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3
x1
2
-4
-3
x2
-2
-1
p1x1 + p2x2 m 0
x1 0
x2 0
The aspect I emphasise is that the constraints are inequalities. We have seen how the Lagrange multiplier
method for dealing with one equality constraint extends naturally to the case of several constraints. If
we wish to maximise f (x) subject to g(x) = b and
h(x) = c, we work with the Lagrangian
-5
Negative quantity!
Terminology:
m
X
j gj (x)
j=1
c = 2 : x = 0
c = 0 : x = 0
(1x2)
Remark 15.1 The conditions L
=
= 0
x
x
and 0 imply that the derivative at the maximum
cannot be negative. It is obvious that the derivative
cannot be negative at a maximum because a reduction
in x (this is always feasible) would then raise the value
of the objective.
16
m
P
j=1
j gj (x)(x x).
j gj (x)(xx)
Remark 16.1 Like Lagrange multipliers these KuhnTucker multipliers can be interpreted as measures of
the sensitivity of the maximum value to changes in the
constraint (10.2) but we wont go into the details. See
SH 696.
17
Return to the quasi-linear utility case and now incorporate all the inequality constraints and include prices
and income
Maximise u(x)
s.t. p1x1 + p2x2 m
x1
x2
The Lagrangean L is
1
x2
= 1 + x2, > 0
0,
0,
0.
1
x 2 +x
1 12
= x1 0p1 + 1 = 0
2
= 0p2 + 2 = 0
0
= 0
= 0, i = 1, 2.
and so
! 1
2
!1
L
1 m
=
x1
2 p1
1
1
0 =
2 p1m
0p1 = 0
L = 0
Putting this value into x
2
1
L
1
=
x2
2 p1m
!1
2
p2 + 2 = 0
1 p22
2 p1m
!1
2
18
Dynamic optimisation
In dynamic optimisation a time-path is chosen. Simple dynamic optimisation problems can be treated by
the same methods as the static optimisation problem. However dynamic problems have special features
which often suggest a dierent treatment.
T
X
t1 ln xt
One dierence between static and dynamic optimisation is that dynamic equations appear naturally in the latter.
t=1
s.t.
T
X
xt = b0 (f ixed)
(*)
t=1
T
X
t=1
t1 ln xt (
T
X
t=1
xt b0)
Example 18.2 (continues Ex. 18.1) In complicated problems it is usually convenient to specify a budget constraint for each time period. Thus the constraint (*)
would appear as:
bt = bt1 xt, t = 1, ..., T ; b0 f ixed
(**)
This law of motion describes how the available chocolate stock evolves: the bars of chocolate left over at
the end of period t equals the bars available at the end
of t 1 less what has been consumed in period t. (*)
collapses these dynamic equations into one constraint
T
P
t=1
T
X
t=1
t1 ln xt
T
X
t=1
t(xt bt bt1).
xt
= t1 .
xt1
t
We already know that xt = xt1 and it turns out
that t is the same for all time periods.
A third dierence between static and dynamic
optimisation is the existence of specialised techniques for treating the latterincluding (Pontryagins) maximum principle and dynamic programming.
18.1
Maximum principle
The maximum principle is widely used in Macroeconomics, usually in its continuous time form. I will go
through a discrete time version to suggest where the
coninuous time forms come from.
A fairly general formulation covering the chocolate
stock example and extensions to include production
and investment involves the choice variables c(1), ..., c(T );
these symbols are easier on the eye than c1 etc.
The notation reflects the terminology of control theory. There is a state variable s governed by an equation of motion or state equation. The problem is to
choose a control variable sequence c to maximise a
value function. This may involve one or both of the
state variable and the control variable.
max V (s, c) =
c
T
X
t=1
v(s(t), c(t))
(***)
T
X
v(s(t), c(t))
t=1
T
X
t=1
These conditions can be obtained as first order conditions involving a new function H (Hamiltonian) defined for all t by
H(s(t), c(t), (t)) v(s(t), c(t)) + (t)f (s(t), c(t).
H
= 0, t = 1, ..., T
c(t)
H
, t = 2, ..., T
(t) (t 1) =
s(t)
18.1.1
In continuous time
ZT
v(s(t), c(t))dt
s.t
ds
= f (s(t), c(t))
dt
The first order conditions for a maximum are conditions on the partial derivatives of H,
H(t, s(t), c(t), (t)) = v(t, s(t), c(t))+(t)f (t, s(t), c(t))
The first order conditions are
H
= 0
c
d
H
=
.
dt
s
Example 18.3 Logarithmic chocolate in continuous time.
Choose a consumption path x(t) to maximise
U(x(t)) =
ZT
ln x(t)etdt
k = x
k(0) = given
k(T ) = f ree
In this case the chocolate stock is the state variableits
derivative appears in the constraintand consumption
.
H
=
=0
k
H
et
=
(t) = 0
x
x(t)
.
THE END