Feb 20, 2002 Edward R.

Morey
I. Curvature Properties*
*Thanks to Laura Langhoff for initial layout, typing and graphics.
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Minimization & Maximization Edward R. Morey - feb 20 2002
I. Curvature Properties
What do we mean by curvature properties?
A mathematical function (or relation) can be described by a set of points in (N+1) dimensional
space. That set of points will have a certain shape (form). For example,
is a sphere of radius 1. The sphere has a certain shape: that is, it
has a certain curvature. All functions that have the same basic shape are said to have the same
curvature property. For example, all linear functions have a certain shape. The same is true of
functions that are convex, concave, quasiconvex, quasiconcave, etc.
What do we care about curvature properties?
There are two basic reasons
1) Economic theory imposes curvature properties on mathematical functions.
For Example: Economic theory dictates that all utility functions are quasiconcave and dictates
that all cost functions are concave in input prices.
Therefore a cost function that is not concave in input prices is not a cost function.
2) If the objective function in our constrained min or max problem has certain curvature
properties we can be sure that the critical point is in fact the point we have been looking for.
For Example: The first-order solution (K
0
, L
0
, 8
0
) to the Lagrangian = wL +rK - 8[y - f(K, L)]
will be a min (rather than a max) if f(K, L) is increasing and quasiconcave in K
and L. It will be a max (rather than a min) if f(K, L) is increasing and quasiconvex
in
(K, L).
If we impose certain curvature properties on the objective function and constraint function, then
there is no need to check second-order sufficient conditions for a constrained max or min (the
imposed curvature properties will guarantee that the appropriate second order conditions are
fulfilled).
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Minimization & Maximization Edward R. Morey - feb 20 2002
Another Example
Assume a consumer wants to max her utility u = u(x
1
, x
2
) subject to the budget constraint
y = p
1
x
1
! p
2
x
2
(note that the constraint function is linear).
Find the stationary point x
1
0
, x
2
0
, and 8
0
. If u(x
1
, x
2
) is increasing and quasiconcave in x
1
and x
2
, x
1
0
and x
2
0
will be those quantities that max utility subject to the constraint.
However, if u(x
1
, x
2
) is increasing and quasiconvex in x
1
and x
2
then x
1
0
and x
2
0
will min utility
subject to the constraint.
Geometric Example
Find the stationary combination of labor and capital that solves the production managers
problem, K
0
, L
0
.
If f(K,L) is increasing and quasiconcave in K and L, the stationary point is demonstrated with the
left graph.
If f(K,L) is increasing and quasiconvex in K and L, the stationary point is demonstrated with the
right graph.
In the first graphical example K
0
, L
0
min costs
in the second graphical example K
0
, L
0
max costs
Before we proceed to define some different curvature properties lets define the concept of a convex
set.
The concept of a convex set will prove useful in the definitions of different curvature properties for
functions and for our intuitive understanding of those properties.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Definition: A set of points S in N-dimensional space is convex if for every two points x
1
and x
2
belonging to S, where x
1
= (x
1
1
, x
2
1
, .., x
N
1
) and x
2
= (x
1
2
, x
2
2
..., x
N
2
), the straight line
segment joining the two points also belongs to S. That is, a set S is convex if and
only if for every x
1
, x
2
0 S, and scalar 8 such that 0 # 8 # 1 we have
8x
1
+ (1!8) x
2
0 S.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Examples of convex sets in two-dimensional space.
Examples of non-convex sets in two-dimensional space.
In three dimensions a sphere or 3 dimensional rectangle floating motionless in space is a convex
set, a donut is not a convex set.
Another useful concept is that of a strictly convex set.
Definition: A set of points S in N-dimensional space is strictly convex if for every two points x
1
and x
2
belonging to S such that x
1
x
2
, the straight line segment joining the two
points belongs to S but does not belong to the boundary of S (i.e. all the points on the
interior of the straight line must be strictly in the interior of S): that is, a set S is
strictly convex if and only if for every x
1
, x
2
0 S, and scalar 8 such that 0 < 8 < 1 we
have
8x
1
+ (1 - 8)x
2
0 the interior of S.
Examples of strictly convex sets in two-dimensional space.
Examples of sets in two-dimensional space that are convex but not strictly convex.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Note that: ALL strictly convex sets are convex
but
ALL convex sets are not strictly convex.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Now Let's Formally Define Some Curvature Properties
As we proceed, I will try to describe what the properties imply about the shape of different economic
functions such as the production function and the utility function.
Definition: Concave and Convex Functions
A function f(x) is a concave function over a convex set S if and only if x
1
0 S, x
2
0 S,
0 # 8 # 1 implies f(8x
1
+ (1-8)x
2
) $ 8f(x
1
) + (1-8)f(x
2
), convex if and only if
f(8x
1
+ (1!8)x
2
) # 8f(x
1
) + (1-8) f(x
2
)
Geometric Example of concavity and convexity when N=1
assume S / {x : x > 0}
N = 1 implies x is a scalar
8

1
In the graph, the continuous line is the indifference curve. Note that it is the boundary of the upper-
level set. The shading indicates the continuation of the upper-level set.
Minimization & Maximization Edward R. Morey - feb 20 2002
A Geometric Example of a Concave Function when N=2.
The graph of a concave function (n = 1) always lies on or below its tangent line. In higher
dimensions (N > 1), the graph of a concave function always lies on or below its tangent hyperplane.
Things to note about concave functions.
a) If y = f(x) is concave, then the set L
u
(y) / {x : f(x) $ y} is a convex set (that is, all the upper
level sets of a concave function are convex sets)
b) However, the fact that L
u
(y) is a convex set for all y does not imply that y = f(x) is a concave
function.
Example: what does concavity mean in terms of the utility function u(x
1
, x
2
)?
If a utility function u(x
1
, x
2
) is concave and increasing in x
1
and x
2
, this implies
i) The upper level set L(u) / {(x
1
, x
2
) in R
2
+
: u(x
1
, x
2
) $ u} is a convex, but not necessarily
strictly convex, set, and the indifference curves don't look like
1
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Minimization & Maximization Edward R. Morey - feb 20 2002
but could look like
Fat indifference curves are disallowed by the assumption that u(x
1
, x
2
) is 8 in x.
ii) In terms of marginal utilities (if you believe in such a thing) they are all strictly positive
but not necessarily declining over there entire range.
iii) Note the restriction that u(x
1
, x
2
) is concave is sufficient, but not necessary, for all the
upper level sets to be convex sets.
The graph of a convex function (n = 1) always lies on or above its tangent line. In higher dimensions
(N > 1), the graph of a convex function always lies on or above its tangent hyperplane.
Things to note about convex functions.
a) If y = f(x) is convex, then the set L
l
(y) / {x : f(x) # y} is a convex set (that is, the lower level
sets of all convex functions are convex sets)
b) However, the fact that L
l
(y) is a convex set for all y does not imply that y = f(x) is a convex
function.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Definition: Strictly Concave and Strictly Convex Functions
A function f(x) is a strictly concave function over a convex set S if and only if x
1
0 S, x
2
0 S,
0 < 8 < 1 implies f(8x
1
+ (1-8)x
2
) > 8f(x
1
) + (1-8)f(x
2
), and strictly convex if and only if
f(8x
1
+ (1!8)x
2
) < 8f(x
1
) + (1-8) f(x
2
)
Things to note about strictly concave functions.
a) If y = f(x) is strictly concave, then the set L
u
(y) / {x : f(x) $ y} is a strictly convex set (i.e.
all the upper level sets of a strictly concave function are strictly convex sets)
b) However, the fact that L
u
(y) is a strictly convex set for all y does not imply that y = f(x) is a
strictly concave function.
Things to note about strictly convex functions.
a) If y = f(x) is strictly convex, then the set L
l
(y) / {x : f(x) # y} is a strictly convex set (i.e. the
lower level sets of all convex functions are convex sets)
b) However, the fact that L
l
(y) is a strictly convex set for all y does not imply that y = f(x) is a
strictly convex function.
Can the production function, be convex in the input levels? Strictly convex? x f k l = ( , )
What will the isoquants look like if is strictly convex in k and l? How will a firm x f k l = ( , )
with such inputs produce x?
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Minimization & Maximization Edward R. Morey - feb 20 2002
Assume a production function x = f(K,L) where f(K,L) is twice differentiable in K and L. Further
assume f(K,L) is nondecreasing in K and L, i.e., and
a. What does it mean to say this production function is concave in K and L? Specifically,
what does it mean in terms of the marginal products of labor and capital, and what does it
mean in terms of the shapes of the isoquants?

b. What does it mean to say this production function is strictly concave? Specifically,
what does it mean in terms of the marginal products of labor and capital? What do we call
this property in principles classes?
c. What does strict concavity mean in terms of the shapes of the isoquants?
d. Would you expect all production functions to be concave in K and L? Yes or No and
explain.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Now let's discuss the weaker curvature properties quasiconcavity and quasiconvexity.
Definition: Quasiconcave and Quasiconvex functions
A function f(x) is a quasiconcave function over a convex set S if and only if x
1
0 S, x
2
0 S,
f(x
1
) # f(x
2
), 0 # 8 # 1, implies f(x
1
) # f(8x
1
+ (1!8) x
2
)
quasiconvex if f(x
2
) $ f(8x
1
+ (1!8) x
2
)
Basically, the definition says that a function is quasiconcave if and only if all of its upper level sets
are convex sets and a function is quasiconvex if, and only if, all of its lower level sets are convex
sets. All concave functions are quasiconcave but all quasiconcave functions are not concave.
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Minimization & Maximization Edward R. Morey - feb 20 2002
A Graphical Example of Quasiconcavity and Quasiconvexity when N=1.
Assume that
This function is quasiconcave but not concave. We can see that it violates the conditions for
concavity and convexity.
in the range x = 2 to 10 it is not concave
in the range x = 10 to 15 it is not convex
However, for any two points belonging to S, the conditions for quasiconcavity will be fulfilled.
For example, if x
1
= 2 and x
2
= 10 then f(2) # f(10) and all the values of f(x) 2 # x # 10 are
greater than or equal to f(2).
Check that all the upper level sets of the graphed function, f(x), are convex sets. The upper level
sets are L(y) / {x : f(x) $ y}
if y = 0 the upper level set consists of all nonnegative values of x (a convex set)
if y = 6 the upper level set consists of all values of x $ 5 (again obviously a convex set)
all of the upper level sets of this function will be convex sets
Is this function quasiconvex? Yes...Why?
Now assume that Is this function quasiconcave?
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Minimization & Maximization Edward R. Morey - feb 20 2002
How about this one? Or this one?
Or this one?
a), b), and d) are quasiconcave. c) is not quasiconcave. Why?
Which ones are quasiconvex?
c) and d) are quasiconvex. a) and b) are not quasiconvex. Why?
A Geometric Example of Quasiconcavity and Quasiconvexity when N=2.
This is supposed to look like a
bell.
It's quasiconcave but not concave.
The upper level sets of this
function are all convex sets.
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Minimization & Maximization Edward R. Morey - feb 20 2002
If all of the upper level sets of a function f(x
1
, x
2
) are of the following sort, f(x
1
, x
2
) is quasiconcave.
Why e) and f)?
If all of the upper level sets of f(x
1
, x
2
) are of the following sort f(x
1
, x
2
) is not quasiconcave.
So, with all this in mind,
what are the implications of assuming that the utility function u = u(x
1
, x
2
) is increasing and
quasiconcave in x
1
and x
2
.
i) The assumption of quasiconcavity alone means all the bundles that provide at least u utils are
a convex set (but not necessarily a strictly convex set).
ii) Quasiconcavity alone doesn't eliminate the possibility of thick indifference curve.
iii) The assumption of that u(@) is increasing in x
1
and x
2
eliminates the possibility of thick
indifference curves.
iv) The assumptions in no way guarantee that the consumer will consume some of all the goods
(i.e. assuming 8 and quasiconcave does not rule out corner solutions)
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Minimization & Maximization Edward R. Morey - feb 20 2002
AND
These assumptions do not guarantee that MRSx
1
x
2
= p
1
/p
2
for the utility max bundle (that is a
tangency solution to the u max problem is not guaranteed).
v) There is no guarantee that the utility max bundle is unique.
vi) In terms of marginal utilities (if you believe in such a thing) they are all positive, but there
are no restrictions on the rate at which utility increases.
Does the assumption that the utility function is increasing and quasiconcave in its arguments
imply that u > 0?
If we want to guarantee that the solution to the consumer's constrained optimization problem is
unique, and a tangency if its an interior solution, then we have to assume that the utility function is
strictly quasiconcave.
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Minimization & Maximization Edward R. Morey - feb 20 2002
Definition: Strictly Quasiconcave and Strictly Quasiconvex Functions
A function f(x) is a strictly quasiconcave function defined over a convex set S if and only if
x
1
0 S, x
2
0 S, x
1
x
2
, f(x
1
) # f(x
2
), and 0 < 8 < 1, implies f(x
1
) < f(8x
1
+ (1!8) x
2
); strictly
quasiconvex if f(x
2
) > f(8x
1
+ (1!8) x
2
)
This definition says a function is strictly quasiconcave if and only if all of its upper level sets are
strictly convex sets
AND
strictly quasiconvex if and only if all of its lower level sets are strictly convex sets
All strictly quasiconcave functions are quasiconcave but quasiconcave functions are not all strictly
quasiconcave.
A Geometric Example of Strict Quasiconcavity and Strict Quasiconvexity when N=2.
Assume that f(x) is
This function is quasiconcave
but not strictly quasiconcave.
The bell on page 43 was strictly
quasiconcave.
If N=1, can one distinguish between a quasiconcave and strictly quasiconcave function?
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Minimization & Maximization Edward R. Morey - feb 20 2002
The upper level sets of a strictly quasiconcave function f(x
1
, x
2
) appear as follows:
where L(y) / {(x
1
, x
2
) : f(x
1
, x
2
) $ y}.
The following upper level sets are consistent with f(x
1
, x
2
) being quasiconcave but not with it being
strictly quasiconcave.
What are the implications of assuming the utility function u = u(x
1
, x
2
) is increasing and strictly
quasiconcave in x
1
and x
2
?
Basically the indifference map has the nice shape one sees in intermediate micro theory books.
More specifically
i) All the bundles that provide at least u utilities are a strictly convex set.
ii) If some of all the goods are consumed then MRSx
1
x
2
= p
1
/p
2
for the chosen bundle.
iii) The u max bundle is unique.
However, strict quasiconcavity of u(@) does not guarantee that some of all goods will be
consumed.
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Minimization & Maximization Edward R. Morey - feb 20 2002
THE END
We typically assume that production functions are quasiconcave. Is this restrictive, or will firms
always behave as if they have a quasiconcave production function? What are the benefits and
costs of assuming the production function is strictly quasiconcave?