Multivariable Optimization

Optimization problems usually can be cast in the following mathematical form. There is an objective function f (x1, . . . , xn), a real valued function of n variables whose value should be maximized (or minimized). For example, a firms profits are a function of its input and output quantities. There is also a constraint set or opportunity set S that is some subset of n. For example, a consumer cannot buy larger quantities of different goods than is allowed by the budget constraint, given the prices that have to be paid and the wealth there is available to spend. Then the problem is to find maximum or minimum points of f in S, provided such points exist.

By specifying the set S appropriately, several different types of optimization problem can be covered. If f has an optimum at an interior point of S, we talk about classical case. If S is the set of all points (x1, . . . , xn) that satisfy a number of equations, we have the Lagrangean problem of maximizing (or minimizing) a function subject to equality constraints. The general programming problem is obtained if S consists of all points (x1, . . . , xn) in n that satisfy m constraints in the form of inequalities (including, possibly, nonnegativity conditions on x1,..., xn). If the objective function and all the constraints are linear in (x1, . . . , xn), then we have a linear programming problem.

Simple Two Variable Optimization

Constrained Optimization
A typical economic example concerns a consumer who chooses how much of the available income m to spend on a good x whose price is p, and how much income to leave over for expenditure y on other goods. Note that the consumer then faces the budget constraint px + y = m. Suppose that preferences are represented by the utility function u (x,y). In mathematical terms, therefore, the consumer faces the problrm of choosing (x,y) in order to maximize u (x,y) subject to px + y = m. This is a typical constrained maximization problem. In this case, because y = m px, the same problem can be expressed as the unconstrained maximization of the function f (x) = u (x,m px) with respect to the single variable x.

When the constraint is a complicated function, this substitution method might be difficult or impossible to carry out in practise. In such cases, other techniques should be used. In particular, economists make much use of the method of Lagrange multipliers. The reason is that Lagrange multipliers have important economic Interpretations.
The method is named after its discoverer, the French mathematician Joseph Louis Lagrange (1736 1813). The Danish economist Harald Westergaard seems to have been the first who used it in economics, in 1876.

The Lagrangean Method

Joseph-Louis Lagrange Born: 25 Jan 1736 in Turin, Sardinia-Piedmont Died: 10 April 1813 in Paris, France