Mathematical for Economics

UNIT TWO

CONSTRAINED OPTIMIZATION

INTRODUCTION

In the previous unit we studied the optimization of functions without the existence of
constraints. However, in business and economics studies there are many situations in
which complete freedom of action is impossible. For example, a firm can maximize
output subject to the constraint of a given budget for expenditures on inputs, or it may
need to minimize cost subject to a certain minimum output being produced. Such
functions which involve constraints are called constrained functions and the process of
optimization is referred as constrained optimization. This unit explains the ways of
solving constrained optimization problems with equality and inequality constraints.

Unit Objective

Up on the completion of this unit, you are expected to

 describe what constrained function is
 describe the order condition for the optimization of constrained function
 explain the Lagrange multiplier
 describe how functions with inequality constraints are solved
 describe the Kuhn - Tucker theorem
 solve objective function subject to mixed constants
2.1 One Variable Constrained Optimization with Non - Negative Constraint

i) With equality constraint

¿
Maximize y = f(x), subject to x= x̄ . In this case y =f ( x̄ )
It simply involves determining the value of the objective function at the given point in
the domain.
ii) With non - negativity constraints
Maximize subject to x ¿ 0

(a)
'
At x=0 , f ( x )< 0
For the above function the unconstrained maximum attained when x < 0 at point b as
shown in the above figure where as y attains its constrained optimum at point a.

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 Mathematical for Economics

¿
y =f (0)

(b)
In this case the constrained and unconstrained maximum value of the function lie at the
¿
same point, i.e., they coincide at point a as shown above. y =f (x ) .

(c)

In this case, similar to that of b, the constrained and unconstrained maximum value of the
function reside on the same point,
¿
y =f (0)
'
f ( x )=0
Dear colleague! Please try to minimize y=f ( x ) , subject to x≥0 in a similar way.

Given the function y=f ( x ) subject to the x≥0

Example
Maximize the objective function y = - 3x2 - 7 x + 2 subject to x¿ 0.
First order condition for maximization
'
f ( x )=−6 x−7 = 0
6x= - 7
−7
x= 6

Second order condition for maximization

''
f ( x )=−6<0

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 Mathematical for Economics

−7
Thus, the unconstrained maximum value of the function locates at x= 6 , i.e., x < 0
'
but the constrained maximum, at x=0 , f ( 0)=−7 <0 Thus the constrained maximum of
the function is y=2 .

2. Minimize y = x2 + 2x+ 5, subject to X ¿ 0

First order condition
'
f ( x )=2 x +2=0
x=−1<0
Second order condition
''
f ( x )=2> 0
Thus the function actives it’s unconstrained minimum at x = -1, i.e., y = 4 However, at
'
x̄=0 , f ( x )=2>0 . Therefore, the minimum value of the constrained function is y = f
(0) = 5.

2. 2. Two Variable Problems with Equality Constraints

A. Constrained Optimization by Substitution

This method is mainly applicable for problems where the objective function with only
two variables is maximized or minimized subject to one constraint.
Consider a firm that wants to maximize output given the production function Q = f (K,
L) and suppose PK and PL prices of K and L respectively and a fixed budget B. Then, we
can determine the amount of K and L that optimize Q using the method of substitution.

Example
1. A firm faces the production function Q= 12K 0.4 L 0.4 and assume it can purchase
K and L at prices per unit of 40 birr and 5 Birr respectively and it has a budget of
800 Birr. Determine the amount of K and L which maximizes output.

Solution
The problem is Maximize Q= 12K 0.4 L 0.4
Subject to 40K +5L = 800

According to the theory of production, the optimization condition is written in such a way
that the ratio of marginal product of every input to its price must be the same. That is
MP K MP L
=
PK PL
The marginal products can be obtained by the method of partial differentiation as
follows.

MP K = 4.8 K -0.6 L 0.4....................................... (1)

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 Mathematical for Economics

MP L =4.8 K 0.4 L−0. 6 ....................................... (2)

Substituting these marginal products and the given prices in the constraint function gives
us

4 .8 K−0 .6 L0.4 4 . 8 K 0 .4 L−0 .6

=
40 5

K -0.6 L 0.4 = 8 K 0.4 L -0.6

Multiplying both sides by K 0.6 L 0.6

L = 8k..................................................................... (3)
Substituting (3) in the budget constraint we get

40K + 5(8K) =800

40K+ 40K = 800
80k =800
K=10
Thus, L= 8(10) =80
Therefore, this firm should employ 10 units of capital and 80 units of labor in the
production process to optimize its output.

2
2. Suppose the utility function of the consumer is given by U =4 xy − y and the budget
constraint is 2x+y = 6. Determine the amount of x and y which will optimize total utility
of the consumer.

Solution
MU X MU y
=
Utility is maximized when P x Py
In our example, MU x = 4y, MU y = 4x-2y.Therefore, at the point of equilibrium
4 y 4 x −2 y
=
2 1
4y = 8x-4y
4y + 4y = 8x
8y = 8x
x= y ---------------------------------------- (4)
Substituting (4) above in the budget constraint gives us
2x +x= 6
3x=6
x=2=y
Therefore, this consumer can optimize his utility when it consumes 2 units of good x and
2 units of good y.

B. Lagrange Multiplier Method

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 Mathematical for Economics

The essence of this method is to change a constrained optimization problem in to a form

such that the first order condition of the unconstrained optimization problem can still be
applicable. This method can be used for most type of constrained optimization problems.
Given the function Z= f (x, y) subject to g (x, y) = P x X+ PYY =M, to determine the
amount of x and y which maximize the objective function using the Lagrange Multiplier
Method, we should involve the following steps.

Step 1:- Rewrite the constraint function in its implicit form as

M−xP x − yP y=0
Step 2:- Multiply the constraint function by the Lagrange multiplier λ
λ (M- x P x- y P y) = 0
Step 3:- Add the above constraint to the objective function and thereby we get the
Lagrange function that is a modified form of the objective function which includes the
constraints as follows:
L( x , y , λ )=Z( x , y )+λ (M −xP x− yP y ) ------------------- (1)
Necessary condition, i.e. the first orders condition for maximization is that the first order
partial derivatives of the Lagrange function should be equal to zero.

Differentiating L with respect to x, y, and λ and equating it with zero gives us.
∂L ∂z
= −λP x = 0
∂x ∂x ----------------------- (2)
∂L ∂z
= −λP y =0
∂y ∂y ----------------------- (3)
∂L
=M −xP x − yP y=0
∂λ ------------------------- (4)
From equation (2) and (3) we get
Zx Zy
λ = P x and λ = P y
Zx Zy Zx Px
λ= = =
This means, P x P y or Z y P y
Sufficient condition -To get the second order condition, we should partially differentiate
equations (2), (3) and (4). Representing the second direct partial derivatives by Z xx and Z
yy and the second cross partial derivatives by Z xy and Z yx, the border Hessian

determinant bordered with 0,

g x and g y is
0 gx g y 0 −P x −P y
|H̄|=|g x L xx Lxy |=|−Px Z xx Z xy |>o
g y L yx L yy −P y Z yx Z yy

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 Mathematical for Economics

d 2 Z is referred to as positive definite subject to dg = 0 iff |H̄| <0,

d 2 Z is referred to as negative definite subject to dg = 0 iff |H̄| > 0 .
2
Negative definiteness of d Z implies that the function achieves its relative maximum
point where as a positive definite is a sufficient condition to satisfy the relative minimum
of the objective function.

Maximization

Example
Given the utility function of the consumer who consumes two goods x and y as
U (x, y) = (x+ 2) (y+1)
If the price of good x is P x = 4 birr, that of good y is P y = 6 Birr and the consumers has a
fixed budget of 130 birr. Determine the optimum values of x and y using the Lagrange
multiplier method,

Solution
Maximize U (x, y) = x y + x+ 2y + 2
Subject to 4x + 6y = 130

Dear colleague! Now we should formulate the Lagrange function to solve this problem.
That is
L( x , y , λ ) = x y + x+ 2y + 2 + λ (130 - 4x - 6y) --------------------------------- (1)
∂L ∂L ∂L
=0 , =0 , =0
Necessary conditions for utility maximization are ∂ x ∂y ∂λ
∂L
=( y +1 )−4 λ
∂x =0
y = -1 + 4 λ ------------------------------------- (2)
∂L
=( x+2)−6 λ =0
∂y
x=−2+6 λ ---------------------------------- (3)
∂L
=4 x+6 y−130 =0
∂λ
4x+6y= 130----------------------------------- (4)
Substituting the value of x and y explained in equation (2) and (3) in to (4) enables us to
determine
4 (-2+ 6 λ ) + 6 (-1 +4 λ ) = 130
- 8 + 24 λ - 6 + 24 λ = 130
48 λ = 144
λ =3
Therefore, x = -2+6(3)

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x = -2 + 18 = 16
y = -1 + 4 (3)
y = 11
Second order sufficient condition for utility maximization is

0 gx g y
|H̄|=|g x L xx Lxy |
g y L yx L yy

The second partial derivatives of the objective function and the first partial derivatives of
the constraint function are
∂2 L
2
L xx = ∂ x = 0, L yy = 0, L xy = L yx = 1
∂g ∂g
ց x = ∂ x = 4, and ց y = 6 = ∂ y
Therefore, the bordered Hessian determinant of this function is

0 4 6
|H̄|=|4 0 1 |
6 1 0 = - 4(0-6) + 6 (4- 0) = 48 > 0

The second order condition, i.e., |H̄| > 0 is satisfied for maximization. Thus, the
consumer maximizes utility when he consumes 11 units of good y and 16 units of good x.
The maximum utility is U = (16+2) (11+1) = (18) (12) = 216 units which is similar to the
value of the Lagrange function at these values of x , y and λ . The value of the Lagrange
multiplier λ is 3. It indicates that a one units increase (decrease) in the budget of the
consumer increases (decreases) his total utility by 3 units.

2. Suppose the monopolist sells two products x and y and their respective demand is
P x = 100 - 2 x and P y = 80 - y
The total cost function is given as TC = 20x + 20y, when the maximum joint product of
the two outputs 60 unit. Determine the profit maximizing level of each output and their
respective price.

Solution
Dear colleague! We know that total profit ( π ) = TR - TC, where TR represents total
revenue and TC represents total cost.
TR= x P x + y P y = (100x - 2x2) + (80y - y2)
Thus π = 100x - 2x2 + 80 y - y2 - 20x - 20 y
π = 80 x + 60 y – 2x2- y2
But this monopolist can maximize its profit subject to the production quota. Thus,

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 Mathematical for Economics

Maximize π = 80x + 60 y- 2x2- y 2

Subject to x+ y = 60
To solve this problem, we should formulate the Lagrange function,
L (x, y, λ ) = 80x + 60y - 2x2 - y 2 + λ (x+ y - 60) --------------- (1)
First order conditions for maximum profit are
L x = 80 - 4x + λ = 0
- 4x = - 80 - λ
1
λ
X = 20 + 4 ------------------------------------------------ ------- (2)
L y = 60 - 2y+ λ = 0
- 2y = - 60 - λ
1
y = 30 + 2 λ ----------------------------------------------------------- (3)
L λ = x + y -60 = 0
X + y = 60------------------------------------------------------------ (4)
Substituting equation (2) and (3) in equation (4), we get
1 1
20 + 4 λ + 30+ 2 λ = 60
3
50 + 4 λ = 60
3
4 λ = 10
40
λ=
3
1 40 1 (40 )
)
Thus, x = 20 + 4 ( 3 y = 30 + 2 3
= 20+ 3.33 = 30+6.67
x = 23.33 y = 36.67
Second order condition for maximum profit is
L xx = - 4, L y y = -2, L x y = L y x = 0
g x = 1, g y 1
=
Therefore, the bordered Hessian determinant of the given function is
0 1 1
|H̄| = 1 -4 0 = -1 (-2 - 0) + 1 (0+4) = 6> 0
1 0 -2

The second order condition is satisfied for maximization of functions.

P x=100−2(23 .33 ) P y=80−36 . 67
P x=53 . 34 P y=43. 33

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 Mathematical for Economics

Therefore, the monopolist maximizes its profit when it sells 23.33 of good x at a price of
40
53.34 birr per unit and 36.67 units of good y at a price of 43.33 birr per unit. λ = 3
shows that a one unit increase in total expenditure on inputs increases total profit of the
40
monopolist by 3 units. In other words, if the constant of the constraint relaxes by one
unit that is x + y=61 , then the value of the objective function increases by the value the
Lagrange multiplier .

Minimization

Dear colleague! As we know, the firm can determine the least cost combination of inputs
for the production of a certain level of output Q. Given the production function Q= f (L,
K) and the cost function of the firm is C = LPL + KP k Where L = labor, K = capital, Q =
output. Suppose the price of both input to be exogenous, we can formulate the problem of
minimizing the cost as
Minimizes C = PL L + P k k
Subject to Q = f (L, K)
To determine the amount of labor and capital that should be employed initially we should
formulate the Lagrange function. It is
L=LP L +KP K + λ(Q−f ( L , K ) --------------------------- ---- (1)

First order conditions for a minimum cost are

L L=P L−λQ L=0
PL P
λ= = L
QL MP L ---------------------------------------------- (2)
L K =P K − λQk =0
PK P
λ= = K
QK MP K ------------------------------------------- (3)
L λ=Q−f ( K , L)=0 --------------------------------------------- (4)
Q Q
Where L and k represents marginal product of labor and capital respectively.
From equation (2) and (3), we get
P P
λ= L = K
MP L MP K -------------------------------------------------- (5)
Equation (5) indicates that, at the point of optimal input combination the input - price
ratio and the marginal product ratio have to be the same for each input. This ratio shows
the amount of expenditure per unit of the marginal product of the input under
consideration. Thus, the interpretation the Lagrange multiplier is the marginal cost of
product at the optimal condition. In other words, it indicates the effect of change in

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 Mathematical for Economics

output on the total costs of production, i.e., it measures the comparative static - effect of
the constraint constant on the optimal value of the objective function.

The first order condition indicated in equation (5) can be analyzed in terms of isoquants
and isocosts as
P L MP L
λ = Pk = MP k --------------------------------------------- (6)
MP L
The MP K represents the negative of the slope of the isoquant , which measures the
marginal rate of technical substitution of labor to capital (MRTS Lk ).
PL
The P K ratio shows the negative of the slope of the isocost. An isocost is a line which
indicates the locus of input combinations which entail the same total cost. It is shown by
the equation
C PL
C= PL L + P k K or K = P L - Pk L
PL MP L
Pk = MP k indicates the fact that the isocost and isoquant lines are tangent to each other
at the point of optimal input combination.

Second order condition for minimization of cost.

Dear colleague! As you know, a negative bordered Hessian determinant is sufficient to
say the cost is at its minimum value. That is

0 QL QK
|H̄|=|Q L LLL L LK |
Q K L KL LKK

Example

Suppose a firm produces an output Q using labor L and capital K with production
0.5 0.5
functionQ=10 K L . If the output is restricted to 200 units, the price of labor is 10 birr
per unit and Price of capital is 40Birr per unit, and then determines the amount of L and
K that should be employed at minimum cost. Find the minimum cost.

The problem is Minimize C = 10 L + 40K

0. 5 0 .5
Subject to 200=10 K L
Formulating the Lagrange function
L( L , K , λ )=10 L+40 K +λ (200−10 K 0 . 5 L0. 5 ) ---------------------- (1)

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 Mathematical for Economics

First order conditions

L L=10−5 λK 0. 5 L−0 .5 =0
2 L0 . 5
λ=
K 0 .5 ------------------------------------------------------------- (2)
L K =40−5 λK −0 . 5 L0. 5 =0
8 K 0. 5
λ= 0 .5
L ------------------------------------------------------------- (3)
L λ=200−10 K 0. 5 L0 .5 =0
10 K 0 .5 L0 . 5 =200 ----------------------------------------------------- (4)

From equation (2) and (3), we get

2 L0 . 5 8 k 0 .5
k 0. 5 = L0. 5
2L = 8K
L= 4K ------------------------------------------------------- (5)
Substituting equation (4) in to (5) gives us
K 0 . 5 (4 K )0 . 5=20 ------------------------------------------------ (6)
2K = 20
K = 10 and L = 4(10) = 40, λ = 4

Second order condition

Dear colleague! Now we should check the second order condition to verify that cost is
least at K = 10 and L = 40
For cost minimization the determinant of the bordered Hessian matrix must be less than
zero.

0 QL QK
|H̄|=|Q L LLL L LK |
Q K L KL LKK < 0

At L = 40 and K = 10
∂Q
QL = ∂ L =
K
√ √
(5 ) =(5)
L
10
40
=2 .5

∂Q
Q k = ∂k =
(5 )
√ √K
L
=(5)
40
10
=10
0 .5 −1 .5
= 2.5(4)(10) ( 40)
0 . 5 −1. 5
LLL = 2.5 λK L
= 0.125

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 Mathematical for Economics

−1 .5 0 .5
L kk = 2.5 λK L = 2.5(4)(10) (40)
−1 . 5 0. 5

=2
L KL=L LK =−2 .5 λK −0. 5 L−0 . 5=−2. 5(4 )(10 )−0 .5 (40 )−0. 5
=-3

Therefore, the determinant of the bordered Hessian matrix is

0 2.5 10
|H̄|=|2.5 0.25 −1 |
10 −1 4
= - 2.5 (10+10) +10(-2.5-2.5)
|H̄| = -100 < 0

Thus, the firm can minimize its cost when it employs 5 units of capital and 20 units of
labor in the production process and the minimum cost is
C = 10 (20) + 40 (5)
Min. C = 200 + 200 = 400 birr
In this problem K, L and λ are endogenous. The Lagrange multiplier λ measures the
responsiveness of the objective function to a change in the constant of the constraint
function.

Dear colleague! What happens to the value of the Lagrangian function and the
constrained function when total output increases from 200 to 201? What about the
amount of L and K? Compare the value of the constrained function and that of the
Lagrangian function at this point. Interpret the value of λ
.-----------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------
2.3 Inequality Constraints and Kuhn - Tucker Theorems
Up on the completion of this section you are expected to

- describe what nonlinear programming is

- describe the Kuhn - Tucker conditions
- explain about the constraint qualification
- describe the Kuhn - Tucker sufficiency theorem
- describe the case of Mixed constraints
- show economic application of this theorem

Nonlinear programming
What is nonlinear programming?

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The problem of optimization of an objective function subject to certain restrictions or

constraints is a usual phenomenon in economics. Mostly, the method of maximizing or
minimizing a function includes equality constraints. For instance, utility may be
maximized subject to a fixed income that the consumer has and the budget constraint is
given in the form of equation. Such type of optimization is referred to as classical
optimization. But objective function subject to inequality constraints can be optimized
using the method of mathematical programming. If the objective function as well as the
inequality constraints is linear, we will use a method of linear programming. However, if
the objective function and the inequality constraints are nonlinear, we will apply the
technique of nonlinear programming to optimize the function.

Maximization problem of non - linear programming

Maximize π = f ( x1 , x 2 , x 3 , .. .. . , x n )
Subject to g1 (x 1 , x 2 , x3 ,. . ., x n )≤k 1
g2 (x 1 , x 2 , x 3 ,. . . , x n )≤k 2
g3 ( x1 , x 2 , x 3 , .. . , x n )≤k 3
: : :
m
g ( x 1 , x 2 , x 3 , . .. , x n )≤k m x j ≥0 ( j=1,2,3.....,n)
and ,
The minimization Problem can be expressed in the form of
Minimize C = f ( x1 , x 2 , x 3 , .. .. . , x n ) )
1
Subject to g (x 1 , x 2 , x3 ,. . ., x n )≥k 1
g2 (x 1 , x 2 , x 3 ,. . . , x n )≥k 2
g3 ( x1 , x 2 , x 3 , .. . , x n )≥k 3
: : : :
g ( x 1 , x 2 , x 3 , . .. , x n )≥k m , x j ≥0
m
( j=1,2,3.....,n)

Where C- represents total cost which is the objective function.

x j is the amount of output produced
-
k i - is the constant of the constraint function
gi - is the constraint function.

We have observed from the above expression that the nonlinear programming also
includes three ingredients. These are
- the objective function
- a set of constraints ( inequality )
- non - negativity restrictions on the choice variable

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The objective function as well as the inequality constraints is assumed to be differentiable

with respect to each of the choice variables. Like linear programming we apply on ¿
constraints for maximization and minimization problem involves only¿ constraints.

Example1
1.Find the values of x and y of the following function graphically.
2 2
a) Minimize C=x + y
Subject to x y ¿ 25
x,y¿ 0
Dear colleague! First we should convert the inequality constraint in to equality as
xy=25 and draw the graph of this constraint function on the xy plane.

x 1 2 3 4 5 6 7 ...............................25
y 2 12.5 8.3 6.25 5 4.16 3.57 ..........................1
5

Fig.(a)

The shaded region in the above figure represents the feasible region. Let us evaluate the
objective function C at points A, B, C, D and E on the graph.

At point a (1, 25), C=12+ 252 = 1+ 625 = 626

At point B (4, 6.3), C = 42 + (6.3) 2 = 16+ 39.69 = 55.69
At point c (5, 5), C = 52 + 52 = 25 + 25 = 50
At point d (6, 4.6) C = 62 + (4.6) 2 = 36 + 21.16 = 57.16
At point E (25, 1) , C = ( 25) 2 + 12 = 625 + 1 = 626
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Therefore, the value of x and y which minimizes the objective function are 5 and 5
respectively. The minimum value is C = 50.

b) Maximize π = x2 + (y - 2) 2
Subject to 5x + 3y ¿ 15
And x, y ¿ 0

Solution
Similar to that of problem a, we should convert the inequality constraint in to equality
constraint and draw its graph in the x y plane. It is 5x + 3y = 15

X 0 1 2 3
Y 5 3.3 1.67 0

Fig.(b)

The shaded region of the above figure represents the feasible region as every point in this
feasible region satisfies the inequality constraint 5 x + 3y ¿ 15.

Evaluating the objective function at points A, B, C and D of the above graph (fig. b),
At point A (0, 5), π = 02 + (5 - 2)2 = 0 + 9 = 9
At point B (1, 3.3), π = 12+ (3.3 - 2) 2 = 1+ 1.69 = 2.69
At point C (2, 1.67), π = 22 + (1.67 - 2)2 = 4 + 0.1089 = 4.1089
At Point D (3, 0), π = 32 + 9 (0 - 2)2 = 9+ 4 = 13
Therefore, the objective function is maximized when x = 3 and
y = 0. The maximum profit is π = 13

In general, we can distinguish the nonlinear programming from that of linear one based
on the following points.
1. In nonlinear programming the field of choice not necessarily locates at its extreme
points.
2. The number of constraints may not be the same with the choice variables.
3. Following the same direction in a movement may not lead to a continually increasing
or (decreasing) value of the objective function.

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4. The feasible region may not be a convex set.

5. A local optimum may not be a global optimum.

Kuhn - Tucker Conditions

Dear colleague! In the previous sections of this unit, we have discussed about
optimization problems of the objective function with equality constraints and without
explicitly restricting the single of the choice variables. In this case, the first order
condition is satisfied provided that the first order partial derivative of the Lagrange
function with respect of each choice variable and with respect to the Lagrange multiplier
is zero. For instance, in the problem

Maximize π = f ( x , y )
Subject to g( x , y )=k
The Lagrange function is
L=f ( x , y )+ λ(k −g( x , y ))
The first order condition states that
L x=L y=L λ=0

In non-linear programming, there is a similar first order condition which is referred to as

Kuhn - Tucker conditions. As we discussed previously, in classical optimization
process, the first order condition is a necessary condition. However, a certain condition
should be fulfilled for the Kuhn - Tucker conditions to be necessary conditions.

Dear colleague! Now let us discuss Kuhn - Tucker conditions in two steps for the purpose
of making the explanation easy to understand.

Step 1
In the first step, let us take a problem of optimizing the objective function with non-
negativity restrictions and with no other constraints. In economics, the most common
inequality constraint is non negativity constraint.
Maximize π = f(x)
Subject to x ¿ 0
provided that the function is supposed to be continuous and smooth. Based on the
restriction x ¿ 0, we may have three possible results. As shown in the following figures.

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When the local maximum resides in side the shaded feasible region as shown above at
point B of fig (i), then we have an interior solution. In this case, the first order condition
dπ
is similar to that of the classical optimization process, i.e., dx = 0.

Diagram (ii) shows that the local maximum is located on the vertical axis indicated by
point C. At this point, the choice variable is 0 and the first order derivative is zero, i.e.
dπ
dx = 0, at point C we have a boundary solution.

Diagram (iii) indicates that the local maximum may locate at point D or point E with in
the feasible region. In this case, the maximum point is characterized by the inequality
dπ
dx < 0 because the curves are at their decreasing portion at these points.

Therefore, from the above discussion it is clear that the following three conditions have
to be met so as to determine the value of the choice variable which gives the local
maximum of the objective function.
'
f ( x )=0 , and x > 0 (point B)
'
f ( x )=0 , and x = 0 (point C)
'
f ( x )< 0 , and x = 0 (point D and E)
Combining these three condition in to one statement given us
' '
f ( x )≤0 x≥0 and x f ( x )=0

dπ
The first inequality indicates the information concerning dx . The second inequality
shows the non negativity restriction of the problem. The third part indicates the product
'
of the two quantities x and f ( x ) .The above statement which is a combination of the

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 Mathematical for Economics

three conditions represents the first order necessary condition for the objective function to
achieve its local maximum provided that the choice variable has to be non negative.

If the problem involves n - choice variables like

Maximize π=f ( x 1 , x 2 , x 3 , . .. x n )
Subject to i
x ≥0
The first order condition in classical optimization process is
f 1 = f 2 = f 3 = -------= f n = 0
The first order condition that should be satisfied to determine the value of the choice
variable which maximizes the objective function is
f i≤ 0 x i ¿ 0 and x i f i = 0 (i =1, 2, 3, -------, n)
Where
f i is the partial derivative of the objective function with respect to x i i.e.,
,
∂π
f i=
∂ xi .
Step 2
Dear colleague! Now we continue to the second step. To do this, let us attempt to
incorporate inequality constraints in the problem. In order to simplify our analysis, let us
first discuss about maximization problem with three choice variables and two constraints
as shown below.
Maximize π = f ( x1 , x 2 , x 3 )
1
¿k
Subject to g (x 1 , x 2 , x3 ) 1
g2 (x 1 , x 2 , x 3 ) ¿ k
2

And x1, x2, x3 ¿ 0

Using the dummy variables s1 and s2 we can change the above problem in to
Maximize π = f ( x1 , x 2 , x 3 )
1
Subject to g (x 1 , x 2 , x3 )+ s1 =k 1
g2 ( x 1 , x 2 , x 3 )+ s 2=k 2
And x1, x2, x3 ¿ 0 and s1, s2 ¿ 0

We can formulate the Lagrange function using the classical method provided that the
non-negativity constraints of the choice variables are not existed as
L=f ( x 1 , x 2 , x 3 )+ λ1 [ k 1−g 1 ( x 1 , x 2 , x 3 )−s1 ]+ λ2 [k 2−g 2 ( x 1 , x 2 , x 3 )−s2 ]

It is possible to derive the Kuhn Tucker conditions directly from the Lagrange function.
Considering the above 3-variable 2-constraints problem
The first order condition is

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 Mathematical for Economics

∂L ∂L ∂L ∂L ∂L ∂L ∂L
∂ x 1 = ∂ x 2 = ∂ x 3 = ∂ s1 = ∂ s2 = ∂ λ 2 = ∂ λ 1 =0

x
However, j and si variable are restricted to be non-negative. As a result, the first order
conditions on these variables ought to be modified as follows.
∂L ∂L
j
∂xj¿ 0 xj¿ 0 and x
∂ xj = 0
∂L ∂L
∂ si ¿ 0 si ¿ 0 s
and i ∂ si = 0
∂L
∂ λi = 0
Where (i = 1, 2 and j= 1, 2, 3)
However, we can combine the last two lines and thereby avoid the dummy variables in
∂L
=− λi
the above first order condition as shown below. As ∂ si , the second line shows that
−λ i≤0 , , Si ¿ 0 and – S i λ i = 0
or
S iλ i = 0
λ i ¿ 0, S i¿ 0 and

i
s
But, we know that si =k i −g ( x 1 , x 2 , x 3 ) . By substituting it in place of i , we can get
k i−gi ( x 1 , x 2 , x3 )≥0 , λ i ¿ 0 and λ i [k i−gi ( x 1 , x 2 , x3 ) ] =0
Therefore, the first order condition without dummy variables in expressed as
∂L ∂L
∂xj¿ 0 xj¿ 0 and j
x ∂xj = 0
∂L
∂ λ i = k i−gi ( x 1 , x 2 , x3 ) ¿ 0 λ i ¿ 0 and λ i [k i−gi ( x 1 , x 2 , x3 ) ] =0
These are the Kuhn - tucker conditions for the given maximization problem. One of the
methods to solve this problem is changing it in to maximization problem and then applies
the same procedure with maximization.
Minimizing C is similar to maximizing (−C ). However, keep in mind the fact that we
have to multiply each constraint inequalities by (−1 ).We can directly apply the Lagrange
multiplier method and determine the minimization version of Kuhn - Tucker condition
instead of converting the inequality constraints into equality constraints using dummy
variables as
∂L ∂L
∂xj ¿ 0 xj¿ 0 and
xj ∂xj = 0
∂L ∂L
∂ λi ¿ 0 λi¿0 and
λi ∂ λi = 0 (minimization)

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 Mathematical for Economics

Example
Let us check whether the solutions of our example 1 satisfy the Kuhn - Tucker conditions
or not

a) Minimize C= x2+ y2
Subject to x y¿ 25
and x, y ¿ 0

The Lagrange function for this problem is

L = x2 + y2 + λ (25 – x y)
It is a minimization problem. Therefore, the appropriate conditions are
∂L ∂L
∂ x = 2x - λ y ¿ 0 , x¿ 0 and x ∂ x = 0
∂L ∂L
∂ y = 2 y - λx ¿ 0 , y ¿ 0 and y ∂ y = 0
∂L ∂L
λ
∂ λ = 25 – x y ¿ 0, λ≥ 0 and ∂ λ = 0
Dear colleague! Can we determine the non negative value λ which will satisfy all the
above conditions together with the optimal solution x and y? The optimal solutions in our
earlier discussion are x = 5 and y = 5, which are nonzero. Thus, the complementary
∂L ∂L ∂L ∂L
=0 .
slackness ( x ∂ x = 0, y ∂ y = 0) shows that ∂ x and ∂ y = 0.
Thus, we can determine the value of λ by substituting the optimal values of the choice
variables in either of these marginal conditions as
∂L
∂ x = 2x - λy = 0
2(5) - λ (5) = 0
10 - 5 λ = 0
λ =2>0
∂L ∂L ∂L
This value λ = 2, x = 5 & y = 5 imply that ∂ x = 0, ∂ y = 0, ∂ λ = 0 which fulfils the
marginal conditions and the complementary slackness conditions. In other words, all the
Kuhn - Tucker conditions are satisfied.

Maximize Z=10 x−x 2 +180 y− y 2

x + y≤80
Subject to x , y ≥0
Solution

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 Mathematical for Economics

Dear colleague! First we should formulate the Lagrange function assuming the equality
constraint and ignoring the non negativity constraints.
L=10 x−x 2 +180 y − y 2 +λ (80−x− y )
The first order conditions are
∂L
=10−2 x− λ=0 ⇒ λ=10−2 x−−−−−−−−−−−−−(1 )
∂x
∂L
=180−2 y −λ=0 ⇒ λ=180−2 y −−−−−−−−−−−−(2)
∂y
∂L
=80−x− y=0 ⇒ x+ y =80−−−−−−−−−−−−−−−−(3 )
∂λ
Taking equation (1) and (2) simultaneously
10−2x=180−2 y
2 y−2 x=170
2 y=170+2 x
y=85+x−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−−( 4 )
If we substitute equation (4) in to (3), we get
x +85+x=80
2 x=−5 ⇒ x=−2 . 5
¿
However, the value of the choice variables is restricted to be non negative. x =−2. 5 is
infeasible. We must set x= 0 since it has to be non negative. Now we can determine the
value of y by substituting zero in place of x in equation (3) .
0+ y=80
¿
y =80
¿
Therefore, λ =180−2(80 )=20
¿ ¿ ¿
The possible solutions are x =0 , y =80 , λ =20
However, we must check the inequality constraints and the complementary slackness
conditions to decide whether these values are solutions or not.
1) Inequality constraints
i) The non negativity restrictions are satisfied since x=0 , y=80 , λ=20≥0
ii) Inequality constraints
x + y≤80
0+80≤80
2) Complementary Slackness conditions
∂L ∂L
x =0 , x=0 ⇒ <0
i) ∂ x ∂x as the problem is maximization.
∂L
=−10<0
∂x
∂L ∂L
y =0 , y=80≠0 ⇒ =0
ii) ∂ y ∂y

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 Mathematical for Economics

∂L
=180−2(80 )−20=0
∂y
∂L ∂L
λ =0 , λ=20≠0⇒ =0
∂λ ∂λ
∂L
=80−0−80=0
iii) ∂ λ
All the Kuhn Tucker conditions are satisfied. Thus, the objective function is maximized
¿ ¿
when x =0 , y =80 , λ=20 .
Kuhn Tucker Sufficiency Theorem

Dear colleague! As we have discussed in the classical approach the sign of the second
order derivative of the function provides the sufficient condition for maximum and
minimum of a function. These conditions have intimacy with the concept of convexity
and concavity of a function. In nonlinear programming, we can express the sufficient
condition for the optimum of the function in terms of convexity and concavity of a
function.

Given the problem

Maximize π=f ( x )
i
Subject to g ( x )≤k i (i=1, 2, 3… n) and x¿ 0
The Kuhn - Tucker sufficient conditions are satisfied provided that

1) the objective function is differentiable and concave in non negative

2) each constrain function is differentiable and convex in the negative
3) the point x̄ satisfies the Kuhn -Tucker maximum condition

For minimization problem you can easily add the Kuhn - Tucker minimum condition on
condition (1) and ( 2) above to determine whether the Kuhn - Tucker sufficient condition
is satisfied or not.

Proof
Given the problems
Maximize π=f ( x )
i
Subject to g ( x )≤k i
and x ¿ 0
The Lagrange function is shown as
m
∑ λi [ k i −gi ( x ) ]
L= f(x) + i=1

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 Mathematical for Economics

If we give specific value for the Lagrange multiplier

λ i , L will be a function of x.
i
According to condition (1) and (2) above, assume f(x) as concave and g ( x ) as convex
i
when we multiply it by (-1) gives us−g ( x ) ) that is concave. Therefore, The L functions
will be concave function (sum of two concave functions) in x.
The Lagrange function L is concave means that
n
∂L
L( x )≤L( x̄ )+ ∑ ( x j− x̄ j )
j=1 ∂ x̄ j
∂L
When x̄ represents some particular point in the domain
∂ x̄ j refers to the partial
∂L
∂x
derivative j examined at x̄ . Now let’s choose the value of the choice variable x̄ and the
value of the Lagrange multiplier in line with condition (3) above, i.e. which satisfy the
Kuhn tucker maximum condition. If we decompose terms in the summation we get
n n n
∑ ∂ x̄ j j ∑ ∂ x̄ j ∑ ∂∂x̄L x̄ j
∂L
( x − x̄ )=
∂L
x −
j=1 j j=1 j j=1 j

By the application of complementary slackness at point

x̄ j , this expression is reduced to
n
∑ ∂∂x̄L x j
j=1 j
∂L
≤0
From this expression we know that
∂ x j x ≥0 as it is a
(marginal condition) and j
choice variable. As a result the reduced expression is non-positive. Thus we can conclude
that L( x )≤L( x̄ ) . This indicates that x̄ is the optimal solution.

Economic Application

Example
2 2
Given the revenue and cost conditions of a firm as R=32 x−x andC=x +8 x +4 ,
where x output is. Suppose the minimum profit is 0
π =18 .Determine the amount of the
out put which maximizes revenue with the given minimum profit. In this case, the
revenue function is concave and the cost function is convex.

The Problem is
2
Maximize R=32 x−x
2 2
Subject to x +8 x +4−32 x + x ≤−18
And x ¿ 0

Under these situations the Kuhn - Tuck en conditions are necessary and sufficient
conditions as all of the above three conditions, i.e., (1), (2), 4(3), are satisfied.

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 Mathematical for Economics

The Lagrange function of this problem is

L=32 x−x 2 +λ (−22−2 x2 +24 x )−−−−−−−−−−−−−−−(1 )
Thus,
∂L
=32−2 x−4 λx +24 λ=0−−−−−−−−−−−−−−−−−−(2)
∂x
∂L
=−22−2 x 2 +24 x=0−−−−−−−−−−−−−−−−−−−−(3)
∂λ
−22−2 x 2 +24 x=0
2
From equation (3) 2 x −24 x +22=0−−−−−−−−−−−−−−−−−−−−−(4 )
−3 1
λ= λ=
Solving (4) we get, x=1 or x=11 . 2 0r 2
However, we must check the inequality constraints and the complementary slackness
conditions to decide whether these values are the solutions or not
∂L ∂L
≤0 , x =0 ,
∂x x≥0 and ∂x -----------------------------(5)
∂L ∂L
≥0 , λ =0 ,
∂λ λ≥0 and ∂λ -----------------------------(6)
At X=1
∂L ∂L −3
=0 , =30+20 λ=0 ⇒ λ=
At this point x >0 this implies that ∂ x Thus ∂ x 2 .It does
not satisfy equation (6).
∂L ∂L 1
=0 , =10−20 λ=0 ⇒ λ=
At X=11, x >0 this implies that ∂ x Thus ∂ x 2 . It satisfies
both equation (5) and (6). This means, the Kuhn Tucker conditions are fulfilled at x=11
.Therefore, revenue is maximized when x=11 .

2.4 The General Case : Mixed Constraints

Dear colleague! An optimization problem with mixed constraints can be reformulated

either as maximization or minimization problem. This procedure incorporates the
following conditions.
i) Maximizing the objective function Z (x ) is equivalent to the problem of Minimizing
−Z (x ) or vice versa-
ii) The constraint g( x )≤c can be presented as −g( x )≥−c .
iii) The constraint g( x )≥c is equivalent to the double constraint g( x )≤c and
−g( x )≤−c
iv) The non-negativity constraint x≥o can be denoted by a new constraint g( x )=−x≤0

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