝜆𝑞1 ℒ𝜆𝑞2 0 −1 −1
∗ ∗ ∗ ℒ ℒ ℒ
det(𝐻ℒ (𝜆 , 𝑞1 , 𝑞2 )) = | 𝑞1𝜆 𝑞1 𝑞1 𝑞1 𝑞2 | = |−1 4 1 | = −4
ℒ𝑞2𝜆 ℒ𝑞2𝑞1 ℒ𝑞2𝑞2 −1 1 2

The function 𝐶 = 𝑓(𝑞1 , 𝑞2 ) has its local minimum at (𝑞1 , 𝑞2 ) = (𝑞1 ∗ , 𝑞2 ∗ ) under the given
constraint; i.e. 𝑞1 = 𝑞1 ∗ and 𝑞2 = 𝑞2 ∗ minimizes costs under the given constraint.
Integration
Calculate the following integrals:

1. ∫ 5𝑑𝑥 = 5𝑥 + 𝐶
𝑥 4+1
2. ∫ 𝑥 4 𝑑𝑥 = +𝐶
4+1

1 𝑥 −4+1
3. ∫ 𝑥 4 𝑑𝑥 = ∫ 𝑥 −4 𝑑𝑥 = +𝐶
−4+1
3
𝑥 ⁄2
4. ∫ √𝑥𝑑𝑥 = ∫ 𝑥1/2 𝑑𝑥 = 3⁄ +𝐶
2
3
1 𝑥 − ⁄2+1
5. ∫ √𝑥 3 𝑑𝑥 = ∫ 𝑥 −3/2 𝑑𝑥 = +𝐶
−3⁄2+1

𝑥 3 −1 𝑥3 −1 𝑥2 𝑥 −2+1
6. ∫ 𝑑𝑥 = ∫ 𝑥 2 + 𝑥 2 𝑑𝑥 = − +𝐶
𝑥2 2 −2+1

𝑥+5𝑥 2 1
7. ∫ 𝑑𝑥 = ∫ 𝑥 + 5𝑑𝑥 = ln|𝑥| + 5𝑥 + 𝐶
𝑥2

(2𝑥−1)(𝑥+3) 2𝑥 2 +5𝑥−3 𝑥 −1
8. ∫ 𝑑𝑥 = ∫ 𝑑𝑥 = ∫ 2 + 5𝑥 −1 − 3𝑥 −2 = 2𝑥 + 5 ln|𝑥| − 3 +𝐶
𝑥2 𝑥2 −1
4
5 𝑥 ⁄5+1 𝑥4
9. ∫ 2 √𝑥 4 − 7 𝑥 3 + 10𝑒 𝑥 − 1𝑑𝑥 = 2 4 −7 + 10𝑒 𝑥 − 𝑥 + 𝐶
⁄ 5 +1 4

1 𝑥2 1
10. ∫ 2𝑥 + 2𝑥 𝑑𝑥 = 2 + 2 ln|𝑥| + 𝐶
2
2𝑄−5
11. ∫ 𝑑𝑄 = 2𝑄 − 5 ln|𝑄| + 𝐶
𝑄

1 1
12. ∫ 5𝑄 − 5𝑥𝑑𝑄 = 5 ln|𝑄| − 5𝑥 ∙ 𝑄 + 𝐶 (𝑥 is a constant for this integration!)

Integrating by substitution
1
(b) 𝐼 = ∫ 5𝑥−2 𝑑𝑥;
5𝑥 − 2 = 𝑢,
1
5𝑑𝑥 = 𝑑𝑢 i.e. 𝑑𝑥 = 5 𝑑𝑢
11 1 1
𝐼 = ∫ 𝑢 5 𝑑𝑢 = 5 ln|𝑢| + 𝐶 = 5 ln|5𝑥 − 2| + 𝐶

1
(c) ∫ 𝑒 5𝑥−2 𝑑𝑥 = 5 𝑒 5𝑥−2 + 𝐶 (same substitution as in (b))

1 3
1 1 𝑢 ⁄2+1 1 (3𝑥+4) ⁄2
(d) ∫ √3𝑥 + 4𝑑𝑥 = ∫ 𝑢1/2 3 𝑑𝑢 = 3 1⁄ +𝐶 =3 3⁄ +𝐶
2 +1 2
3𝑥 + 4 = 𝑢,
 1
3𝑑𝑥 = 𝑑𝑢 i.e. 𝑑𝑥 = 3 𝑑𝑢

5 1 5 𝑢−4+1 5 (6𝑥+3)−3
(e) ∫ (6𝑥+3)4 𝑑𝑥 = 5 ∫ 𝑢−4 6 𝑑𝑢 = 6 ∙ +𝐶 = 6∙ +𝐶
−4+1 −3
6𝑥 + 3 = 𝑢,
1
6𝑑𝑥 = 𝑑𝑢 i.e. 𝑑𝑥 = 6 𝑑𝑢

1 (1−3𝑄)6 1
(f) ∫(1 − 3𝑄)5 𝑑𝑄 = −3 + 𝐶 (substitution: 1 − 3𝑄 = 𝑢, 𝑑𝑄 = −3 𝑑𝑢)
6

2 1 1 1 2
(g) ∫ 𝑥𝑒 𝑥 𝑑𝑥 = ∫ 𝑒 𝑢 2 𝑑𝑢 = 2 𝑒 𝑢 + 𝐶 = 2 𝑒 𝑥 + 𝐶
𝑥 2 = 𝑢,
1
2𝑥𝑑𝑥 = 𝑑𝑢 i.e. 𝑥𝑑𝑥 = 2 𝑑𝑢