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Week 25
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
1 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
2 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
3 / 23
Lets start from our usual problem and lets write it in the
most general way:
max U = U(x, y )
x,y
s.t. g (x, y ) = 0
We start from here and we build a completely new function
that includes both the objective function and the constraint
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
4 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
5 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
5 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
6 / 23
at x = x , y = y and = .
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
7 / 23
=0
x
x
x
L(x, y , )
U(x, y )
g (x, y )
=0
=0
y
y
y
L(x, y , )
= 0 g (x, y ) = 0
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
8 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
9 / 23
s.t. px x + py y = m.
The lagrangian of this problem is given by:
L(x, y , ) = x 1/2 y 1/2 (px x + py y m).
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
10 / 23
1
L(x, y , )
= 0 x 1/2 y 1/2 px = 0,
x
2
(B) :
L(x, y , )
1
= 0 x 1/2 y 1/2 py = 0,
y
2
(C ) :
L(x, y , )
= 0 px x py y + m = 0.
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
11 / 23
1 1/2 1/2
y
2x
= py
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
12 / 23
But:
and of course
1 1/2 1/2
y
2x
1 1/2 1/2
y
2x
U/x
U/y
px
px
=
py
py
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
(2)
Week 25
13 / 23
px
U/x
U/y
py
m px x py y = 0
which is exactly:
px
MRS = p
y
mp x p y =0
x
y
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
14 / 23
px
U/x
U/y
py
m px x py y = 0
which is exactly:
px
MRS = p
y
mp x p y =0
x
y
Doesnt it look familiar?!?!
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
14 / 23
U/x
px
U/y
py
m px x py y = 0
implies
y
px
=
x
py
m px x py y = 0
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
15 / 23
px x = py y .
x =
m
,
2px
y =
m
.
2py
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
16 / 23
How about ?
So far we have found x and y . How about the
optimal value of our third variable, ?
Well, once we have found x and y finding is trivial.
If we consider for example equation (A) of our initial
system we have:
1 1/2 1/2
x
y px = 0
2
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
17 / 23
m
2px
and so:
=
Domenico Tabasso
1/2
m
2py
1/2
1
1
2 px1/2 py1/2
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
18 / 23
How about ?
So =
1
1
2 px1/2 py1/2
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
19 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
20 / 23
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
21 / 23
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
22 / 23
G
x
6= 0;
G
y
6= 0;
G 2
x
2L
x 2
G
x
G
y
2L
xy
G
y
2
2L
y 2
0;
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
23 / 23
G
x
6= 0;
G
y
6= 0;
G 2
x
2L
x 2
G
x
G
y
2L
xy
G
y
2
2L
y 2
0;
Domenico Tabasso
(University
Lectureof10Essex
- Spring
- Department
Term
of Economics)
Week 25
23 / 23