LU

7
Unconstrained Optimization
Constrained Optimization
Lagrange Multipliers

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2
Unconstrained Optimization
Optimizing functions without any constraints.
Strategy
1. Solve the simultaneous equations to find the stationary
point, (a, b),
f
x
(x,y) = 0
f
y
(x,y) = 0
2. If
a. f
xx
> 0, f
yy
> 0 and f
xx
fyy f
2
xy
>0 at (a,b) then the
function has a minimum at (a, b).
b. f
xx
< 0, f
yy
< 0 and f
xx
f
yy
f
2
xy
>0 at (a,b) then the
function has a maximum at (a, b).
c. f
xx
f
yy
f
2
xy
< 0 at (a,b) then the function has a saddle
point at (a, b).
3
Example
Find and classify the stationary points of the function f(x,y) = x
3
3x + xy
2
.
Answer:
Given f(x,y) = x
3
3x + xy
2
f
x
= 3x
2
3 + y
2
f
xx
=6x
f
y
= 2xy f
yy
= 2x
f
xy
= 2y

Step I:
f
x
(x,y) = 0
3x
2
3 + y
2
= 0(1)

f
y
(x,y) = 0
2xy = 0 (2)
Begin with equation (2). The only way that the product of
three numbers can be equal to zero is when one or more
of the individual numbers forming the product are zero.
So either x = 0 or y = 0.

Case 1: x = 0, Substituting x = 0 into equation (1),
3x
2
3 + y
2
= 3(0)
2
3 + y
2
= 0
y
2
= 3
y = \3 and y = -\3

The stationary points = (0,\3) and (0, -\3).

Case 2: y = 0, Substituting y = 0 into equation (1),
3x
2
3 + y
2
= 3x
2
3 +(0)
2
= 0
3x
2
= 3
x
2
= 1
x = 1 and x = -1
The stationary points = (1,0) and (-1,0).
4
Continued
Step 2:

Point (0, -\3)
fxx =6x= 6(0) = 0
fyy = 2x= 2(0) = 0
fxy = 2y=2(-\3) =-2\3
fxxfyy f
2
xy =0(0) (-2\3)
2
= -12 < 0.

So, (0,-\3) ia a saddle point.

Point (0, \3)
fxx =6x= 6(0) = 0
fyy = 2x= 2(0) = 0
fxy = 2y=2(\3) = 2\3
fxxfyy f
2
xy = 0(0) (2\3)
2
= -12 < 0.

So, (0,\3) ia a saddle point.
Point (-1, 0)
fxx =6x = 6(-1) = -6 < 0
fyy = 2x = 2(-1) = -2 < 0
fxy = 2y =2(0) = 0
fxxfyy f
2
xy =(-6)(-2) (0)
2
= 12 > 0

So, (-1, 0) ia a maximum point

Point (1, 0)
fxx = 6x = 6(1) = 6 > 0
fyy = 2x = 2(1) = 2 > 0
fxy = 2y =2(0) = 0
fxxfyy f
2
xy = 6(2) (0)
2
= 12 > 0

So, (1, 0) ia a minimum point

5
Example
A firm has the possibility of charging different prices in its domestic and
foreign markets. The corresponding demand equations are given by
Q
1
= 300 P
1
Q
2
= 400 2P
2

The total cost function is
TC = 5000 + 100Q
where Q = Q
1
+ Q
2
.

Determine the prices that the firm should charge to maximize profit with
price discrimination and calculate the value of this profit.
6
Answer
Given Q
1
= 300 P
1
P
1
= 300 Q
1

TR
1
= P
1
Q
1
= 300Q
1
Q
1
2

Q
2
= 400 2P
2
2P
2
= 400 Q
2
P
2
= 200 - 0.5Q
2
TR
2
= P
2
Q
2
= 200Q
2
0.5Q
2
2


So, TR = TR
1
+ TR
2
= 300Q
1
Q
1
2
+ (200Q
2
0.5Q
2
2
)
TR = 300Q
1
Q
1
2
+ 200Q
2
0.5Q
2
2


Given TC = 5000 + 100Q where Q = Q
1
+ Q
2
.
So, TC = 5000 + 100(Q
1
+ Q
2
) = 5000 + 100Q
1
+ 100Q
2


Profit, t = TR TC = 300Q
1
Q
1
2
+ 200Q
2
0.5Q
2
2
(5000 + 100Q
1
+ 100Q
2
)
= 300Q
1
Q
1
2
+ 200Q
2
0.5Q
2
2
5000 - 100Q
1
- 100Q
2

t = 200Q
1
+ 100Q
2
Q
1
2
0.5Q
2
2
5000

7
Continued
Step 1: At a stationary point
t = 200Q
1
+ 100Q
2
Q
1
2
0.5Q
2
2
5000




Step 2: Check that the conditions for a maximum are satisfied.


It is a maximum value.

Substitute Q
1
= 100 & Q
2
= 100 into the demand & profit functions,





t = 200Q
1
+ 100Q
2
Q
1
2
0.5Q
2
2
5000
= 200(100) + 100(100) (100)
2
0.5(100)
2
5000
= 20 000 + 10 000 10 000 5000 5000
= RM10 000
units Q
Q
Q
dQ
d
100
200 2
0 2 200
1
1
1
1
=
=
= =
t
units Q
Q
dQ
d
100
0 100
2
2
2
=
= =
t
0 2
2
1
2
< =
dQ
d t
0 1
2
2
2
< =
dQ
d t
( )( ) 0 2 0 1 2
2
2 1
2
2
2
2
2
1
2
> = =
|
|
.
|

\
|

|
|
.
|

\
|
|
|
.
|

\
|
dQ dQ
d
dQ
d
dQ
d t t t
P
1
= 300 Q
1
= 300 100
= RM200
P
2
= 200 - 0.5Q
2
= 200 0.5(100)
= 200 - 50
= RM150
8
Constrained Optimization
Optimizing functions subject to a constraint.
In general,
to optimize a function, z = f(x,y), called the
objective function, subject to a constraint |(x,y) =
M. Phi, | is a known function of two variables
and M is a known constant.
The problem is to pick the pair numbers (x, y)
which maximizes or minimizes f(x,y) as before.
However we limit the choice o f pair to those
which satisfy |(x,y) = M.

9
Example
Find the maximum value of the objective function z = 2x
2
3xy + 2y + 10, subject to the
constraint y = x.

Given y = x z = 2x
2
3xy + 2y + 10 = 2x
2
3x(x) + 2x + 10
= 2x
2
3x
2
+ 2x + 10
= -x
2
+ 2x + 10

At a stationary point, dz/dx = 0 -2x + 2 = 0 y = x = 1
2x = 2
x = 1

Check: d2z/dx2 = -2 < 0 maximum point. The value of z is
z = -x
2
+ 2x + 10 = -(1)
2
+ 2(1) + 10
z = -1 + 2 + 10
z = 11

The constraint function therefore has a maximum value of 11 at the point (1,1).


10
Example
A firms unit capital and labor costs are RM1 and RM2
respectively. If the production function is given by Q =
4LK + L
2
, find the maximum output and the levels of K
and L at which it is achieved when the total input costs
are fixed at RM105. Verify that the ratio of marginal
product to price is the same for both inputs at the
optimum.
11
Answer
The objective function: Q = 4LK + L
2

subject to the constraint: K + 2L = 10

Step1: Rearranging the constraint to express K in
terms of L, gives
K + 2L = 105
K = 105 2L

Step 2: Substituting this into the objective function
Q = 4LK + L
2

Q = 4L(105 2L) + L
2

Q = 420L 8L
2
+ L
2

Q = 420L 7L
2


Step 3: At a stationary point, dQ/dL = 0, that is
Q = 420L 7L
2

dQ/dL = 420 14L = 0
14L = 420
L = 30 of labor

Differentiating a second time,
d
2
Q/dL
2
= -14 < 0, a maximum point.

Substituting L = 30 into the objective function,
Q = 420L 7L
2
= 420(30) 7(30)2
= 12 600 6 300 = 6 300 units

Substituting L = 30 into the constraint,
K = 105 2L = 105 2(30)
= 105 60 = 45 units

The firm should therefore use 30 units of labor and
45 units of capital to produce a maximum output
of 6 300 units.


12
Continued
From Q = 4LK + L
2

MP
L
= dQ/dL = 4K + 2L
MP
K
= dQ/dK = 4L

At the optimum,
MP
L
= 4K + 2L = 4(45) + 2(30) = 180 + 60 = 240
MP
K
= 4L = 4(30) = 120

The ratios of marginal products are then and
which are seen to be the same.

120
2
240
= =
L
L
P
MP
120
1
120
= =
K
K
P
MP
K
L
MP
MP
dK
dQ
dL
dQ
=
Note:
MRTS =
13
Lagrange Multipliers
A method to solve constrained optimization problems. It handles a non-
linear constraint and problems involving more than two variables.
To optimize an objective function, f(x,y) subject to a constraint, |(x,y) =
M the work as follows.
Step 1:
Define a new function
g(x, y, ) = f(x,y) + |M-(x,y)| . Lagrangian function,
= Lagrange multiplier
Step 2:
Solve the simultaneous equations below, for the three unknowns, x, y
and .
dg/dx = 0 dg/dy = 0 dg/d = 0
14
Example
A firms unit capital and labor costs are RM1 and RM2
respectively. If the production function is given by Q =
4LK + L
2
, find the maximum output and the levels of K and
L at which it is achieved when the total input costs are
fixed at RM105.
15
Answer
Step 1: g(L, K, ) = 4LK + L
2
+ (105 - K 2L)
Step 2:
dg/dL = 4K + 2L -2 = 0 (1)
dg/dK = 4L - = 0 (2)
dg/d = 105 K 2L = 0 (3)
From (2) : = 4L (4)
From (1): 4K + 2L -2 = 0 2K + L = (5)

Substitute (4) into (5): 4L = 2K + L
3L = 2K
L = 2/3 K (6)
Substitute (6) into (3):
105 K 2(2/3K) = 0
105 K 4/3K = 0
7/3K = 105
7K = 315
K = 45 units

Substitute K = 45 into (6):
L = (2/3)(45) = 90/3 = 30 labors

So,
Q = 4LK + L
2
= 4(30)(45) + (30)
2

= 5 400 + 900
= 6 300 units
The objective function: Q = 4LK + L2
Subject to the constraint: K + 2L = 105
= 105 K 2L
16
Example
A consumers utility function is given by
U(x
1
,x
2
) = 2x
1
x
2
+ 3x
1


Where x
1
and x
2
denote the number of items of two
goods G1 and G2 that are bought. Each item costs
RM1 for G1 and RM2 for G2. Use Lagrange
multipliers to find the maximum value of U if the
consumers income is RM83. Estimate the new
optimal utility if the consumers income rises by
RM1.

17
Answer
Maximize U = 2x
1
x
2
+ 3x
1
subject to x
1
+ 2x
2
= 83
= 83 - x
1
- 2x
2

Step 1:
g(x, y, ) = 2x
1
x
2
+ 3x
1
+ (83 - x
1
- 2x
2
)

Step 2:
dg/dx
1
= 2x
2
+ 3 - = 0
dg/dx
2
= 2x
1
-2 = 0
dg/d = 83 - x
1
- 2x
2
= 0
That is,
2x
2
+ 3 - = 0 2x
2
- = -3 (1)
2x
1
-2 = 0 2x
1
-2 = 0 (2)
83 - x
1
- 2x
2
= 0 x
1
+ 2x
2
= 83 (3)
From (1): = 2x
2
+ 3 (4)
From (2): 2 = 2x
1

= x
1
(5)

Hence, x
1
= 2x
2
+ 3 (6)


Substituting (6) into (3) Substituting x
2
= 20 into (1)
2x
2
+ 3 + 2x
2
= 83 = 2(20) + 3 = 40 + 3 = 43
4x
2
= 80 From (5)
x
2
= 20 = x
1
= 43

So, the value of U = 2x
1
x
2
+ 3x
1

= 2(43)(20) + 3(43) = 1 720 + 129
= 1 849 util
18
Continued
The final part wants us to find the new optimal
utility if the consumers income rises by RM1.
One way of doing this is just to repeat the
calculations replacing the previous consumers
income of RM83 by RM84. This is extremely
tedious and not strictly necessary. There is a
short cut to this, based on the value of the
Lagrange multiplier, .

19
Continued
Replace the consumers income, RM83 by M, so that the Lagrangian
function is
g(x, y, , M) = 2x
1
x
2
+ 3x
1
+ (M - x
1
- 2x
2
)

Partial differentiate with respect to M then, dg/dM = .

The is a multiplier and represents the (approximate) change in g
due to a one-unit increase in M. Moreover if the constraint is
satisfied , then
x
1
+ 2x
2
= M, and the expression of g reduces to
2x
1
x
2
+ 3x
1
, which is equal to utility function.

In this case, = x
1
= 43, so when income rises by 1 unit, utility
increases by approximately 43 to 1 892 util (1 849 + 43).