Chap. 17 Optimization with constrained conditions...

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1 Cha. 7 Otimization with constrained conditions Under thecondition k ma f min f Bdet constraint... nn I I Constraint of a rodctionfnction q f... f... q n n

2 lower contor set Uer Contor set

3 3 Constraint set constraint line } { k Continosly differentiable Partial derivatives are ositive

4 4 Analysis by the imlicit fnction theorem there eists By theimlicit fnction theorem h k h h h at differentiate Totally d d k d d

5 Gradient vector of the constraint crve k k k qasi - conve 5

6 Gradient vector of the objective fnction qasi - concave 6

7 The tanent condition of the otimm soltion * * * constraint k * 7

8 Method of aranean mltilier ma [min ] sbject to k : strictly qasi -concave fnction d is weakly monotone increasin d at k 8

9 9 arane mltilier and arane fnction aranian k mltilier : arane arane fnction aranian The st order conditions

10 First order conditions and tanency conditions k k k

11 Second order conditions Conditions for maimm: is strictly qasi-concave * * constraint : k k qasi - conve

12 Second order conditions Conditions for minimm: is strictly qasi-conve Constraint: k k qasi-concave * * k

13 Second order conditions Conditions for maimm: is strictly qasi-concave Constraint: k k qasi-conve * * k 3

14 Second order conditions Conditions for maimm: is strictly qasi-concave * Constraint: k k qasi-concave * k 4

15 Second order conditions for maimization : strictly qasi-concave and : qasi-conve : strictly qasi-concave and : qasi-cancave 5

16 6 Second order conditions for maimization

17 Second order conditions for maimization 3 4 : qasi-concave and : strictly qasi-conve : qasi-concave and : strictly qasi-concave 7

18 8 Second order conditions for maimization

19 9 Second order conditions for maimization The sloe of s contor crve increases faster than that of

20 Smmary of the otimization conditions ] [min ma f f sb to f First order conditions

21 Smmary of Second order conditions for maimization f: strictly qasi-concave : linear f: strictly qasi-concave > : qasi-conve f: strictly qasi-concave < : qasiconcave f: qasi-concave > : strictly qasi-conve f: qasi-concave < : strictly qasiconcave

22 Smmary of Second order conditions for minimization f: strictly qasi-conve : linear f: strictly qasi-conve > : qasi-concave f: strictly qasi-conve < : qasi-conve f: qasi-conve > : strictly qasi-concave f: qasi-conve < : strictly qasi-conve

23 The maimm vale fnction and arane mltilier ma sbject to [min k ] varies accordin to the arameter k k k k 3

24 The maimm vale fnction and arane mltilier d d dk d d d d d d d dk d k dk 4

25 5 Utility-maimization roblem of a consmer sbject to I qasi-concave linear I I ma

26 6 The tility-maimization roblem of the consmer I I I I is sbstitted to the bdet constraint and solve

27 7 Utility-maimization roblem of a consmer I di d I I I

28 Utility-maimization roblem of a consmer s. t. I qasi-concave ma I conve set linear qasi-conve fnction 8

29 9 I I The arane's mltilier law Make arane fnction Since is a qasi-concave fnction and the bdet constraint is linear the second order conditions of maimization are met. Partially differentiate w.r.t. three variables

30 Cost minimization roblem of a rodcer conve set C K rk w linear qasi-conve min C K K s. t. F K Q Q F K strictly qasi-concave 3

31 The arane's mltilier law Make arane fnction K rk w [ Q F K ] K r F K K wf Q K F K Since the objective fnction is linear and F is strictly qasi-concave the second order conditions of minimization are met. 3

λ. It is usually positive; if it is zero then the constraint is not binding.

λ. It is usually positive; if it is zero then the constraint is not binding. hater 4 Utilit Maimization and hoice rational consmer chooses his most referred bndle of commodities from the set of feasible choices to consme The rocess of obtaining this otimal bndle is called tilit-maimization

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