WENDNER: INTERMEDIATE MICROECONOMICS Second Order Conditions

1. Notation and Basic Concepts n = number of choice variables, m = number of constraints, f (x1 , ..., xn ) = objective function, g i (x1 , ..., xn ) = i-th (non)linear constraint. Hessian Matrix of f (x1 , ..., xn ): f11 f21 H= fn1 f1n f2n fnn

f12 f22 fn2

(1)

Leading principal minors of the Hessian Matrix of f (x1 , ..., xn ): |H1 | = |f11 | = f11 , f11 f21 fk1 f12 f22 fk2 |H2 | = f1k f2k fkk f11 f12 f21 f22 , , ,

|Hk | =

|Hn | = |H| ,

where |Hi | denotes the ith leading principal minor. Bordered Hessian Matrix of the Lagrange-function L: L = f (x1 , ..., xn ) + 1 g 1 (x1 , ..., xn ) + 2 g 2 (x1 , ..., xn ) + + m g m (x1 , ..., xn ): L1 1 L1 m L1 x1 L1 xn Lm 1 Lm m Lm x1 Lm xn Hb = Lx1 1 Lx1 m Lx1 x1 Lx1 xn Lxn 1 Lxn m Lxn x1 Lxn xn 1 1 gn 0 0 g1 m m 0 0 gn g1 . (2) = 1 m m i i m g1 g1 f11 + f1n + i=1 i g1n i=1 i g11 m m i i m 1 gn gn fn1 + i=1 i gn1 fnn + i=1 i gnn Ronald Wendner Notes V-1 v1.1

If the constraints are linear as bordered Hessian becomes: 0 0 Hb = 1 g 1 1 gn

gij = 0, i = 1, ..., n, j = 1, ..., n the

1 0 g1 m 0 g1 m g1 f11 m gn fn1

1 gn m gn f1n fnn

(3)

Notice that quadrants 1 to 3 represent the border, and quadrant 4 equals the (un-bordered) Hessian matrix. Leading principal minors of the bordered Hessian. As the second quadrant of bordered Hessian matrix (=rst m rows and columns) is a nullmatrix, the rst leading principal minor of interest concerns the square matrix of the rst m + 2 rows and columns! I.e., the rst leading principal minor we are looking at is: |Hbm+2 |, and NOT |Hbm+1 |.
1 0 0 g1 m 0 0 g1 1 m g1 g1 f11 1 m g2 g2 f21 1 g2 m g2 f12 f22 1 g2 m g2 f12 f22 f32 1 g3 m g3 f13 f23 f33

|Hbm+2 | =

|Hbm+3 | =

0 0 1 g1 1 g2 1 g3

1 0 g1 m 0 g1 m g1 f11 m g2 f21 m g3 f31

|Hbm+n | = |Hb| .

2. Concavity and Negative (Semi)Deniteness of H Suppose, m = 0. Concavity of f (x1 , ..., xn ) is a sucient (second order) condition for the rst order conditions to actually represent a maximum for unconstrained maximization problems. Concavity of f (x1 , ..., xn ) implies (and is implied by) negative semi-deniteness of the Hessian matrix. The Hessian matrix is negative semi-denite if (i) the sign of the rst leading principal minor is non-positive, i.e., f11 0, and (ii) the signs of the further leading principal minors alternate. I.e., sign |Hi | = sign (1)i or |Hi | = 0. If all inequalities hold strictly, the Hessian matrix is (strictly) negative denite, f (x1 , ..., xn ) is strictly concave, and the maximizer (if it exists) is unique.

Ronald Wendner

Notes V-2

v1.1

3. Negative (Semi)Deniteness of Hb Suppose, m > 0. Negative (semi)deniteness of Hb is a sucient (second order) condition for the rst order conditions to actually represent a maximum for constrained maximization problems. The bordered Hessian matrix is negative semi-denite if (i) the sign of the rst leading principal minor |Hbm+2 | equals the sign (1)m+1 (or equals zero), and (ii) the signs of the further leading principal minors alternate. I.e., sign |Hbm+i | = sign (1)m+i1 (or equal zero). If all inequalities hold strictly, the bordered Hessian matrix is (strictly) negative denite, and the maximizer (if it exists) is unique. 4. Example: n=2, m=1, linear constraint The bordered Hessian matrix is: 1 1 0 g1 g2 1 Hb = g1 f11 f12 , 1 g2 f21 f22

(4)

and the only leading principal minor we are interest in is |Hb1+2 | = |Hb|. I.e., 1 1 0 g1 g2 1 |Hb| = g1 f11 f12 (5) 1 g2 f21 f22 If we are looking for a (unique) maximum, we need to verify that Hb is negative denite, i.e., sign|Hb| = sign(1)1+1 , which is positive: |Hb| > 0. Notice: For this linear constraint considering that f1 /(g1 ) = f2 /(g2 ) we exactly get our condition for quasiconcavity (with n = 2, m = 1). Good luck for your Final!

Ronald Wendner

Notes V-3

v1.1