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Constrained Optimization With Equality Constraint

Constrained optimization problems can be solved using the Lagrange multiplier method. This involves forming a Lagrange function by incorporating the constraint into the objective function using a Lagrange multiplier. Taking the partial derivatives of the Lagrange function and setting them equal to zero provides the first-order conditions for a maximum. The second-order conditions involve examining the bordered Hessian matrix to determine if a solution is a maximum. The value of the Lagrange multiplier indicates the marginal effect of the constraint on the objective function at its maximum.

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261 views32 pages

Constrained Optimization With Equality Constraint

Constrained optimization problems can be solved using the Lagrange multiplier method. This involves forming a Lagrange function by incorporating the constraint into the objective function using a Lagrange multiplier. Taking the partial derivatives of the Lagrange function and setting them equal to zero provides the first-order conditions for a maximum. The second-order conditions involve examining the bordered Hessian matrix to determine if a solution is a maximum. The value of the Lagrange multiplier indicates the marginal effect of the constraint on the objective function at its maximum.

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CONSTRAINED

OPTIMIZATION WITH
EQUALITY CONSTRAINTS
Dr. Purba Roy Choudhury
Email: purba.roychoudhury@thebges.edu.in
B.Sc. Economics (Honours)
Semester II, Paper CC-2-4:Mathematical Methods in Economics II
Unit 2: Multi-Variable Optimization
Constrained Optimization with Equality Constraints: Lagrange Multiplier Method
Constrained Optimization
Constrained Optimization

The ratio of the marginal utilities are equal to their price ratios
Constrained Optimization
Constrained Optimization
• The free optimum in this graph is
the peak of the entire dome.
• The constrained optimum is peak
of the inverse U shaped curve
situated on the top (lying directly
above) the constraint line.
• In general, constraint maximum
can be expected to be lower than
the free maximum, but the two
maximum may happen to be the
same, by coincidence.
• But the constrained maximum
can never exceed the free
maximum.
Generalized Constraint Optimization
Generalized Constraint Optimization
Lagrange Multiplier Method
Lagrange Multiplier Method

Please note: The constraint may be such that g(x,y) = c


Please refer Chapter 12 of Chiang and Wainwright: Fundamentals Methods
of Mathematical Economics
Lagrange Multiplier Method
Lagrange Multiplier Method

• The Lagrange function is a modified version is the objective function that


incorporates the constraint.
• The Greek symbol lambda (λ) is called the Lagrange multiplier.
• If the constraint is satisfied the last term in the equation vanishes
regardless of the value of λ. In that case max. L is identical to max. U.
• Moreover without the constraint, we only seek the free maximum of L in
lieu of the constrained maximum of U with respect to the variables x and
y.
• Simply treat λ as another variable such that
L=L(λ, x, y)
Lagrange Multiplier Method
Lagrange Multiplier Method
Lagrange Multiplier Method
Lagrange Multiplier Method
Properties of Demand Functions
Properties of Demand Functions
Minimization and Lagrange
Minimization and Lagrange
Second Order Conditions
Second Order Conditions
Second Order Conditions
Second Order Conditions
Constrained and Unconstrained Hessian
Second Order Conditions
2 Variable Case:

n Variable Case
Determinantal Test
Please note:
Determinantal Test for Relative Constrained Optimization
𝑧 = 𝑓 𝑥1 , 𝑥2 , … … . , 𝑥𝑛 𝑠𝑢𝑏𝑗𝑒𝑐𝑡 𝑡𝑜 𝑔 𝑥1 , 𝑥2 , … … . , 𝑥𝑛 = 𝑐
Form the Lagrangean function
𝑍 = 𝑓 𝑥1 , 𝑥2 , … … . , 𝑥𝑛 + 𝜆[𝑐 − 𝑔 𝑥1 , 𝑥2 , … … . , 𝑥𝑛 ]
Conditions Maximum Minimum
First Order 𝑍𝜆 = 𝑍1 = 𝑍2 … … … … . = 𝑍𝑛 𝑍𝜆 = 𝑍1 = 𝑍2 … … … … . = 𝑍𝑛
Necessary =0 =0
Second Order
Sufficient #

#Applicable only after the first order necessary conditions are satisfied
Alternative form: Bordered Hessian
Bordered Hessian: Example
Bordered Hessian: Example
Interpreting the Lagrange Multiplier
Interpreting the Lagrange Multiplier
References:
• Alpha C. Chiang and Kavin Wainwright: Fundamental
Methods of Mathematical Economics
• K. Sydsaeter and P. Hammond: Mathematics for
Economic Analysis
• Carl Simon and Lawrence Blume: Mathematics for
Economists
• Archibald, G.C. and Lipsey, R.G.: An Introduction to
Mathematical Treatment of Economics
• Henderson, J.M. and Quandt, R.E.: Microeconomic
Theory : A Mathematical Approach

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