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13
13.1 Nonlinear Programming and KuhnTucker Conditions 13.2 The Constraint Qualification 13.3 Economic Applications 13.4 Sufficiency Theorems in Nonlinear Programming 13.5 Maximum-value Functions and the Envelope Theorem 13.6 Duality and the Envelope Theorem 13.7 Some Concluding Remarks
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6.5 Digression on Inequalities and Absolute Values: Rules of inequalities Absolute values and inequalities (pp. 136-139)
addition and subtraction by k a > b result in a k > b k multiplication and division by k if k > 0, 0 then h a > b results l in i ka k > kb if k < 0, then a > b results in ka < kb squaring a > b (b0) results in a2 > b2 /n/ absolute value (-n < /n/ < n)
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13.1 Nonlinear Programming and KuhnTucker Conditions Step 1: Effect of non-negativity restrictions Step 2: Effect of inequality constraints Interpretation of the Kuhn-Tucker conditions diti Example 1 & 2
13.1 Nonlinear programming and Kuhn - Tucker conditions step1 : local maximum conditions " Examining the solution" Polya 1) Z = f (x ) Let 1 ) is 1st derivative of Z with respect to x1 , f (x
* x1 is the equilibrium value of an endogenous variable, and * 1 ) is their product called complementary slackness such that x1 f (x
1st derivative equilibrium value complementary slackness Familiar interior maximum (local max is w/in the feasible range ) 2) 1 ) = 0, f (x
* > 0, and x1 * 1)= 0 x1 f (x * Conclusion : K - T cond. (1) reveals a dependence of Z* on x1
L l boundary Local b d maximum i (hi h than neighbors (higher i hb in i feasible f ibl range) ) 3) 4) 5) 1 ) < 0, f (x 1 ) > 0, f (x
* x1 = 0, and * 1)= 0 x1 f (x
Local boundary minimum (lower than neighbors in feasible range) Boarder boundary max or min (local max or min at the boarder of feasible range ) 1 ) = 0, f (x
* x1 = 0, and * 1)= 0 x1 f (x * Conclusion : K - T conds. (2 - 4) reveal an independence of Z* from x1 * x1
= 0, and
* 1)= 0 x1 f (x
1 ) 0, f (x
* x1 0, and
* 1)= 0 x1 f (x
13.1 Nonlinear programming and Kuhn - Tucker conditions Multiple - constraint Kuhn - Tucker conditions for a maximum (p. 409) marginal Z x j = f x j (1 )g x j (2 )hx j 0 Z i = ri g x j nonnegative xj 0 complementary slackness x jZxj = 0
13.1 Nonlinear programming and Kuhn - Tucker conditions Step 1 : Complementary Slackness 1) 2) 3) 4) Z = f (x1,x2 ) + 1 [r1 g (x1,x2 )] + 2 [r2 h(x1,x2 )]
( )
i 0
i Z i = 0
Y
* * x1 Z x1 = 0 > 0, and x1
* * x1 = 0, and x1 Z x1 = 0
* * 1 > 0, and 1 Z 1 = 0
0 Figure 1
0 Figure 2
0 Figure 3
5)
5
* * 1 = 0, and 1 Z 1 = 0
13.1 Nonlinear programming and Kuhn - Tucker conditions Step 2 : Effect of inequality constraints (maximum) pp. 404 - 405 1) 2) 3) 4) = f ( x1 ,x2 ,x3 ) maximize s.t. s.t. s.t.
* * * solve for x1 ,x2 ,x3 , *
13.1 Nonlinear programming and Kuhn - Tucker conditions Step 2 : Effect of inequality constraints (maximum) pp. 404 - 405 " Find an auxilliary problem if an immediate connection cannot be obtained" Polya Z = f (x1,x2 ,x3 ) + 1 [r1 g (x1,x2 ,x3 ) s1 ] + 1 [r2 h(x1,x2 ,x3 ) s2 ] 5) 1 = Z x 2 = Z x 3 = Z s 1 = Z s 2 = Z 1 = Z 2 = 0 Zx 6)
g 2 (x1,x2 ,x3 ) r2
7) 8) 9) 9)
j = f x j (1 )g x j (2 )hx j 0, Zx i = i 0, Zs
x j 0, and si 0, and
x jZ xj = 0 i = 0 si Z s
" Find an auxilliary problem if an immediate connection cannot be obtained" Polya 1 ) = f ( x1 ,x2 ,x3 ) maximize 2) 3) 4) 5) 6) 7) 8) 9) g 1 (x1,x2 ,x3 ) + s1 = r1 s.t. s.t. g 2 (x1,x2 ,x3 ) + s2 = r2
( )
Given that
( )
i = i Zs
x1,x2 ,x3 , s1 , s 2 0 s.t. solve for Z = f (x1,x2 ,x3 ) + 1 [r1 g (x1,x2 ,x3 ) s1 ] + 1 [r2 h(x1,x2 ,x3 ) s2 ] 1 = Z s 2 = Z 1 = Z 2 = 0 Z x1 = Z x2 = Z x3 = Z s Z x j = f x j ( )g x j ( )hx j 0, x j 0, and si 0, and x jZxj = 0 si Z s i = 0 i 0, Zs i = 0 Z
then (8) and (9) can be combined w/o reference to si or its derivative as 8) si 0, and i 0, s i i = 0 8) si 0, i 0, and si i = 0 8) ri g i x j 0,
( ) ( )
i 0, and
[r g (x )]
i i j i
=0
(i = 1,2) ( j = 1,2,3)
Kuhn - Tucker conditions expressed in terms of Lagrangian function Z j = f x j (1 )g x j (2 )hx j 0, x j 0, and j = 0 7) Zx x jZx 8)
7
ri g i x j 0,
i 0, and
[r g (x )]
i j
=0
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13.1 Nonlinear programming and Kuhn - Tucker conditions pp. 404 - 405 Results from the auxilliary problem when an immediate connections could not be obtained Given Lagrangian function Z with inequality constraints Z = f ( x1,x 2 ,x3 ) + 1 [r1 g (x1 ,x2 ,x3 ) s1 ] + 1 [r2 h(x1,x2 ,x3 ) s 2 ] 5)
* * * ,x2 ,x3 ,& Z * such that K - T conditions are met, Solve for the maximum equilibrium values x1
13.1 Nonlinear programming and Kuhn - Tucker conditions Multiple - constraint Kuhn - Tucker conditions for a maximum (p. 409) marginal Z x j = f x j (1 )g x j (2 )hx j 0 Z i = ri g x j nonnegative xj 0 complementary slackness x jZxj = 0
7) 8)
j = f x j (1 )g x j (2 )hx j 0, Zx
i
( j = 1, 2, 3) Where (i = 1, 2 ), Applying the results from the auxilliary problem to the original problem Given Lagrangian function Z with inequality constraints
10) 11) 12) 13) 14) Z = f ( x1,x2 ,x3 ) + 1 [r1 g (x1,x2 ,x3 )] + 1 [r2 h( x1,x2 ,x3 )] Z x j = f x j (1 )g x j (2 )hx j 0, Z i = ri g x j 0, Z x j = f x j (1 )g x j (2 )hx j 0, Z i = ri g i x j 0,
i
ri g x j 0,
( )
x* j 0, and
* i
0, and
i * i ri g (x j ) = 0
x* jZ xj = 0
( )
i 0
i Z i = 0
Y
* * * ,x2 ,x3 ,& Z * such that K - T conditions are met, Solve for the maximum equilibrium values x1
( ) ( )
x* j 0, and
x* jZxj = 0
* i
0, and
* i Z i = 0 (for maximum)
x* jZxj = 0
0 Figure 1
0 Figure 2
0 Figure 3
x* j 0, and
* i 0, and
* i Z i = 0 (for minimum )
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13.1 Nonlinear programming and Kuhn - Tucker conditions Multiple - constraint Kuhn - Tucker conditions for a minimum (p. 410) Zxj marginal = f x j (1 )g x j (2 )hx j 0 nonnegative xj 0 complementary slackness x jZxj = 0
13.1 Nonlinear programming and Kuhn - Tucker conditions Step 2 : Effect of inequality constraints Given Z = f (x1,x2 ) + 1 [r1 g (x1,x2 )] + 2 [r2 h(x1,x2 )]
Z i = ri g x j
( )
i 0
i Z i = 0
2 Z 2 = (2 )(r2 h(x1,x2 )) = 0
1Z 1 = (1 )(r1 g (x1,x2 )) = 0
Algorithm
either (2 ) = 0 or r2 h(x1,x 2 ) = 0
either (1 ) = 0 or r1 g (x1,x2 ) = 0
Logic of the trial and error strategy either r1 g (x1,x2 ) > 0, then 1 = 0 and r1 is not a constraint or
0 Figure 1 X 0 Figure 2 X 0 Figure 3 X
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13.1 Nonlinear programming and Kuhn - Tucker conditions Step 2 : Effect of inequality constraints 1) Z = f (x1,x2 ) + 1 [r1 g (x1,x2 )] + 1 [r2 h(x1,x2 )] Algorithm : a) b) c) d) e) f) g) Check to see if it is possible to solve for an endog. var. immediately. If K - T conditions met, then stop. Else
13.1 Example 1 p. 406 Suppose that a ration has been imposed on commodity x equal to X 0 . Then the consumer would face a second constraint below. 1) 2 - 3) 4) 5) 6 - 9) 10) 11) 12) 13) 14)
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U = U (x,y ) x&y 0
Px x + Py y B,
let (1 ) = 0, solve for (x1 , x 2 , 2 ), use Z x1 , Z x 2 ,&Z 2 . If K - T conditions met, then stop. Else conclude that r2 h(x1 ,x2 ) > 0, i.e., not a constraint and solve for (x1 , x 2 , 1 ), use equations Z x1 , Z x 2 ,&Z 1 . Check if K - T conditions met. (They should be met by now.) repeat procedure by letting (2 ) = 0, and
Z = U ( x,y ) + 1 B-Px x-Py y + 2 ( X 0 x ) U = xy, B 100, Z x = y 1 2 = 0; Z y = x 1 = 0; Z 1 = 100-x-y = 0; Z 2 = 40 x = 0; Z = xy + 1 (100-x-y ) + 2 (40 x ) Px &Py = 1, 1 = y 2 ; 1 = x; 100 = x + y,
where X 0 40 ,
* 1 = 20 * 1 = 40
y* = 60; x* = 40
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13.1 Example 2, minimization problem (p. 410) Let us apply the Kuhn - Tucker conditions to solve a minimization problem below 1) 2) 3) 4) let 5) 6) 7) 8) 9) let 5) 6) 7) 8) 9) C = (x1 4 )2 + (x 2 4 )2 2x1 + 3x 2 6; and 3 x1 2 x2 12 x1 , x 2 0 minimize s.t. s.t.
13.1 Example 2 (p. 410) Kuhn - Tucker conditions Assume Z 1 = Z x1 = Z x 2 = 0, Z 2 < 0 , therefore x1 , x 2 ,&1 > 0, 2 = 0. 1) 2) 3) Z 1 = 6 - 2x1 3x 2 0 Z x1 = 2 x1 8 21 0 Z x2 = 2 x 2 8 31 0
Z = (x1 4 )2 + (x 2 4 )2 + 1 (6 - 2x1 3x 2 ) + 2 ( 12 + 3 x1 + 2 x2 )
2 = 0, Z 2 > 0
Z x2 = 2(x 2 4 ) 31 + 22 = 0; Z 1 = 6 - 2x 1 3x 2 = 0; Z 2 = 12 + 3 x1 + 2 x 2 > 0; x2 = 6 5 ,
* x1
Z x1 = 2(x1 4 ) 21 + 32 = 0;
(13 6)x2 = 5 3
3 2 x2 = 2 3 x2 5 3 x2 = 5 3 (6 13)
Use eq.s (1), (2), & (3) to solve for 1 , x1 , and x 2 6 2 3 0 6 3 0 2 6 0 2 3 1 6 2 2 8 0 2 0 , J x1 = 2 8 0 , J x2 = 2 2 x1 = 8 , J 1 = 8 3 0 8 3 0 8 2 8 0 2 3 8 2 x2 J = 26 , J 1 = 56 , J x1 = 48 J x2 = 20 56 28 48 24 20 10 = <0 = >0 = >0 x1 = x2 = 26 13 26 13 26 13 (1 , 2 , x1 , x2 ) do not meet the K - T conditions for a minimum (p. 410).
= 6 5,
1 < 0 2 = (2 3)(x1 4)
x1 = 3 3 2 x 2 = 3 3 2 (6 5); x1 = 2 3 x2 + 4 = 3 3 2 x 2 ;
1 = 0, Z 1 > 0
Z x1 = 2(x1 4 ) 21 + 32 0; Z 1 = 6 - 2x 1 3x 2 0;
Z x2 = 2(x 2 4 ) 31 + 22 0;
2 = ( x 2 4 )
1 =
Z 2 = 12 + 3 x1 + 2 x 2 0; x2 = 6 5 ,
* x1 = 6 5,
(2 3 3 2)x2 = 1
2 > 0
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13.1 Example 2 (p. 410) Kuhn - Tucker conditions Assume Z x1 , Z x 2 ,& Z 2 = 0, Z 1 < 0 , therefore x1 , x 2 ,&2 > 0, 1 = 0. (1) ( 2) (3) Z 2 = 12 + 3 x1 + 2 x2 0 Z x1 = 2 x1 8 + 32 0 Z x2 = 2 x2 8 + 22 0
13.2 The Constraint Qualification Irregularities at boundary points The constraint qualification Linear constraints Exercises 1, 3, 4
Use eq.s (1), (2), & (3) to solve for 2 , x 1 , and x 2 12 3 2 0 12 2 0 3 12 0 3 2 2 12 3 2 0 x = 8 , J = 8 2 0 , J = 3 8 0 , J = 3 2 8 x1 x2 1 2 2 0 2 x2 8 8 0 2 2 8 2 2 0 8 J = 26 , J 2 = 32 , J x1 = 56 J x2 = 72 32 16 56 28 72 36 = >0 = >0 = >0 x1 = x2 = 26 13 26 13 26 13 (1 , 2 , x1 , x2 ) meet the K - T conditions for a minimum (p. 410).
2 =
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13.2 The constraint qualification : Irregularities at boundary points Example 1 (p. 412) Maximize subject to and x1 & x2 0 Z = x1 + - x 2 + (1 - x1 )3 Z x1 = 1 3 (1 x1 )2 0
= x1
x 2 - (1 - x1 )3 0
13.2 The constraint qualification : Irregularities at the boundary points Example 2 (p. 413) Maximize = x1 subject to and where x 2 - (1 - x1 )3 0 2x1 + x2 2
Z = x1 + 1 - x 2 + (1 - x1 )3 + 2 (2 - 2x1 x2 ) Z x1 = 1 31 (1 x1 )2 22 0 Z 1 = -x 2 + (1 - x1 ) 0
3
x1 & x2 0
x1 = 1 at a max (see fig.13.2). However, x1Z x1 = 1 3 (1 1)2 = 1 when it should equal zero. Reason : on an inflection point or cusp
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Z x2 = 1 2 0 Z 2 = 2 - 2x1 x2 0
1 1 x1 = 1, x 2 = 0 , 1 = , 2 = 2 2
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Z x1 = 2 x1 6 1 10-x12-x2 x1 + 2 Z 1 = 10-x12-x2 x1 = 2, x2 = 6,
Z x 2 = 1 3 1 10-x12-x2 Z 2 = 2 + x1
(2,6)Z x
1 = 1 ,
2 = 4
13.3 Example 1 (p. 419) War - time rationing Assume the utility function and constraints given below (1) (2) (3) (4) (5) ( 6) (7 ) U = xy 2 Px x + P y y B cx x + cy y C x, y 0 maximize objective function subject to budget constraint, coupon constraint, and nonnegative quantity of x, y constraint
13.3 Example 1 (p. 419) War - time rationing K - T conditions (1) ( 2) (3) ( 4) Solve for Z x = y 2 1 22 0 Z y = 2 xy 1 2 0 Z 1 = 100 x y 0 Z 2 = 120 2 x y 0
* * x*, y*, 1 , 2
x0 y0
xZ x = 0 yZ y = 0 1 Z 1 = 0 2Z 2 = 0
1 0 2 0
L Lagrangian i Lagrangian
Let the values of B = 100, Px = Py = 1, C = 120, c x = 2 and c y = 1 1st order conditions for a maximum assoc. w/ inequality constraints Z y = 2 xy 1 2 0 Z 2 = 120 2 x y 0
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Strategy #1 (aka trial and error) Let Z x = Z y = Z 1 = 0, Z 2 0, such that x > 0, y > 0, 1 > 0, * 2 =0
* Solve for x * , y* , and 1
Strategy #2
* Let Z x = Z y = Z 2 = 0, Z 1 0, such that x > 0, y > 0, 2 > 0, 1 =0
13.3 Example 1 (p. 419) War - time rationing : strategy #1 Assume Z x = Z y = Z 1 = 0, and Z 2 0, therefore x, y, & 1 > 0, * 2 = 0. 1
st
= 0. y = 1
2
1) Z x = y
1 2* 2
=0 Z 1
* 1) Z x = y 2 1 2 2 = 0 * 2) Z y = 2 xy 1 2 = 0
y 2 = 22
1 = 2 xy
x = 100 y
2 = 2 xy
x = 60 1 2 y
y 2 2(100 y ) y = 0
y 200 + 2 y = 0
y * = 66 2 3 > 0
y 2 4(60 1 2 y ) y = 0 x = 20 > 0
* 1 * 2 * *
3 y 240 = 0
y * = 80 > 0 Z 1 = 0
* 2
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13.3 Example 2 (p. 423) Peak - load pricing : strategy 1 Suppose the average revenue functions during peak and off - peak hours are as given below. To produce a unit of output per half - day requires a unit of capacity costing 8 cents per day. The cost of a unit of capacity is the same whether it is used a peak time only, or off - peak also. In addition to the cost of capacity, its costs 6 cents in operating costs (labor and fuel) to produce one unit per half day (both day and evening). (1) (2) (3) (4) (5) P1 = 22 - 10 -5 Q1 avg. revenue at peak P2 = 18 - 10 Q 2 avg. revenue at off - peak MC1 = b + c = 14 MC 2 = b = 6 constraint 1 constraint 2 [b = 6, c = 8]
-5
13.3 Example 2 (p. 423) Peak - load pricing : strategy 2 Suppose the average revenue functions during peak and off - peak hours are as given below. To produce a unit of output per half - day requires a unit of capacity costing 8 cents per day. The cost of a unit of capacity is the same whether it is used a peak time only, or off - peak also. In addition to the cost of capacity, its costs 6 cents in operating costs (labor and fuel) to produce one unit per half day (both day and evening). (1) (2) (3) (4) (5) P1 = 22 - 10 -5 Q1 avg. revenue at peak P2 = 18 - 10 -5 Q 2 avg. revenue at off - peak MC1 = b + c = 14 MC 2 = b = 6 constraint 1 constraint 2 [b = 6, c = 8]
) (
) (
1st derivatives of eq. 5 wrt the choice variables Q1 , Q2 , 1 , 2 , K and assuming Z Q1 = Z Q2 = Z 1 = Z K = 0, Z 2 0, therefore Q1 , Q2 , 1 , K > 0, 2 = 0. ( 6) ( 7) (8) (9) (10) (11) (12) (13) Z Q1 = 22 2 *10 -5 Q1 6 1 = 0 Z Q2 = 18 2 *10 -5 Q2 6 2 = 0 Z 1 = K Q1 = 0 Z 2 = K Q2 0 Z K = 8 + 1 + 2 = 0 22 (2)10
-5 * Q1
1st derivatives of eq. 5 wrt the choice variables Q1 , Q2 , 1 , 2 , K and assuming Z Q1 = Z Q2 = Z 2 = Z K = 0, Z 1 0, therefore Q1 , Q2 , 2 , K > 0, 1 = 0. ( 6) ( 7) (8) (9) (10) (11) (12) (13) Z Q1 = 22 2 *10 -5 Q1 6 1 = 0 Z Q2 = 18 2 *10 -5 Q2 6 2 = 0 Z 1 = K Q1 0 Z 2 = K Q2 = 0 Z K = 8 + 1 + 2 = 0
* 22 (2 )10 -5 Q1 =6
22 (2 )10 -5 Q1 = 6 + 1 = 0 18 (2 )10 -5 Q2 = 6 K = Q1 K Q2 1 = 8
22 (2 )10 -5 Q1 = 6 18 (2 )10 -5 Q2 = 6 + 2 K Q1 K = Q2 2 = 8
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13.3 Example 2 (p. 423) Peak - load pricing : strategy 3 K = Q1 = Q 2 Suppose the average revenue functions during peak and off - peak hours are as given below. To produce a unit of output per half - day requires a unit of capacity costing 8 cents per day. The cost of a unit of capacity is the same whether it is used a peak time only, or off - peak also. In addition to the cost of capacity, its costs 6 cents in operating costs (labor and fuel) to produce one unit per half day (both day and evening). (1) where (2) (3) (4) (5)
13.3 Example 2 (p. 420) Peak - load pricing (1) (2) (3) (4) (5) (6) P1 = 22 - 10 -5 Q1 MR 1 = b + c = 14 P2 = 18 - 10 -5 Q 2 MR 2 = b = 6 Avg. revenue at peak constraint Avg. revenue at off - peak constraint
) (
1st derivatives of eq. 5 wrt the choice variables Q1 , Q2 , 1 , 2 , K and assuming K = Q1 = Q2 = Q and Z Q1 = Z Q2 = Z 1 = Z 2 = Z K = 0, therefore 1 & 2 > 0 (6) (7 ) (8) (9) (10) (11) (12) (13) (14) (15) Z Q1 = 22 2 *10 Q1 6 1 0 Z Q2 = 18 2 *10 -5 Q2 6 2 0 Z 1 = K Q1 0 Z 2 = K Q2 0 Z K = 8 + 1 + 2 0
-5
) (
22 (2 )10 Q = 6 + 1
-5
Lagrangian
18 (2 )10 -5 Q = 6 + 2 K =Q K =Q 2 = 8 1
Q* = (6 + 1 22) (2 )10 -5 = (16 1 )50,000 = 800,000 50,0001 Q* = (6 + 8 1 18 ) (2 )10-5 = (4 + 1 )50,000 = 200,000 + 50,0001 50,000 1 1 800,000 50,000 1 Q = 200,000 J = 100,000 J 1 = 600,000 J Q = 50,000,000,000
* * * 2 = 2, P 1 = 17, P2 = 13
1st order conditions for a maximum assoc. w/ inequality constraints 1 1 (7) Z Q1 = Q1 + 16 1 = 0 ZQ2 = Q2 + 12 2 = 0 50000 50000 Z 1 = K Q1 = 0 Z 2 = K Q2 = 0 Z K = 8 + 1 + 2 = 0
* * * 1 = 6, Q * = K = Q1 = Q2 = 500,000 and
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13.4 Sufficiency Theorems in Nonlinear Programming The Kuhn-Tucker sufficiency theorem: concave programming The Arrow-Enthoven sufficiency theorem: quasi concave programming quasi-concave A constraint-qualification test none
13.5 Maximum-value Functions and the Envelope Theorem The envelope theorem for unconstrained optimization The profit function Reciprocity R i it condition diti The envelope theorem for constrained optimization Interpretation of the Lagrange multiplier none
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13.5 Maximum - value functions and envelope theorem The envelope theorem for unconstrained optimization 1) 2) 3) 4) 5) 6) 7) U = f (x,y, ) x* = x * ( ); f x ( x, y , ) = f y ( x, y , ) = 0 maximize FOC equilibrium solutions
13.5 Maximum - value functions and envelope theorem The envelope theorem for constrained optimization 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) U = f (x,y; ) g (x,y; ) = 0 maximize s.t. Lagrangian FOC
y * = y * ( )
Z = f (x,y; ) + (0 g (x,y; )) Z x = f x g x = 0
Z y = f y g y = 0 x * = x * ( );
Z = g (x,y; ) = 0
V( ) = U * = f x * ( ), y * ( ), f x = g x ; f y = g y
y * = y * ( );
* = * ( ) equil. solutions
max. value function total differential eqs. (4 - 5) max. value constraint total differential
dV d = f x x * + f y y * + f g x * ( ), y * ( ), 0
The mvf or indirect objective function traces out all the maximum values of the objective function as the parameters vary. (C & W, p. 428) At the optimum, as varies with x and y allowed to adjust, the derivative dV d gives the same result as if x * and y* are treated as constants, i.e., only the direct effect of on the objective function matters exogenous variable need be considered
33
* *
g x x* + g y y* + g 0
g x x* + g y y* + g 0
) (
dV d = ( f x g x ) x * + f y g y y * + f g = Z
multiply by
The mvf or indirect objective function traces out all the maximum values of
the objective function as the parameters vary (C & W, p. 428). The Lagrangian
function replaces the objective function in deriving the i.o.f. of constrained U (p. 433)
34
13.5 Maximum - value functions and envelope theorem The envelope theorem to interprete the Lagrange multiplier 1) 2) 3) 4) 5) 6) 7) 7) 8) 9) 10) 14) U = f (x,y ) g (x,y ) = c maximize s.t. Lagrangian FOC
13.5 Maximum - value functions and envelope theorem The envelope theorem for profit function & Hotelling' s lemma 1) 2) 3) 4) 5) 6) 7) 8) 9 11)
= Pf (K , L ) wL rK L = Pf L w = 0 K = Pf K r = 0
= fx gx = f y gy
x * = x * (c ); V (c ) = Z * (c ) = f x* (c ), y * (c )
+* (c ) c g x* (c ), y * (c )
y * = y * (c );
* = * (c ) equil. solutions
L* = L* (w, r , P ); K * = K * (w, r , P )
))
* (w, r , P ) = Pf L* , K * wL* rK * w = L
dV d = ( f x g x ) x* + f y g y y * + f g = Z
The mvf or indirect objective function traces out all the maximum values of the objective function as the parameters vary (C & W, p. 428). The Lagrangian function replaces the objective function in deriving the i.o.f. of constrained U (p. 433).
Equations (9 - 11) are the comparative - static derivatives of profit m.v.f. (eq. (5)), They are also know collectively as Hotelling' s lemma, which is an example of the envelope theorem applied to the profit function, holding L* , K * constant (C & W, p. 430).
35 36
* measures the rate of change of the maximum value of the objective function
the constraint only (C & W, pp 434 - 435). when c changes, and is referred to as the " shadow price"of c, which enters through
13.5 Maximum - value functions and envelope theorem The envelope theorem, reciprocity condition, and comparative statics 1) 2) 3) 4) 5) ) 6) 7) 8) U = f (x,y, ) fx = fy = 0 x * = x * ( ); V ( ) = f x ( ), y ( ),
* *
13.5 Maximum - value functions and envelope theorem The envelope theorem, reciprocity condition, and comparative statics 4) 5) 6) 7) 8) 9) 10) V( ) = f x * ( ), y * ( ), (x,y, ) = f (x,y, ) V( ) f xx H = f yx fx f xy f yy f y f x f y f V
2 H 2 = f xx f yy f xy > 0;
maximize FOC of U y * = y * ( ) equilibrium solutions max. value function diff. bet' n U and U * FOC of
x = f x = y = f y = = f V = 0
(x,y, y ) = f (x,y, y ) V( ) f xx H = f yx fx f xy f yy fy f x f y f V
x = f x = y = f y = = f V = 0
H 1 = f xx < 0;
H3 < 0
H 1 = = f V < 0 V ( ) = f x * ( ), y * ( ),
H 1 = f xx < 0;
2 H 2 = f xx f yy f xy > 0;
H3 < 0
37
V = f x x * + f y x * + f V f = f x x * + f y x * > 0 f x x * > 0
38
13.6 Duality and the Envelope Theorem The primal problem The dual problem Duality Roys identity Shephards lemma Examples 1 & 2
13.6 Example 1 Utility maximization, p. 439 <= Consider the consumer with the utility function below, who faces a budget constraint of B and is given prices Px and Py . primal : F(x,y,; B,Px Py ) (1) ( 2) (3) ( 4) U = xy Px x + Py y = B Z = xy + B-Px x-Py y Z = B-Px x-Py y = 0 Z x = y Px = 0 Z y = x Py = 0 Matrix format (5)
39
0 Px Py
Px 0 1
Py B 1 x = 0 0 y 0
40
13.6 Example 1 Utility maximization, p. 439 <= Consider the consumer with the maximum value utility function in which
J = 2 Px Py
x * = x(Px ,Py , B), y * = y(Px ,Py , B) (1) ( 2) V Px ,Py , B = U * = x * y* x* = B , 2 Px y* = B 2 Py Roy' s identity (p. 437)
* =
(3) ( 4) (5) ( 6)
V Px V B = x m
B Py 0 1 = BPy 0 Px 0 1 0 B 0 = BPx 0
x* =
B 2B = 4 Px Py 2 Px Py B2 4 Px2 Py B 2 2 Px Py B = 2 = B 2 Px B 4 Px Py 2 Px Py
y* =
BPx B = >0 2 Px Py 2 Py
(7)
xm =
U Px UB
Check the 2nd order conditions for a max or min. J = H = 2 Px Py > 0, negative definite maximum
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)
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13.6 Example 2 (p. 440) Cost minimization problem Now consider a consumer with an expenditure function subject to a fixed level of utility U* and prices Px and Py . dual F(x, y, ;U,Px ,Py ) (1) ( 2) (3) E = Px x + Py y xy = U * Z = Px x + Py y + U * xy Minimize expenditure function subject to target level of utility U * Lagrangian U* y Px
13.6 Example 2 (p. 440) Cost minimization problem Now consider a consumer with an expenditure function subject to a fixed level of utility U* and prices Px and Py . dual F(x, y, ;U,Px ,Py ) (5) y= Px U * Px Py y U * Px Py = PxU *1 2 Px1 2 Py1 2 U * Px Py U* U * Py Px
y2 =
y* =
)
x= y= =
( 6)
* =
x* =
U * Px Px = Px y Py U U = y 0
* * *1 2
1 2
Px Py
U Px1 2 Py1 2 x
y 0
(8)
H = y
Py x
Note : you can not solve this problem using Cramer' s rule because the J is all endogenous vars.
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13.6 Example 2 (p. 440) Cost minimization problem Now consider the maximum value cost function (1) ( 2) E * = Px x * + Py y * x =
*
13.6 Example 2 duality between Utility max. and Expend. min. Maximize U = xy subject to Px x + Py y = B Z = xy + (B-Px x-Py y ),
m =
U * Py Px
Px Py U*
B , 2 Px Py Px Py U*
xm =
B , 2 Px U * Py Px
ym =
B 2 Py
E = Px x + Py y = Px = U * Px Py
U * Py Px
+ Py
) + (U
12
Px Py
12
= 2 U * Px Py
U * Py U * Px U * Px = Px + Py Py (P x )1 2 Py 1 2
12
( )
12
Z = Px x + Py y + U * xy
h =
xh =
yh =
U * Px Py
The Marshallian ordinary demand does not equal the Hickian compensated demand. xm = 1) U * = U * Py B xh = Px 2 Px
12
12 12 Py = 2U *1 2 Px
Shephard' s lemma and Hickian compensated demand curves x = g(Px ,Py , U * ) ( 4) (5) (6) E Px = E Py = E PU =
12 U *1 2 Py 12 Px 12 U *1 2 Px 12 Py 12 12 Px Py
= xh = yh = h
2) B = 2 Px1 2 Py1 2U *1 2 = Px x + Py y = E ( Px , Py , U * ), i.e., the expenditure function Roy' s identity and the utility function (1) gives Marshallian demand functions. Shephard' s lemma and the expenditure function (2) gives Hickian demand functions.
45 46
U *1 2
12.5 - 3 Comparativ e - static analysis Z = U (x, y ) + (B xPx yPy ) Z = B xPx yPy = 0 Z x = U x Px = 0 Z y = U y Py = 0 Px .dx Py dy = x dPx + ydPy dB Px d + U xx dx + U xy dy = dPx Py d + U yx dx + U yy dy = F ( , x, y; Px , Py , B )
Px U xx U yx Px U xx U yx
Py d x dPx U xy dx = dPx U yy dy 0 Py B 1 U xy x B = 0 0 U yy y B
ydPy 0
dPy
dB 0 0
dPy
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U xy
J x = PyU xy PxU yy
(12.39, p. 379)
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12.5 - 3 Comparative - static analysis Z = U ( x, y ) + (B xPx yPy ) Z = B xPx yPy = 0 Z x = U x Px = 0 Py U yy Z y = U y Py = 0 (12.42, p. 379) x x Px U xy 0 = + Px J Py U yy J Py 1) 2) x 1 Px U xy = B J Py U yy x= dB , dPx Px .dx Py dy = x dPx + ydPy dB
P0 B A C
0 3) If no income effect, then vector of constants is and x Px = (x Px ) U constant 0 x x x dB < 0 for a normal good if = Px Px U constant B dPx x x dB > P x U constant B dPx (not Giffen good)
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U0 U1
P1
P1
P0
Quantity Q1
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P1
P0
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Quantity X