ES5081 Paul Madden

CONCAVITY & STATIC OPTIMIZATION LECTURE I

Functions A function f : X  Y is a rule or mapping that

associates each element of X with one and only one element of Y.

X is the domain and f  X  = { y  Y : y = f  x , x  X } is the range.

Example: power functions f = R   R  where f  x = x ,

  0 . (Notation: R is the set of real numbers, R  the non-

n n n
negative subset, R  the strictly positive subset; R , R  , R 

are the corresponding sets of n-dimensional vectors.)

See diagram (1.1.1)

All power functions are continuous (the graphs have no “kinks“)

with first derivatives f ' x  =  x−1 (= the slope of f  x at x),

second derivative f ' ' x =  −1 x −2 (= the slope of f ' x  at x).

Some terminology: f is C 2 means second derivatives of f exist and

are continuous (power functions are certainly C 2 ).

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CONCAVE FUNCTIONS The line joining any 2 points on the

graph lies entirely on or below the graph. Formally, f : X  Y is

concave iff:

f   x1−z  ≥  f x   1− f z , ∀ x , z  X , ∀   [0,1]

If f is C 2 then f is concave iff its Hessian matrix H x is negative

semi-definite ∀ x  X where

 
f 11 '' x  ... f 1n ' ' x
∂2 f
H x = ... ... ... and f ij '' x  = at x
∂ xi ∂ x j
f n1 '' x  ... f nn ' ' x

n = 1 gives f ' ' x ≤ 0 ∀ x  X ; n = 2 gives f 11 ' ' x ≤ 0 ,

f 22 ' ' x ≤ 0 and

det H x = f 11 ' ' x⋅f 22 ' ' x − f 12 ' ' x⋅f 21 ' ' x ≥ 0 , ∀ x  X .

Strict concavity requires that the line joining any 2 points on the

graph lies (ends apart) entirely below the graph;

f  x1− z   f x   1− f z , ∀ x , z  X , x ≠ z ,   0,1 .

The C 2 test now requires strict inequalities

(negative definite H x ).

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For convex functions the line joining any 2 points on the graph lies

entirely on or above the graph. The C 2 test requires a positive

semi-definite H x : for n = 1 , f ' ' x ≥ 0 ∀ x  X ; for n = 2 ,

f 11 ' ' x ≥ 0 , f 22 '' x  ≥ 0 and det H x ≥ 0 ∀ x  X .

Strict convexity is analogous.

Examples (a) f : R  R  where f  x = x ,   0 .

f ' x  =  x −1 , f '' x  = −1 x −2 . So f is concave if  ≤ 1 ,

strictly concave if   1 , convex if  ≥ 1 , strictly convex if   1

(b) f : R 2 R  where f  x1, x 2  = x 1 x2 .

f 1 ' = x 2 , f 2 ' = x 1 : f 11 ' ' = f 22 ' ' = 0 , f 12 ' ' = f 21 ' ' = 1 ⇒ H x  =  
0 1
1 0

and det H x = −1  0 . So f is neither concave nor convex.

UNCONSTRAINED OPTIMIZATION A stationary point of f : X  Y

is x  X where f i ' x  = 0 , i = 1,... ,n (all partial derivatives are

zero).

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A global maximum (minimum) of f is x  X where f  x ≥ ≤  f  z

∀ z  X . An important result is: if f is concave, then x is a global

max of f iff it is a stationary point. [if f is convex, replace max with

min]

Examples (a) f : R  R where f  x = ln x − x .

1 1
f ' x  = − 1 = 0 when x = 1 ; f ' ' x = − 2  0 ∀ x  R  ,
x x
So f is concave. So x = 1 is global max of f (& f 1 = 0 )

2 2
(b) f : R 2  R where f  x1, x 2  = x 1  x2 − x1 − x 2

f 1 ' = 1 − 2x 1 , f 2 ' = 1 − 2x 2 ⇒ x =
 
1 1
,
2 2
is stationary point

 
f 11 ' ' = f 22 ' ' = −2 , f 12 '' = f 21 '' = 0 ⇒ H x  =
−2 0 , n.s.d. so
0 −2

f is concave and x =  
1 1
,
2 2
is global max   
f
1 1
, =
2 2
1
2
.

CONSTRAINED OPTIMIZATION 1

max f  x s. t. g x ≥ 0 (1)
x

Assume: f, g are concave and ∃ x where g x   0 .

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Define the Lagrangian: L  x , = f  x  g  x

Then x solves (1) iff ∃  such that;

∂L ∂f ∂g
(A) =   = 0 ∀ i , (B)  ≥ 0 , (C)  g x = 0 ,
∂ x i ∂ xi ∂ xi

(D) g x  ≥ 0

These conditions are Kuhn-Tucker conditions (& (C) is the

complementary slackness condition)

Note: if f has no stationary points then  ≠ 0 from (A), so

(B) – (D) reduce to   0 and gx  = 0 .

1
Examples max x1  x 2 − x 12 − x22 s. t. 2x 1  2x 2 ≤
2
1
f is concave (previous exercise), g = − 2x 1 − 2x 2 is concave
2
(check) and g 0  0 (e.g.).

2 2
L = x1  x 2 − x 1 − x 2  
 1
2
− 2x 1 − 2x 2

∂L ∂L
(A) = 1 − 2x 1 − 2  = 0 = 1 − 2x 2 − 2  = 0 ,
∂ x1 ∂ x2

1 1
(B)  ≥ 0 , (C)  = 0 or 2x 1  2x 2 = , (D) 2x 1  2x 2 ≤
2 2

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1 1
Try  = 0 : x 1 = x 2 = from (A) but 2x 1  2x 2 = 2  no
2 2
1 1
solution. Try 2x 1  2x 2 = : x1 = x 2 = 1−2  from (A) so
2 2
1 3 1
21−2 = and  =  0 : x1 = x2 = is solution
2 8 8
therefore.

HOMOGENEOUS FUNCTIONS f : R n R  is homogeneous of

degree r (hod r) iff f tx  = t r f  x ∀ t  0 . A useful result is

n
Euler's theorem; if f is hod r then ∑ x i ⋅ f i ' x  = r ⋅f  x  .
i=1

Examples (a) f  x = x ⇒ f  tx  = tx  = t  x = t  f x  and f

is hod 

 2   12
(b) f  x1 , x 2  = x 1 1 ⋅x 2 ⇒ f tx  = tx 1 1 tx 2 2 = t ⋅f  x  and

f is hod 1  2

The Cobb-Douglas functions

n

f : R R  where f  x = ∏ x i i , i  0
n

i=1

n = 1 gives a power function: n = 2 gives example (b) above.

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Some properties: (a) f is continuous and C 2

(b) f 0 = 0 and f  x = 0 when any xi = 0 ; f x   0 if xi  0

(c) f is hod ∑ i
(d) f is strictly concave if ∑ i  1 , concave if ∑ i = 1 , and
neither concave nor convex (if n ≥ 2 ) if ∑ i  1 .
The Cobb-Douglas as a utility function

 2
max ux  = x 1 1 x 2 s. t. p1 x 1  p2 x2 ≤ m x1 , x 2 ≥ 0
(u max) x ,

where m , p1 , p 2  0 are parameters and ∑ i ≤ 1

All solutions will be “interior“, i.e. xi  0 ∀ i , since any xi = 0

means u x  = 0 , and u x   0 can be attained since m  0 .

Hence we ignore non-negativity constraints and the Lagrangian for

the reduced 1 – constraint problem is

 
L  x , = x1 1 x2 2  m − p1 x 1 − p2 x2 

i −1 
Since ui ' = i x i x j j  0 , u has no stationary points and the K-T

conditions reduce to (requirements satisfied – check)

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∂L  1−1 2 ∂L 1 2−1
(I) ∂ x =  x
1 1
x 2
− p 1
= 0 =  x
2 1
x 2
−  p2 = 0
1
∂ x 2

(II)   0 and (III) m = p1 x 1  p2 x 2

1 1 2 2 1 
From (I) x1 x 2 =  p1 , x1 x 2 2 =  p2 ( ⇒   0 )
x1 x2

1 x 2 p1 2 2
Dividing, ⋅ = ⇒ p x
2 2 = p x
1 1 ⇒ m = p x
1 1  p 1 x1
x1  2 p2  1  1

1 2
⇒ p1 x 1 = m , p2 x 2 = m
1  2  12
and the consumer's (Marshallian) demand functions are:
1 m 2 m
x1 p , m = ⋅ x2 p , m = ⋅
12 p1 12 p2

The value of utility at this solution to (u max) gives the indirect

utility function;

  
1 2
1 m 2 m
[
V p , m = u x1 p ,m , x2 p , m = ] 1 2
⋅
p1 12
⋅
p2

Notice that, as prices and income vary, the budget share spent on

good i  
pi x i
m
remains constant  =
i
 12   . Also the own price

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demand elasticity for any good i  i =

 ∂ xi pi
⋅
∂ pi x i  is

i m pi
i = − ⋅ 2
⋅ = −1
 12 pi i m
⋅
12 pi
These constant budget shares and unit elastic demands are special

features of Cobb-Douglas consumers.

Consumer theory also studies expenditure minimization:

n
(E min) min ∑ pi x i s. t. ux  ≥ u
 , xi ≥ 0 ∀ i where p,
x i=1

u are parameters. The solutions in x, as functions of p, 

 u , are

Hicksian demand functions, and the resulting expenditure is the

expenditure function.

Note: the problem min f  x  s. t. g x ≥ 0 has the same x

solutions as max −f  x s. t. gx  ≥ 0 .

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REFERENCES

MADDEN pages 11 – 25, 29 – 30, 34 – 40, 41 – 50, 60 – 74,

75 – 82, 114 – 120

KLEIN pages 29 – 34, 202 – 206, 354 – 357, 235 – 240,

244 – 250

# MAS-COLELL pages 930 – 933, 55 – 56, 63

Note:

# INDICATES A MORE ADVANCED REFERENCE AND MATERIAL

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