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Notes on optimization and Pareto optimallity,
These notes were written for PSC 408, the second semester of the formal modeling
sequence in the political science graduate program at the University of Rochester.As alternatives to these notes, I suggest Simon
and Blume (1994), who cover a greater range of topics, and Sundaram (1996), who
is more thorough and technically rigorous. Unfortunately, my notes are not entirely
self-contained and do presume some sophistication with calculus and a bit of linear
algebra and matrix algebra (not too much), and worse yet, I haven’t been entirely
consistent with notation for partial derivatives; I hope the meaning of my notation is
clear from context.
Contents
1 Opening Remarks 1
2 Unconstrained Optimization 1
3 Pareto Optimality 8
3.1 Existence of Pareto Optimals . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Characterization with Concavity . . . . . . . . . . . . . . . . . . . . . 12
3.3 Characterization with Differentiability . . . . . . . . . . . . . . . . . 18
4 Constrained Optimization 19
5 Equality Constraints 21
5.1 First Order Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
5.3 Second Order Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.4 Multiple Equality Constraints . . . . . . . . . . . . . . . . . . . . . . 37
6 Inequality Constraints 44
6.1 First Order Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.2 Concave Programming . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.3 Second Order Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 55
7 Pareto Optimality Revisited 58
8 Mixed Constraints 62

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John Duggan

University of Rochester

June 21, 2010

Contents

1 Opening Remarks

2 Unconstrained Optimization

3 Pareto Optimality

3.1 Existence of Pareto Optimals . . . . . . . . . . . . . . . . . . . . . .

3.2 Characterization with Concavity . . . . . . . . . . . . . . . . . . . . .

3.3 Characterization with Differentiability . . . . . . . . . . . . . . . . .

8

9

12

18

4 Constrained Optimization

19

5 Equality Constraints

5.1 First Order Analysis . . . . .

5.2 Examples . . . . . . . . . . .

5.3 Second Order Analysis . . . .

5.4 Multiple Equality Constraints

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6 Inequality Constraints

6.1 First Order Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.2 Concave Programming . . . . . . . . . . . . . . . . . . . . . . . . . .

6.3 Second Order Analysis . . . . . . . . . . . . . . . . . . . . . . . . . .

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49

55

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8 Mixed Constraints

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Opening Remarks

These notes were written for PSC 408, the second semester of the formal modeling

sequence in the political science graduate program at the University of Rochester. I

hope they will be a useful reference on optimization and Pareto optimality for political scientists, who otherwise would see very little of these subjects, and economists

wanting deeper coverage than one gets in a typical first-year micro class. I do not

invent any new theory, but I try to draw together results in a systematic way and to

build up gradually from the basic problems of unconstrained optimization and optimization with a single equality constraint. That said, Theorem 8.2 may be a slightly

new way of presenting results on convex optimization, and Ive strived for quantity

and quality of figures to aid intuition. As alternatives to these notes, I suggest Simon

and Blume (1994), who cover a greater range of topics, and Sundaram (1996), who

is more thorough and technically rigorous. Unfortunately, my notes are not entirely

self-contained and do presume some sophistication with calculus and a bit of linear

algebra and matrix algebra (not too much), and worse yet, I havent been entirely

consistent with notation for partial derivatives; I hope the meaning of my notation is

clear from context.

Unconstrained Optimization

max{f (y) | y X}, i.e., for all y X, f (x) f (y). We say x is a local maximizer

of f if there is some > 0 such that for all y X B (x), f (x) f (y). And x is a

strict local maximizer of f if the latter inequality holds strictly: there is some > 0

such that for all y X B (x) with y 6= x, f (x) > f (y). We sometimes use the term

global maximizer to refer to a maximizer of f .

Our first result establishes a straightforward necessary condition for an interior local

maximizer of a function: the derivative of the function at the local maximizer must

be equal to zero. A direction t Rn is any vector with unit norm, i.e., ||t|| = 1.

Theorem 2.1 Let X Rn , let x X be interior to X, and let f : X R be differentiable at x. If x is a local maximizer of f , then for every direction t, Dt f (x) = 0.

Proof Suppose x is an interior local maximizer, and let t be an arbitrary direction.

Pick > 0 such that B (x) X and for all y B (x), f (x) f (y). In particular,

f (x) f (x + t) for R small. Then

Dt f (x) = lim

f (x + t) f (x)

0

Dt f (x) = lim

f (x + t) f (x)

0,

and

0

and we conclude Dt f (x) = 0, as required.

condition is written Df (x)t = 0. This is a generalization of the well-known first order

condition from univariate calculus: if the graph of a function peaks at one point in

the domain, then the graph of the function has slope equal to zero at that point.

In general, we see that the derivative of the function in any direction (in multiple

dimensions, there are many directions) must be zero. See Figure 1.

This suggests an approach for finding the maximizers of a function: we solve the

first order condition on the interior of the domain and check to see if any of these

solutions are maximizers. Now, however, solving the first order condition can itself

be a rather complicated task. Considering the directions pointing along each axis

(the unit coordinate vectors), we see that each partial derivative is equal to zero,

D1 f (x1 , . . . , xn ) = 0

D2 f (x1 , . . . , xn ) = 0

..

.

Dn f (x1 , . . . , xn ) = 0,

a system of n equations in n unknowns (x1 , . . . , xn ). Solving such a system can be

straightforward or impossiblehopefully the former.

Example Letting X = R2+ and f (x) = x1 x2 2x41 x22 , the first order condition is

x2 8x31 = 0

x1 2x2 = 0.

2

Solving the second equation for x1 , we have x1 = 2x2 . Substituting this into the first

equation, we have x2 64x32 = 0, which has three solutions: x2 = 0, 1/8, 1/8. Then

the first order condition has three solutions,

(x1 , x2 ) = (0, 0), (1/4, 1/8), (1/4, 1/8),

but the last of these is not in the domain of f , and the first is on the boundary of the

domain. Thus, we have a unique solution in the interior of the domain: (x1 , x2 ) =

(1/4, 1/8).

The usual necessary second order condition from univariate calculus extends as well.

Theorem 2.2 Let X Rn , let x X be interior to X, and let f : X R be twice

differentiable. If x is a local maximizer of f , then for every direction t, we have

Dt2 f (x) 0.

Proof Assume x is an interior local maximizer of f , let t be an arbitrary direction,

and let > 0 be such that B (x) X and for all y B (x), f (x) f (y). Consider a

sequence {n } such that n 0, so for sufficiently high n, we have x + n t B (x),

and therefore f (x + n t) f (x). For each such n, the mean value theorem yields

n (0, n ) such that

Dt f (x + n t) =

f (x + n t) f (x)

,

n

Dt f (x + n t) Dt f (x)

0.

n

Taking limits, we have Dt2 f (x) 0, as required.

the previous theorem is written t D 2 f (x)t 0. That is, the Hessian of f at x is

negative semi-definite. It is easy to see that the necessary second order condition is

not sufficient.

Example Let X = R and f (x) = x3 x4 . Then Df (0) = D 2 f (0) = 0, but x = 0 is

not a local maximizer.

As for functions of one variable, we can give sufficient conditions for a strict local

maximizer. Although this result is of limited usefulness in finding a global maximizer, we will see that it can be of great use in comparative statics analysis, which

investigates the dependence of maximizers on parameters.

continuously differentiable. If Dt f (x) = 0 and Dt2 f (x) < 0 for every direction t, then

x is a strict local maximizer of f .

Proof Assume x is interior, Dt f (x) = 0 and Dt2 f (x) < 0 for every direction t, and

suppose that x is not a local maximizer. Then for all n, there exists xn B 1 (x) such

n

that f (xn ) f (x). For each n, letting tn = ||xn1x|| (xn x), the mean value theorem

yields n (0, 1) such that

Dtn f (n xn + (1 n )x) =

f (xn ) f (x)

0.

||xn x||

Dftn (yn ) Dtn f (x)

0.

||yn x||

Since {tn } lies in the closed unit ball, a compact set, we may consider a convergent subsequence (still indexed by n) with limit t. Taking limits, we conclude that

Dt2 f (x) 0, a contradiction. We conclude that x is a local maximizer.

In matrix terms, the inequality in the previous theorem is written t D 2 f (x)t < 0. That

is, the Hessian of f at x is negative definite. (See Simon and Blume (1994) for methods to check negative definiteness of a symmetric matrix.) Obviously, the sufficient

second order conditions are not necessary: consider X = R, f (x) = x4 , and x = 0.

Example Return to the example of X = R2+ and f (x) = x1 x2 2x41 x22 . We

saw that the first order condition has a unique interior solution, (x1 , x2 ) = (1/4, 1/8).

Then

3

Dt2 f (1/4, 1/8) = t21 + 2t1 t2 2t22 t21 + 2t1 t2 t22 = (t1 t2 )2 ,

2

which is non-positive. Thus, Dt2 f (1/4, 1/8) 0 for every direction t, but the sufficient

condition of Theorem 2.3 is not satisfied, and it is open for now whether (1/4, 1/8) is

a local maximizer.

Let X Rn be convex, and let f : X R be twice continuously differentiable. To

describe a systematic method for solving the unconstrained maximization problem

max f (x),

xX

we assume for simplicity that X is closed, though not necessarily compact. To represent the values of f at the extremes of the domain, if it is unbounded, let

y =

where we assume for simplicity that this limit exists, and let

y = sup{f (x) : x bdX}

represent the highest value of f on the boundary of its domain. Assume for simplicity

that the function f has at most a finite number of critical points. There are then

three possibilities.

1. The first order condition has a unique solution x .

(a) If Dt2 f (x ) < 0 for every direction t, then x is the unique maximizer.

(b) If Dt2 f (x ) > 0 for every direction t, then x is the unique minimizer.

An element x is a maximizer if and only if it is a boundary point and

f (x) max{y , y}. There may be no maximizer.

(c) Else, x is the unique maximizer if and only if f (x ) max{y , y}.

If this inequality does not hold, then an element x is a maximizer

if and only if it is a boundary point and f (x) max{y , y}. There

may be no maximizer.

2. There are multiple solutions, say x1 , . . . , xk , to the first order condition.

An element x is a maximizer if and only if it is a critical point or boundary

point and

f (x) max{y , y, f (x1 ), . . . , f (xk )}.

There may be no maximizers.

3. The first order condition has no solution. An element x is a maximizer

if and only if it is a boundary point and f (x) max{y , y}. There may

be no maximizer.

If X is compact, then f has a maximizer, simplifying the situation somewhat.

Example Returning one last time to X = R2+ and f (x) = x1 x2 2x41 x22 , we

have noted that (1/4, 1/8) is the unique interior solution to the first order condition

and that the second directional derivatives of f are non-positive at this point. Thus,

we are in case 1(c). Note that when x1 = 0 or x2 = 0, we have f (x1 , x2 ) 0, and

f (0) = 0. Thus, y = 0. Furthermore, we claim that y = . To see this, take any

value c < 0, and suppose ||(x1 , x2 )|| = k. We argue that when k is sufficiently large,

we necessarily have f (x1 , x2 ) c. Rewriting f (x1 , x2 ) as

f (x1 , x2 ) = (x2 x1 )2 + x21 x1 x2 2x41 ,

we see that f (x1 , x2 ) c if x21 2x41 c. This in turn holds if x1 a =

5

max{1, |c|}.

q

x2 =

k 2 x21 >

k 2 a.

Then we have

for high enough k, which establishes the claim. Then f (1/4, 1/8) > 0 = max{y , y},

and we conclude that (1/4, 1/8) is the unique maximizer of this function.

As for functions of one variable, matters are greatly simplified when we consider

concave functions. Recall that a necessary condition for f to be concave is that at the

Hessian matrix D 2 f (x) be negative semi-definite at every interior x, i.e., t D 2 f (x)t 0

for every direction t. When the domain is open, negative definiteness is also sufficient.

Theorem 2.4 Let X Rn be convex, let x X be interior to X, and let f : X R

be differentiable at x and concave. If Df (x) = 0, then x is a global maximizer of f .

1

Proof Suppose Df (x) = 0 but f (y) > f (x) for some y X. Let t = ||yx||

(y x).

Consider any sequence n 0, and let xn = x + n t. When n < ||y x||, note that

xn =

||y xn ||

||xn x||

x+

y

||y x||

||y x||

f (xn ) f (x)

||xn x||

||yxn ||

f (x)

||yx||

||xn x||

f (y)

||yx||

||xn x||

f (x)

f (y) f (x)

> 0.

||y x||

Dt f (x)

f (y) f (x)

> 0,

yx

a contradiction.

Example Assume X = Rn , and note that f (x) = ||x x||2 is strictly concave. The

first order condition has the unique solution x = y, and we conclude that this is the

unique maximizer of the function. (Of course, we could have verified that directly.)

The next result lays the foundation for comparative statics analysis, in which we

consider how local maximizers vary with respect to underlying parameters of the

problem. Specifically, we study the effect of letting a parameter, say , vary in the

6

the value of the parameter changes to , then x may no longer be a local maximizer.

But we will see that under the first order and second order sufficient condition, its

location will vary smoothly as we vary the parameter.

Theorem 2.5 Let I be an open interval and X Rn , and let f : X I R be twice

continuously differentiable in an open neighborhood around (x , ), an interior point

of X I. Assume x satisfies the first order condition at , i.e., Dx f (x , ) = 0. If

t Dx2 f (x , )t < 0 for all directions t, then there are an open set Y Rn with x Y ,

an open interval J R with J, and a continuously differentiable mapping

: J Y such that for all J, () is the unique solution to maxxY f (x, )

belonging to Y , and () satisfies the second order sufficient condition at , i.e.,

t Dx2 f ((), )t < 0 for all directions t. Furthermore,

D() = Dx f ((), )[Dx2 f ((), )]1 .

Proof By continuous differentiability, there exist open sets Y X and J I such

that (x , ) Y J and for all (x, ) Y J and all directions t, t Dx2 f (x, )t < 0.

In particular, the matrix Dx2 f (x , ) is non-singular. Since x is a local maximizer

of f (, ), the first order condition holds at x : Dx f (x , ) = 0. By the implicit

function theorem, there exist open sets Y X and J I with (x , ) Y J

and a continuously differentiable function : J Y such that for all J , ()

is the unique solution to Dx f (x, ) = 0 belonging to Y . Define Y to be a nonempty,

convex, open subset of the intersection Y Y and J = J J 1 (Y ). This is

possible because x Y Y and the intersection Y Y is open, so we can choose

Y to be any open ball containing x and included in Y Y . Note that Y is open

and is continuous, so 1 (Y ) is open, so J is open. Furthermore, (i) maps J

into Y , (ii) for all , () is the unique solution to Dx f (x, ) = 0 belonging to J,

and (iii) for all (x, ) Y J and all directions t, t Dx2 f (x, )t < 0. Note that (iii)

implies that f (, ) is strictly concave on Y . Taken together, given any J, (i)(iii)

imply that () is the unique solution to maxyY f (y, ) belonging to Y . To obtain

the derivative, note the () satisfies the first order condition, so

() Dx f ((), ) = 0

for all J, i.e., is constant on J. Then D() = 0 on J, and using the chain

rule, this is

0 = Dx2 f ((), )D() + Dx f ((), ) ,

where we view D() and Dx f ((), ) as 1 n matrices. Since Dx2 f ((), ) is nonsingular, we can premultiply the above equation by its inverse and take transposes to

obtain the desired expression.

7

In case the matrix algebra in the preceding theorem is a bit hard to digest, we can

state the derivative of in terms of partial derivatives when n = 1: it is

D( ) =

Dx f (x , )

.

D2 f (x , )

can consider the locally maximized value of the objective function,

F () = f ((), ),

as a function of . Since f is twice continuously differentiable and is continuously

differentiable, it follows that f ((), ) is continuously differentiable as a function

of . The next result, known as the envelope theorem, provides a simple way

of calculating the rate of change of the locally maximized objective function as a

function of : basically, we take a simple partial derivative of the objective function

with respect to , holding x = () fixed. That is, although the location of the

constrained local maximizer may in fact change when we vary , we can ignore that

variation, treating the constrained local maximizer as fixed in taking the derivative.

Theorem 2.6 Let I be an open interval and X Rn , and let f : X I R be twice

continuously differentiable in an open neighborhood around (x , ), an interior point

of X I. Let : I Rn be a continuously differentiable mapping such that for all

I, () is a local maximizer of f at . Let x = ( ), and define the mapping

F : I R by

F () = f ((), )

for all I. Then F is continuously differentiable and

DF ( ) = D f (x , ).

Proof For all I, the chain rule implies

DF () = Dx f ((), )D() + D f ((), ).

Since () is a local maximizer at , the first order condition Dx f ((), ) = 0

obtains, and the above expression simplifies as required.

Pareto Optimality

Assume each individual is preferences over alternatives are represented by a utility

function ui : A R. One alternative y Pareto dominates another alternative x if

8

x1

x2

x

ui(y) ui (x) for all i, with strict inequality for at least one individual. An alternative

is Pareto optimal if there is no alternative that Pareto dominates it.

Consider the case of two individuals and quadratic utility, i.e., ui(x) = ||x xi ||2 ,

and an alternative x, as in Figure 2. It is clear that any alternative in the shaded

lens is strictly preferred to x by both individuals, which implies that x is Pareto

dominated and, therefore, not Pareto optimal. In fact, this will be true whenever

the individuals indifference curves through an alternative create a lens shape like

this. The only way that the individuals indifference curves wont create such a lens

if they meet at a tangency at the alternative x, and this happens only when x lies

directly between the two individuals ideal points. We conclude that, when there are

just two individuals and both have Euclidean preferences, the set of Pareto optimal

alternatives is the line connecting the two ideal points. See Figure 3 for elliptical

indifference curves, in which case the set of Pareto optimal alternatives is a curve

connecting the two ideal points. This motivates the standard terminology: when

there are just two individuals, we refer to the set of Pareto optimal alternatives as

the contract curve.

3.1

alternative in terms of social welfare maximization with weights 1 , . . . , n on the

utilities of individuals.

Theorem 3.1 Let x A, and let 1 , . . . , n > 0 be positive weights for each individual. If x solves

n

X

max

i ui (y),

yA

i=1

x1

x2

Proof Suppose x solves the above maximization problem but there is some alternative y that Pareto dominates it. Since ui (y) ui (x) for each i, each term i ui (y)

is at least as great as i ui(x). And since there is some individual, say j, such that

uj (y) > uj (x), and since j > 0, there is at least one y-term that is strictly greater

than the corresponding x-term. But then

n

X

i ui (y) >

i=1

n

X

i ui(x),

i=1

a contradiction.

From the preceding sufficient condition, we can then deduce the existence of at least

one Pareto optimal alternative very generally.

Theorem 3.2 Assume A Rd is compact and each ui is continuous. Then there

exists a Pareto optimal alternative.

P

Proof Define the function f : A R by f (x) = ni=1 i ui(x) for all x. Note that f

is continuous, and so it achieves a maximum over the compact set A. Letting x be

a maximizer, this alternative is Pareto optimal.

We have shown that if an alternative maximizes the sum of utilities for strictly positive

weights, then it is Pareto optimal. The next result imposes Euclidean structure on

the set of alternatives and individual utilities, namely strict quasi-concavity, and

strengthens the result of Theorem 3.1 by weakening the sufficient condition to allow

some weights to be zero.

10

there exist weights 1 , . . . , n 0 (not all zero) such that x solves

max

yA

n

X

i ui (y),

i=1

Proof Suppose x maximizes the weighted sum of utilities over A but is Pareto

dominated by some alternative z. In particular, ui(z) ui (x) for each i. Define

w = 12 x + 12 z, and note that convexity of A implies w A. Furthermore, strict

quasi-concavity implies ui (w) > min{ui(x), ui (z)} = ui(x) for all i. Since the weights

i are non-negative, we have i ui (w) i ui (x) for all i, and since i > 0 for at least

one individual, the latter inequality is strict for at least one individual. But then

n

X

i ui(w) >

i=1

n

X

i ui (x),

i=1

Our sufficient condition for Pareto optimality for general utilities, Theorem 3.1, relies

on all coefficients i being strictly positive, while Theorem 3.3 weakens this for strictly

quasi-concave utilities to at least one positive i . In general, we cannot state a

sufficient condition that allows some coefficients to be zero, even if we replace strict

quasi-concavity with concavity.

Example Let there be two individuals, A = [0, 1], u1 (x) = x, and u2(x) = 0. These

utilities are concave, and x = 0 maximizes 1 u1 (x) + 2 u2 (x) with weights 1 = 0

and 2 = 1, but it is obviously not Pareto optimal.

In the latter example, of course the problem maxx[0,1] 1 u1 (x)+2 u2 (x) (with 1 = 0

and 2 = 1) has multiple (in fact, an infinite number of) solutions. Next, we provide

a different sort of sufficient condition, relying on uniqueness of solutions to the social

welfare problem, for Pareto optimality.

Theorem 3.4 Assume that for weights 1 , . . . , n 0 (not all zero), the problem

max

yA

n

X

i ui (y)

i=1

has a unique solution. If x solves the above maximization problem, then it is Pareto

optimal.

11

utility for 2

V

z

z + (1 )z

= (1 , . . . , n )

(u1 (x ), . . . , un (x ))

z

U

utility for 1

The proof is trivial. Suppose that the conditions of the theorem hold and x solves

the problem but is not Pareto optimal; but then there is a distinct alternative y that

provides each individual with utility no lower than x, but then y is another solution

to the problem, a contradiction.

3.2

As yet, we have derived sufficientbut not necessaryconditions for Pareto optimality. To provide a more detailed characterization of the Pareto optimal alternatives

under convexity and concavity conditions, we define the set of utility imputations as

there exists x A s.t.

n

.

U =

zR :

(u1(x), . . . , un (x)) z

Intuitively, given an alternative x, we may consider the vector (u1 (x), . . . , un (x))

of utilities generated by x. Note that this vector lies in Rn , which has number of

dimensions equal to the number of individuals. The set of utility imputations consists

of all such utility vectors, as well as any vectors less than or equal to them. See Figure

4 for the n = 2 case.

The next lemma gives some useful technical properties of the set of utility imputations.

In particular, assuming the set of alternatives is convex and utilities are concave, it

establishes that the set U of imputations is convex. See Figure 4.

Lemma 3.5 Assume A Rm is convex and each ui is concave. Then U is convex.

Furthermore, if each ui is strictly concave, then for all distinct x, y A and all

12

z > (u1 (x), . . . , un (x)) + (1 )(u1(y), . . . , un (y)).

Proof Take distinct z, z U , so there exist x, x A such that

(u1 (x), . . . , un (x)) z

and

(u1 (x ), . . . , un (x )) z .

ui(x ) ui (x) + (1 )ui(x ) zi + (1 )zi

for all i N. Setting z = (u1 (x ), . . . , un (x )), we have z z + (1 )z , which

implies z + (1 )z U . Therefore, U is convex. Now assume each ui is strictly

concave, and consider any distinct x, x A and any (0, 1). Borrowing the above

notation, strict concavity implies

ui (x ) > ui (x) + (1 )ui(x ),

which implies

z > (u1(x), . . . , un (x)) + (1 )(u1 (x ), . . . , un (x )),

as required.

Next, assuming utilities are concave, we derive a necessary condition for Pareto optimality: if an alternative x is Pareto optimal, then there is a vector of non-negative

weights = (1 , . . . , n ) (not all zero) such that x maximizes the sum of individual

utilities with those weights. Note that we do not claim that x must maximize the

sum of utilities with strictly positive weights.

Theorem 3.6 Assume A Rd is convex and each ui is concave. If x is Pareto

optimal, then there exist weights 1 , . . . , n 0 (not all zero) such that x solves

max

yA

n

X

i ui (y).

i=1

V

of vectors strictly greater than the utility vector (u1(x ), . . . , un (x )) in each coordinate. For the remainder of the proof, let z = (u1 (x ), . . . , un (x )) be the utility

vector associated with x . The set V is nonempty, convex, and open (and so has

13

nonempty interior). The set U of imputations is nonempty and, by Lemma 3.5, convex. Note that U V = , for suppose otherwise. Then there exists z U V ,

which implies the existence of x A such that

(u1 (x), . . . , un (x)) z > z .

But then we have xPi x for all i N, contradicting our assumption that x is Pareto

optimal. Therefore, by the separating hyperplane theorem, there is a hyperplane H

that separates U and V . Let H be generated by the linear function f at value c,

and let = (1 , . . . , n ) Rn be the non-zero gradient of f . Then we may assume

without loss of generality that for all z U and all w V , we have f (z) c f (w),

i.e., z c w. We claim that z = c, and particular that x solves the

maximization problem in the theorem. Since z U , it follows immediately that

f evaluated at this vector is less than or equal to c. Suppose it is strictly less so,

i.e., z < c. Given > 0, define w = z + (1, 1, . . . , 1), and note that w V ,

and therefore w c. But for sufficiently small, we in fact have w < c, a

contradiction. That x solves the maximization problem in the theorem then follows

immediately: for all x A, we have (u1 (x), . . . , un (x)) U , and then

(u1 (x), . . . , un (x)) c = z ,

or equivalently,

X

iN

i ui(x)

i ui (x ),

iN

as claimed. Finally, we claim that Rn+ , i.e., i 0 for all i N. To see this,

suppose that i < 0 for some i. Then we may define the vector w = z + ei , and for

high enough , we have

w = z + i i < z .

For all > 0, we have w = w + (1, 1, . . . , 1) V , and therefore w c. But we

may choose > 0 sufficiently small that w < z = c, a contradiction. Thus,

Rn+ \ {0}.

The proof of the previous result uses the separating hyperplane theorem and the

following insight. We can think of the social welfare function above as merging two

steps: first we apply individual utility functions to an alternative x to get a vector,

say z = (z1 , . . . , zn ), of individual utilities, and then we take the dot product z

to get the social welfare from x. Of course, dot products are equivalent to linear

functions, so we can view the second step as applying a linear function f : Rn R to

the vector of utilities. Geometrically, when n = 2, we can draw the level sets of the

linear function, and if x maximizes social welfare with weights , then the vector

of utilities from x , denoted (u1 (x ), . . . , un (x )), must maximize the linear function

over the set U of utility imputations. See Figure 4.

14

utility for 2

= (1 , 2 ) 0

(u1 (1), u2(1))

U

utility for 1

With the previous result, this provides a complete characterization of Pareto optimality (under appropriate convexity/concavity conditions) in terms of optimization

theory.

Corollary 3.7 Assume A Rd is convex and each ui is strictly concave. Then x is

Pareto optimal if and only if there exists weights 1 , . . . , n 0 (not all zero) such

that x solves

n

X

max

i ui (y).

yA

i=1

The condition that the weights are non-negative but not all zero cannot be strengthened to the condition that they are all strictly positive in the necessary condition of

Theorem 3.6 and Corollary 3.7.

Example Suppose there are two individuals who must choose an alternative in the

unit interval, A = [0, 1], with quadratic utilities: u1 (x) = x2 and u2 (x) = (1 x)2 .

Then x = 1 is Pareto optimal, yet there do not exist strictly positive weights 1 , 2 >

0 such that x maximizes 1 u1 (y) + 2 u2 (y). See Figure 5. Given any strictly positive

weights, 1 and 2 , the level set through (0, 1) of the linear function with gradient

(1 , 2 ) cuts through the set of utility imputations; thus, (u1(1), u2 (1)) does not

maximize the linear function over the set of imputations.

The previous corollary uses the assumption of strict concavity to provide a full characterization of Pareto optimality. It is simple to deduce a more general conclusion

that relies instead on the uniqueness condition of Theorem 3.4.

15

assume that for all weights 1 , . . . , n 0 (not all zero), the problem

max

yA

n

X

i ui (y)

i=1

has a unique solution. Then x is Pareto optimal if and only if there exist weights

1 , . . . , n 0 (not all zero) such that x solves the above maximization problem.

One direction follows immediately from Theorem 3.6. Under the conditions of the

corollary, suppose x solves the maximization problem for some non-negative weights

(not all zero). Then Theorem 3.4 implies x is Pareto optimal, as required.

With the necessary condition for Pareto optimality established in Theorem 3.6, we

can use calculus techniques to calculate contract curves in simple examples with two

individuals. Let x intX be Pareto optimal, which therefore maximizes 1 u1 (x) +

2 u2 (x) for some 1 , 2 0 such that 1 + 2 > 0. Then the first order necessary

condition holds, and for all coordinates j, k = 1, . . . , n, we have

1 Dj u1 (x ) + 2 Dj u2 (x ) = 0

1 Dk u1 (x ) + 2 Dk u2 (x ) = 0.

Note that when Dk u1 (x ) 6= 0 and Dk u2 (x ) 6= 0, we have

Dj u1 (x )

Dj u2 (x )

=

.

Dk u1 (x )

Dk u2 (x )

That is, the marginal rates of substitution of k for j are equal for the two individuals,

i.e., their indifference curves are tangent, as in Figures 2 and 3. And although the

machinery we have developed thus far requires the utilities u1 and u2 in the preceding

discussion to be concave, we will see that the analysis extends more generally.

Example Suppose A = Rd and each ui is quadratic. Since quadratic utilities are

strictly concave, it follows that x is Pareto optimal if and only if there exist weights

1 , . . . , n 0 (not all zero) such that x solves

max

yA

n

X

i ui (y).

i=1

P

Furthermore, since each ui is strictly concave, the function ni=1 i ui (x) is strictly

concave, so x is a solution to the above maximization problem if and only if it solves

the first order condition

0 = D

n

X

i ui(x) =

i=1

n

X

i=1

16

2i (

xi x),

or

x =

n

X

i=1

Finally, writing

i =

Pni

j=1

i

Pn

j=1 j

xi .

, we have

i 0 for all i,

x =

n

X

Pn

i=1

i = 1, and

i xi ,

i=1

i . This gives us a

characterization of all of the Pareto optimal alternatives: an alternative is Pareto

optimal if and only if it is a convex combination of individual ideal points. That is,

we connect the exterior ideal points to create an enclosed space, and the Pareto

optimals consist of that line and the area within. See Figure 6.

Since we rely only on ordinal information contained in utility representations, and

any utility representation ui is equivalent, for our purposes, to an infinite number of

others resulting from monotonic transformations of ui . This may seem to run counter

to the result just described: if x maximizes social welfare with weights (1 , . . . , n )

for one specification of utility representations, u1 , . . . , un , then there is no cause to

think it will maximize social welfare with those weights for a different specification,

say 5u1, u32 , ln(u3 ), . . .. Indeed, it may not. But if we take monotonic transformations

of the original utility functions, x will still be Pareto optimal, and there will still exist

weights, say (1 , . . . , n ), for which x maximizes social welfare. In short, Theorem

3.6 says that a Pareto optimal alternative will maximize social welfare for suitably

chosen weights, but those weights may depend on the precise specification of utility

functions.

17

3.3

When utilities are differentiable, we can sharpen the characterization of the previous

subsection. We first note that at an interior Pareto optimal alternative, the gradients

of the individuals are linearly dependent.

Theorem 3.9 Assume A Rd , and let x be interior to A. Assume P

each ui is differentiable at x. Then there exist 1 , . . . , n 0 (not all zero) such that ni=1 i Dui(x) =

0.

Proof If there do not exist such weights, then 0

/ conv{Du1 (x), . . . , Dun (x)}. Then

by the separating hyperplane theorem, there is a non-zero vector p Rn such that

p Du1 (x) > 0, . . . , p Dun (x) > 0. Then there exists > 0 such that x + p A and

ui(x + p) > ui(x) for all i, contradicting Pareto optimality of x.

An easy implication of Theorem 3.9 is a differentiable version of Theorem 3.6. Indeed,

if each ui is differentiable and concave and x is Pareto optimal, then there

weights

Pare

n

1 , . . . , n 0 such that x satisfies the first order condition for maxyA i=1 i ui (y),

and by concavity, x solves the maximization problem.

We can take a geometric perspective by defining the mapping u : X Rn from

alternatives to vectors of utilities, i.e., u(x) = (u1 (x), . . . , un (x)). Then the derivative

of u at x is the matrix

u1

u1

(x)

(x)

x1

xd

..

..

..

.

.

.

.

un

(x)

x1

un

(x)

xd

The span of the columns is a linear subspace of Rn called the tangent space of u

at x. Theorem 3.9 implies that at a Pareto optimal alternative, the rank of this

derivative is n 1 or less. By Pareto optimality, u(x) belongs to the boundary of

u(X). Furthermore, the theorem implies

u1

u1

(x) x

(x)

x1

d

..

..

..

1 n

= 0,

.

.

.

un

(x)

x1

un

(x)

xd

theorem, then any positive scaling of the weights does as well. But when the derivative

Du(x) has rank n 1, the weights are unique up to a positive scalar. Indeed, when

the derivative has rank n 1, the tangent space at u(x) is a hyperplane of dimension

n 1, e.g., it is a tangent line when n = 2 and a tangent plane when n = 3. See

18

utility

for 1

du

(x)

dx1

normal space

u(x)

du

(x)

dx3

du

(x)

dx2

boundary

of u(X)

utility

for 2

utility

for 3

Figure 7: Unique weights

Figure 7 for the three-individual case. Then the normal space is one-dimensional,

and the uniqueness claim follows.

Theorem 3.10 Assume A Rd , and let x be interior to A. Assume each ui is

differentiable at x and that

P Du(x) has rank n 1. Then there exist 1 , . . . , n 0

(not all zero) such that ni=1 i Dui (x) = 0, and these weights are unique up to a

positive scaling.

The rank condition used in the previous result, while reasonable in some contexts,

is restrictive; it implies, for example, that the set of alternatives has dimension at

least n 1. Note that the condition that the weights are non-negative and not all

zero implies that the tangent line at u(x) is downward sloping when n = 2, and it

formalizes the idea that the boundary of u(X) at u(x) is downward sloping for any

number of individuals.

Constrained Optimization

a constraint set C Rn . Given domain X Rn , constraint set C Rn , and objective

19

maxxX f (x)

subject to x C.

That is, we want a vector x X C such that for all y X C, f (x) f (y).

An element x X C is a constrained local maximizer of f subject to C if there

exists some > 0 such that for all y B (x) X C, f (x) f (y).

Similarly, an element x X C is a constrained strict local maximizer of f subject

to C if there exists some > 0 such that for all y B (x) X C with y 6= x, we

have f (x) > f (y).

As long as f is continuous and X C is nonempty and compact, there is at least one

(global) constrained maximizer.

We will first consider constraint sets C taking the form of a single equality constraint:

C = {x Rn | g(x) = c},

where g : Rn R is any function, and c R is a fixed value of g. We write a

maximization problem subject to such a constraint as

maxxX f (x)

s.t. g(x) = c.

You might think of g(x) as a cost and c as a pre-determined budget. The latter

formulation is unrestrictive, but we will impose more structure (i.e., differentiability)

on g. Then we will allow multiple equality constraints g1 : Rn R, . . . , gm : Rn R,

so that the constraint set takes the form

C = {x Rn | g1 (x) = c1 , . . . , gm (x) = cm },

where cj is a fixed value of the jth constraint for j = 1, . . . , m.

We then consider the maximization problem with multiple inequality constraints: C

satisfying

C = {x Rn |g1 (x) c1 , . . . , gm (x) cm }.

These problems are written

maxn f (x)

xR

..

.

s.t. g1 (x)

gm (x)

20

c1

cm ,

now defining f on the entire Euclidean space and building any restrictions on the

domain into the constraints of the problem. Of course, it may be that gj (x) = xj

and cj = 0, so the j th constraint is just a non-negativity constraint: xj 0. Note

that the problem of equality constraints is a special case of inequality constraints: we

can always convert g(x) = c into two inequalities g(x) c and g(x) c.

Finally, we consider the general problem with mixed constraints, where we are given

equality constraints g1 : Rn R, . . . , g : Rn R and inequality constraints h1 : Rn

R, . . . , hm : Rn R. Then the form of the constraint set is

g1 (x) = c1 , . . . , g (x) = c

n

.

C =

xR |

h1 (x) d1 , . . . , hm (x) dm

We consider the hybrid optimization

maxxRn f (x)

s.t gj (x) = cj , j = 1, . . . ,

hj (x) dj , j = 1, . . . , m,

again defining f on the entire Euclidean space.

5

5.1

Equality Constraints

First Order Analysis

local maximizers in terms of directional derivatives. In contrast to the unconstrained

case, however, we can only consider moves in a small range of directionsonly in

directions t that are orthogonal to the level set of g at c. In truth, we can only move

along the level set of g at c; moving from a constrained local maximizer in such a

direction t can violate the constraint if g is non-linear, a fact that is the source of some

complexity of the analysis. But we can almost move in the directions orthogonal

to the gradient of the constraint function, and that is enough for our purposes.

In problems with equality constraints, constrained local maximizers look something

like x in Figure 8. Note that such a vector need not be a constrained global maximizer

here, f takes a strictly higher value at y, which also satisfies the constraint.

Note that the level sets of f and g are tangent at x. In other words, their gradients

are collinear (maybe pointing in opposite directions). When thats not the case, we

can find a point like y in Figure 9 with g(y) = c and f (y) > f (x). Moreover, we can

find such vectors arbitrarily close to x, so x cant be a local maximizer.

21

x2

level sets

of f

y

Df (x)

x

g=c

Dg(x)

x1

Figure 8: Constrained local maximizer

x2

level set

of f

Df (x)

x

g=c

y

Dg(x)

x1

22

x2

Dg(x)

g=c

z

x1

x=0

(z)

I

Figure 10: Proof of Lagrange

Theorem 5.1 (Lagrange) Let X Rn , f : X R, and g : Rn R. Assume f

and g are continuously differentiable in an open neighborhood around x, an interior

point of X. Also assume Dg(x) 6= 0. If x is a constrained local maximizer of f subject

to g(x) = c, then there is a unique multiplier R such that

Df (x) = Dg(x).

(1)

Proof I provide a heuristic argument for the case of two variables. The idea is to

transform the constrained problem into an unconstrained one. The theorem assumes

that Dg(x) 6= 0, and (only to simplify notation) we will assume x = 0 and D2 g(x) 6= 0.

The implicit function theorem implies that in an open interval I around x1 = 0, we

may then view the level set of g at c as the graph of a function : I R such that for

all z I, g(z, (z)) = c. See Figure 10. Note that 0 = x = (0, (0)). Furthermore,

is continuously differentiable with derivative

D(z) =

D1 g(z, (z))

.

D2 g(z, (z))

(2)

Because x is interior to X, we can choose the interval I small enough that each

(z, (z)) belongs to the domain X of the objective function. Then z = 0 is a local

maximizer of the unconstrained problem

maxzI f (z, (z)),

23

and we know the first order condition holds, i.e., differentiating with respect to z and

using the chain rule, we have

D1 f (0) + D2 f (0)D(0) = 0,

which implies

D1 f (0) + D2 f (0)

D1 g(0)

= 0.

D2 g(0)

2 f (0)

, we have Df (0) = Dg(0), as desired.

Defining = D

D2 g(0)

Of course, the first order condition from Lagranges theorem can be written in terms

of partial derivatives:

f

g

(x) =

(x)

xi

xi

for all i = 1 . . . n. Thus, the theorem gives us n + 1 equations (including the constraint) in n + 1 unknowns (including ). If we can solve for all of the solutions of this

system, then we have an upper bound on the interior constrained local maximizers.

Remember: the theorem of Lagrange gives a necessary condition for a constrained

local maximizer, not a sufficient one; the solutions to the first order condition may

not be local maximizers.

The number is the Lagrange multiplier corresponding to the constraint. The condition Dg(x) 6= 0 is called the constraint qualification. Without it, the result would

not be true.

Example Consider X = R, f (x) = (x + 1)2 , and g(x) = x2 . Consider the problem

of maximizing f subject to g(x) = 0. The maximizer is clearly x = 0. But Dg(0) = 0

and Df (0) = 2, so there can be no such that Df (0) = Dg(0).

There is an easy way to remember the conditions in the corollary to the Lagranges

theorem: if x is an interior constrained local maximizer of f subject to g(x) = c,

and if Dg(x) 6= 0, then there exists R such that (x, ) is a critical point of the

function L : X R R defined by

L(x, ) = f (x) + (c g(x)).

That is, there exists R such that

L

(x, )

x1

=

..

.

f

(x)

x1

L

(x, )

xn

L

(x, )

=

=

f

(x)

xn

g

x

(x) = 0

1

..

.

g

x

(x) = 0

n

c g(x)

= 0,

24

which is equivalent to the first order condition (1). The function L is called the

Lagrangian function.

Though its not quite technically correct, its as though weve converted a constrained

maximization problem into an unconstrained one: maximizing the Lagrangian L(x, )

with respect to x. Imagine allowing xs that violate the constraint; for example,

suppose, at a constrained maximizer x , that we could increase the value of f by

moving from x to a nearby point x with g(x) < c. Since this x violates the constraint,

we dont want this to be profitable, so the Lagrangian has to impose a cost of doing

so in the amount (c g(x)) (here, has to be positive). Then is like a price

of violating the constraint imposed by the Lagrangian. The reason why this is not

technically correct is that given the multiplier , a constrained local maximizer need

not be a local maximizer of L(, ).

Example Consider X = R, f (x) = (x 1)3 + x, g(x) = x, and

maxxR f (x)

s.t. g(x) = 1

The unique solution to the constraint, and therefore to the maximization problem,

is x = 1. Note that Df (x) = 3(x 1)2 + 1 and Dg(x) = 1, and evaluating at the

solution x = 1, we have Df (1) = 1 = Dg(1). Thus, the multiplier for this problem is

= 1. The Lagrangian is

L(x, ) = (x 1)3 + x + (1 x),

and evaluated at = 1, this becomes

L(x, 1) = (x 1)3 + 1.

But note that this function is strictly increasing at x = 1, i.e., for arbitrarily small

> 0, we have L(1 + , 1) > L(1, 1), so x = 1 is not a local maximizer of L(, 1).

Note the following implication of Lagranges Theorem: at a constrained local maximizer, x, we have

f

(x)

xi

f

(x)

xj

g

(x)

xi

g

(x)

xj

for all i and j. The lefthand side is the marginal rate of substitution telling us the

value of xi in terms of xj . The righthand side tells us the cost of xi in terms of xj .

Lagrange tells us that, at an interior local maximizer, those have to be the same.

Recall that Lagranges theorem only gives us a necessarynot a sufficientcondition

for a constrained local maximizer. To see why the first order condition is not generally

sufficient, consider the following example.

25

maxxR2 f (x1 , x2 )

s.t. g(x1 , x2 ) = 1.

Note that x = (1, 0) satisfies the constraint g(x ) = 1, and the constraint qualification is also satisfied. Furthermore, the first order condition from Lagranges theorem

is satisfied at x = (1, 0). Indeed, Df (x) = (1, 2x2 ) and Dg(x) = (1, 0). Evaluating

at x , we have Df (x ) = (1, 0) = Dg(x). Thus, the equality Df (x ) = Dg(x) is

obtained by setting = 1, as in Lagranges theorem. But x is not a constrained local

maximizer: for arbitrarily small > 0, (1, ) satisfies g(1, ) = 1 and f (1, ) > f (x ).

Note that the objective function in the preceding example violates quasi-concavity.

I claim, for now without proof, that when the objective function is concave and the

constraint is linear, the first order condition from Lagranges theorem is sufficient

for a global maximum. But what if g is linear, the first-order condition is satisfied

at x, and f is only quasi-concave? Must x be a global maximizer? The answer,

unfortunately, is no. In fact, x need not even be a local maximizer.

Example Consider f (x1 , x2 ) = x32 , g(x1 , x2 ) = x1 , and

maxxR2 f (x1 , x2 )

s.t. g(x1 , x2 ) = 1.

Note that f is quasi-concave, that g is linear with gradient (1, 0) satisfying the constraint qualification, and that x = (1, 0) satisfies the constraint g(x ) = 1. Furthermore, Df (x1 , x2 ) = (0, 3x22 ). Evaluating at x , we have Df (x ) = 0, and we obtain

the equality Df (x ) = Dg(x) by setting = 0. But x is not a constrained local

maximizer: for arbitrarily small > 0, (1, ) satisfies g(1, ) = 1 and f (1, ) > f (x ).

But the example leaves open one possibility for a general result. In the example, the

objective function was quasi-concave, but the gradient at x was zero; what if f is

quasi-concave and the gradient is non-zero? The next result establishes that these

conditions are indeed sufficient for a global maximizer. It actually follows from a more

general result, Theorem 6.2, for inequality constrained maximization, so we defer the

proof until then.

Theorem 5.2 Let X be open and convex, let f : X R be quasi-concave and continuously differentiable, and let g : Rn R be linear. If g(x) = c and there exists

R such that the first order condition (1) holds with respect to x, then x is a constrained

global maximizer of f subject to g(x) = c provided either of two conditions holds:

26

1. Df (x) 6= 0, or

2. f is concave.

The preceding example shows that the first order condition is not sufficient for a

local maximizer (and a fortiori, not for a global maximizer). One approach to this

problem, taken above, is to add the assumption of non-zero gradient. An alternative is to strengthen the first order condition to the assumption that x is a local

maximizer. . . but this hope is not realized: in the previous example, re-define f to

be constant at zero whenever x2 < 0, leaving the definition unchanged whenever

x2 0; then every vector with x2 < 0 is a local maximizer (right?) but not a global

maximizer. We end by strengthening these assumptions even further, and deducing

an even stronger condition: if f is quasi-concave and x is a constrained strict local

maximizer, then x is the unique global maximizer.

Theorem 5.3 Let X Rn be convex, let f : X R be quasi-concave, and let

g : Rn R be linear. If x X is a constrained strict local maximizer, then it is the

unique constrained global maximizer, i.e., it is the unique maximizer of f subject to

g(x) = c.

Proof Assume x X is a constrained strict local maximizer, and suppose there

exists y X with y 6= x such that g(y) = c and f (y) f (x). Let > 0 be

such that for all z X C B (x) with z 6= x, we have f (x) > f (z). Given any

with 0 < < 1, define z() = y + (1 )x. Then quasi-concavity implies

f (z()) min{f (x), f (y)} = f (x). Furthermore, with g(x) = g(y) = c, linearity of g

implies g(z()) = c. But for small enough > 0, we have z() X C B (x) and

f (z()) 0, a contradiction.

Of course, if f is strictly quasi-concave and x is a constrained local maximizer, then

it is a constrained strict local maximizer, and the theorem can be applied.

5.2

Examples

I > 0 and prices are p1 > 0 and p2 > 0. His utility function is u : R2+ R. We assume

u is differentiable and monotonic in the following sense: for all (x1 , x2 ) and (y1 , y2 )

with x1 y1 and x2 y2 , at least one inequality strict, we have u(x1 , x2 ) > u(y1, y2 ).

The consumers problem is:

max(x1 ,x2 )R2+ u(x1 , x2 )

s.t. p1 x1 + p2 x2 = I.

27

Note that we impose the constraint that the consumer must spend all of his income;

since we assume monotonicity, this is without loss of generality. The set X C =

R2+ {(x1 , x2 ) | p1 x1 + p2 x2 = I} is compact (since p1 , p2 > 0), and u is continuous,

so the maximization problem has a solution. We can apply Lagranges theorem with

f (x1 , x2 ) = u(x1 , x2 )

g(x1 , x2 ) = p1 x1 + p2 x2

c = I

to find all the constrained local maximizers (x1 , x2 ) interior to R2+ (i.e, x1 , x2 > 0)

satisfying Dg(x1 , x2 ) 6= 0. In fact, for all (x1 , x2 ) R2+ ,

Dg(x1 , x2 ) = (p1 , p2 ) 6= 0,

so the constraint qualification is always met. Letting (x1 , x2 ) be an interior constrained local maximizer, there exists R such that (x1 , x2 , ) is a critical point of

the Lagrangian:

L(x1 , x2 , ) = u(x1 , x2 ) + (I p1 x1 p2 x2 ).

That is,

L

u

(x1 , x2 , ) =

(x1 , x2 , ) p1 = 0

x1

x1

L

u

(x1 , x2 , ) =

(x1 , x2 , ) p2 = 0

x2

x2

L

(x1 , x2 , ) = I p1 x1 p2 x2

= 0.

Solving these equations gives us the critical points of the Lagrangian, and if a maximizer (x1 , x2 ) is interior to R2+ (x1 , x2 > 0 ), then it will be one of these critical points.

Note that

u

(x1 , x2 )

x1

u

(x1 , x2 )

x2

p1

,

p2

i.e., the relative value of x1 in terms of x2 equals the relative price. Consider the CobbDouglas special case u(x1 , x2 ) = x1 x2 , where , > 0. Its clear that every maximizer

must be interior to R2+ . (Right?) The critical points of the Lagrangian satisfy

x1

x2 p1 = 0

1

x1 x21 p2 = 0,

Divide to get

x2 p 1

,

x1 p 2

or x2 =

p1

x.

p2 1

p1

p1 x1 + p2

x1

= I,

p2

28

x1 =

I

+ p1

and

x2 =

I

.

+ p2

Since this critical point is unique, it is the unique maximizer, and we call

I

+ p1

I

x2 (p1 , p2 , I) =

+ p1

x1 (p1 , p2 , I) =

demand functions. They tell us the consumers consumption for different prices and

incomes. Fixing p2 and I, we can graph x1 as a function of p1 , which gives us the

demand curve for good 1. We can also solve for by substituting into x1

x2 = p1 .

1

This gives us,

1 1

=

p1 +

p1

+

p2

+1

I

=

.

p1

p2

+

If + = 1, then the last term drops out. Note that we can always take a strictly

increasing transformation of Cobb-Douglas utilities to obtain + = 1 without altering the consumers demand functions, but such a transformation can affect the

Lagrange multiplier.

Example Now consider the distributive model of social choice, where the set of

alternatives is the unit simplex,

)

(

n

X

xi = 1 ,

X =

x Rn+ |

i=1

and each individual simply wants more of this scarce resource for him- or herself.

Formally, assume each is utility function ui(x1 , . . . , xn ) is strictly increasing in xi

and invariant with respect to reallocations of the resource among other individuals.

Consider the welfare maximization problem of a social planner with non-negative

weights 1 , . . . , n (not all zero):

max

xX

n

X

i ui (x).

i=1

n

ui (x)

X

i ui(x) = i

=

xi i=1

xi

n

X

xi = 1.

i=1

29

In contrast to unconstrained maximization, where the first order condition means that

the marginal impact of changing each choice variable is zero, now an interior allocation

can be a local maximizer only if the marginal impacts are equalized across individuals.

If a local maximum involves some individuals receiving an allocation of zero, then the

logic extends to all individuals receiving a positive amount of the resource. Now

consider the special case ui (x) = ln(xi ). (Henceforth, we only consider alternatives in

which each individual receives a strictly positive amount of the resource, so utilities

are well-defeined.) These utilities are concave in x but not strictly concave or even

strictly quasi-concave. Given the structure of the set of alternatives and utilities, we

can write the first order condition as

n

X

i

i ln(xi ) =

=

xi i=1

xi

n

X

xi = 1,

i=1

Interestingly, we have seen this problem before in the Cobb-Douglas example of the

consumers problem: the maximization problem in the distributive setting is unaffected if we take a strictly increasing transformation of the objective function, so we

can replace the above objective with

n

n

Y

Y

Pn

i

ln(x

)

ln

x

i

i

e i=1

e i =

xi i ,

=

i=1

i=1

which has the form of a Cobb-Douglas utility function with exponent i on xi ; thus,

the above problem is isomorphic to the problem of a Cobb-Douglas consumer facing

unit prices p1 = = pn = 1 and income I = 1. Because the maximization problem

has a unique solution for all such weights, the characterization result of Corollary 3.8

applies, and so we have solved for all Pareto optimal alternatives. In fact, by varying

the weights 1 , . . . , n , we conclude that every alternative is Pareto optimal a fact

that was pretty obvious from the outset (right?).

Example Prior to a national election, suppose a political party must decide how

much to spend in a number of electoral districts i = 1,

P.n. . , n. Let xi denote the amount

spent in district i, and assume x1 0, . . . xn 0, i=1 xi = I. The probability the

party wins district i is Pi (xi ), where Pi : R+ R is a differentiable function. The

party seeks to maximize the expected number of districts it wins, i.e.,

P

max(x1 ,...xn )Rn+ ni=1 Pi (xi )

s.t. x1 + + xn = I.

n

X

DP1 (x1 ) = , . . . , DPn (xn ) = ,

xi = I.

i=1

30

Again, the first order conditions reduce to the following simple principle: allocate

money to districts in a way that equalizes marginal probability of victory across

the districts. Note that the special case Pi (xi ) = i ln(xi ) is equivalent to the CobbDouglas specification of the consumers problem. For an alternative parameterization,

it could be that

Pi (xi ) =

i +

+ xi

where i < and i may vary across districts. The first order condition is

1

2

n1

n

.

2 =

2 = =

2 =

( + x1 )

( + x2 )

( + xn1 )

( + xn )2

The solutions to these equations will include all interior maximizers, if any. (Whether

there are any will depend on the i s. If i is close to so the probability of victory

2 ( )

is close to one, spending will be low. If i < (+1)2j for all j 6= i, spending in

district j will be zero.) The n = 2 case is analytically tractable:

(1 + 2 ) + 1 I 1 2 (I + 2)

x1 =

2 1

(1 + 2 ) + 2 I 1 2 (I 2)

,

x2 =

1 2

where 1 = 1 and 2 = 2 .

5.3

Second order necessary and sufficient conditions are more complicated than they

were in unconstrained optimization. As in the first order analysis, a condition on

second order directional derivatives needs to be satisfied at an interior constrained

local maximizerbut only in directions t that are orthogonal to the level set of g

at c. Once again, we must deal with the complication that we can only move along

the level set of g at c; moving from a constrained local maximizer in such a direction

t can violate the constraint if g is non-linear. Once again, the insight is to convert

the constrained optimization problem into an unconstrained one using the implicit

function theorem.

Theorem 5.4 Let f : X R and g : Rn R be twice continuously differentiable in

an open neighborhood around x, an interior point of X. Assume Dg(x) 6= 0. Assume

x is a constrained local maximizer of f subject to g(x) = c, and let R satisfy the

first order condition (1). Then

t [D 2 f (x) D 2 g(x)]t 0

for all directions t with Dg(x)t = 0.

31

(3)

Proof We give a heuristic proof for the two-variable case similar to that of Lagranges

theorem. As above, we have Dg(x) 6= 0, and we assume for simplicity that x = 0 and

D2 g(x) 6= 0. To further simplify matters, assume that the gradient of g at x points

straight up, so D1 g(x) = 0. (This just amounts to a rotation of axes that doesnt

affect the second order analysis.) Again, we have an open interval I around x1 = 0

and a continuously differentiable function : I R such that for all z I, we have

g(z, (z)) = c. Because we assume Dg(0) = (0, D2g(0)), this means Dg(x)t = 0 for

exactly two directions, i.e., t = (1, 0) and t = (1, 0). In either case, the necessary

second order condition is

D12 f (0) D12 g(0).

To obtain this, we note again that z = 0 is a local maximizer of the unconstrained

problem

max f (z, (z)).

zI

maximizer of . Thus, the first order necessary condition holds,

D(0) = D1 f (0) + D2 f (0)D(0) = 0,

where the derivative of has the form (2) given by the implicit function theorem.

Furthermore, the necessary second order condition holds, i.e., D 2 (0) 0. To expand

this we use the chain rule to calculate the derivatives of as follows:

D(z) = D1 f (z, (z)) + D2 f (z, (z))D(z)

D 2 (z) = D12 f + D1,2 f D + [D1,2 f + D2,2 f D]D + D2 f D2 ,

where f is evaluated at (z, (z)) and at z. To unpack this further, we must expand

the second derivative of using (2) and the chain rule:

D2 g[D12g + D1,2 gD] D1 g[D1,2 g + D2,2 gD]

(D2 g)2

D2 gD12g D1 gD1,2g

,

=

(D2 g)2

D 2 (z) =

z = 0, because D1 g(0) = 0 and (2) imply D(0) = 0. Then

D 2 (0) = D12 f (0) + D2 f (0)D 2 (0) 0

D2 g(0)D12g(0)

D12 g(0)

D 2 (0) =

=

.

(D2 g(0))2

D2 g(0)

Substituting the latter expression for D 2 (0) into the inequality D 2 F (0) 0, we have

D12 f (0) D2 f (0)

32

D12g(0)

0.

D2 g(0)

Finally, recall that the first order condition (1) implies D2 f (0) = D2 g(0), so the

preceding inequality becomes D12 f (0) D12 g(0), as required.

We can write the necessary second order condition in (3) in terms of the Lagrangian.

Recall the Lagrangian of an equality constrained maximization problem is defined as

L(x, ) = f (x) + (c g(x)).

Suppose the first order condition (1) holds at x with multiplier , i.e.,

Dx L(x, ) = Df (x) Dg(x) = 0,

and define the Hessian of the Lagrangian with respect

2

2

L(x, )

L(x, )

x1 x2

x21

2

2

x2 x1 L(x, )

L(x, )

x22

Dx2 L(x, ) =

..

..

.

.

2

2

L(x, ) xn x2 L(x, )

xn x1

to x as

..

.

2

L(x, )

x1 xn

2

L(x, )

x2 xn

..

.

2

L(x, )

x2

n

t Dx2 L(x, )t 0

for all t with Dg(x)t = 0.

How do we check whether the Hessian satisfies these inequalities? We can form the

bordered Hessian of the Lagrangian,

0

Dg(x)

,

Dg(x) Dx2 L(x, )

and then check signs of the last n 1 leading principal minors of the matrix. But

this takes us beyond the scope of these notes. See Simon and Blume (1994) for a nice

explanation.

Of course, the latter result provides only a necessary second order condition, not a

sufficient one. Strengthening the condition to strict inequality, we have a stronger

second order condition that is sufficient for a constrained strict local maximizer. Note

that, in contrast to the analysis of necessary conditions, the next result does not rely

on the constraint qualification.

Theorem 5.5 Let f : X R and g : Rn R be twice continuously differentiable

in an open neighborhood around x, an interior point of X. Assume x satisfies the

constraint g(x) = c and the first order condition (1) with multiplier R. If

t [D 2 f (x) D 2 g(x)]t < 0

(4)

for all directions t with Dg(x)t = 0, then x is a constrained strict local maximizer of

f subject to g(x) = c.

33

Again, we can write the sufficient second order condition in terms of the Lagrangian

as t Dx2 L(x, )t < 0 for all t with Dg(x)t = 0.

In fact, with the first order condition (1) from Lagranges theorem, the second order

sufficient condition implies much more. It implies that x is locally isolated, i.e., there

is an open set Y Rn around x such that x is the unique constrained local maximizer

belonging to Y . Furthermore, following the analysis of unconstrained optimization,

we can consider the possibility that the objective function f and the constraint function g contain parameters, notationally suppressed until now, and we can study the

effect of letting one parameter, say , vary. Of course, if x is a constrained local

maximizer given parameter , and then the value of the parameter changes a small

amount to , then x may no longer be a constrained local maximizer, but assuming

the second order sufficient condition, the new constrained local maximizer will be

close to x, and its location will vary smoothly as we vary the parameter. Note that

the constraint qualification is reinstated in the next result.

Theorem 5.6 Let I be an open interval and X Rn , and let f : X I R and

g : Rn I R be twice continuously differentiable in an open neighborhood of (x , ),

an interior point of X I. Assume Dg(x , ) 6= 0. Assume x satisfies the constraint

g(x , ) = c and the first order condition at , i.e.,

Dx f (x , ) Dx g(x , ) = 0,

with multiplier R. If

t [D 2 f (x , ) D 2 g(x , )]t < 0

for all t with Dg(x , )t = 0, then there are an open set Y Rn with x Y , an open

interval J R with J, and continuously differentiable mappings : I Y and

: I R such that for all I, (i) () is the unique maximizer of f (, ) subject to

g(x, ) = c belonging to Y , (ii) the unique multiplier for which () satisfies the first

order necessary condition (1) at is (), and (iii) () satisfies the second order

sufficient condition (4) at with multiplier ().

The preceding result lays the theoretical groundwork necessary for studying the effect

of a parameter on the solution to a given optimization problem. This exercise is

referred to as comparative statics. For example, under the conditions of the preceding

theorem, we can take partial derivatives,

x1 x1 x1

,

,

, etc.,

p1 p2 I

that tell us how the consumers maximizer changes with respect to market parameters.

34

x1 (p1 , p2 , I) =

I

+ p1

and

x2 (p1 , p2 , I) =

I

+ p1

The conditions of Theorem 5.6 are satisfied here, and indeed we can directly compute

partial derivatives of demand for good 1 as

x1

I

(p1 , p2 , I) =

p1

+ p21

x1

(p1 , p2 , I) = 0

p2

x1

(p1 , p2 , I) =

.

I

p1 ( + )

Obviously, partial derivatives for good 2 are similar. Interesting features of CobbDouglas demands are that demand curves are downward-sloping and the demand for

any good is invariant with respect to price changes in other goods. Indeed, the share

of income spent on good 1 is always /( + ) and the share spent on good 2 is

/( + ).

Given the preceding result and the mapping , which specifies a constrained local

maximizer as a continuously differentiable function of the parameter I, the locally

maximized value

F () = f ((), )

is itself a continuously differentiable mapping. The next result is an extension of

the envelope theorem to equality constrained maximization problems; it provides a

simple technique for performing comparative statics on this maximized value function:

basically, we can take a simple partial derivative of the parameterized Lagrangian,

L(x, , ) = f (x, ) + (c g(x, )),

only through the argument. That is, although the location of the constrained local

maximizer may indeed change when we vary , we can ignore that variation, treating

the constrained local maximizer as fixed in taking the derivative.

Theorem 5.7 Let I be an open interval and X Rn , and let f : X I R and

g : Rn I R be twice continuously differentiable in an open neighborhood around

(x , ), an interior point of X I. Let : I Rn and : I R be continuously

differentiable mappings such that for all I, () is a constrained local maximizer

satisfying the first order condition (1) with multiplier () at . Let x = ( ) and

= ( ), and define the mapping F : I R by

F () = f ((), )

35

DF ( ) =

L

(x , , ).

f

g

L

(x , , ) =

(x , ) (x , ),

n

X

f

di

f

DF () =

((), )

() +

((), ).

x

d

i

i=1

n

X

g

f di

(x , )

( ) = (x , ).

xi

d

i=1

To verify the latter equality, we write G() = g((), ) and use the chain rule to

conclude

DG() =

n

X

g

di

g

((), )

() +

((), ) = 0,

x

d

i

i=1

where the second equality above follows since g((), ) takes a constant value of c

on I, so its derivative is zero. Then

n

X

g di

(x , ) =

(x , )

( ),

xi

d

i=1

g

n

X

f

i=1

g di

(x , )

(x , )

( ) = 0,

xi

xi

d

The previous analysis looks less general than it is, and in fact, it provides an intuitive

interpretation of the Lagrange multiplier. Although the parameter does not explicitly enter the value of the constraint, c, we can consider a simple linear specification,

g(x, ) = g(x) , so the Lagrangian becomes

L(x, ) = f (x) + (c + g(x)),

36

By Theorem 5.7, the rate of change of the locally maximized value of the objective

function as we increase is

DF ( ) =

L

(x , , ) = .

That is, the value of the multiplier at a constrained local maximizer tells us the

marginal effect of increasing the value of the constraint.

Example In the consumers problem, given prices and income p1 , p2 , and I, let

x1 (p1 , p2 , I) and x2 (p1 , p2 , I) be demands satisfying the first order condition and second order sufficient condition. Then the consumers maximum utility is

U(p1 , p2 , I) = u(x1 (p1 , p2 , I), x2 (p1 , p2 , I)),

and the function U() is called the consumers indirect utility function. How does

this vary with respect to prices and income? Consider I. According to the envelope

theorem, we take the partial derivative of the Lagrangian,

u1 (x1 , x2 ) + (I p1 x1 p2 x2 ),

with respect to I, where x1 and x2 are fixed at their maximized values and is

the associated multiplier. Thats just ! Thus, we see that the Lagrange multiplier

measures the rate at which the consumers utility increases with her income, i.e., it

is the marginal utility of money. How does the consumers maximum utility vary

with the price p1 ? It is simply x1 .

5.4

f : X R, g1 : Rn R, . . . , gm : Rn R. Consider

maxxX f (x)

s.t g1 (x) = c1

..

.

gm (x) = cm .

The results for problems with multiple equality constraints are very similar to the

case with one constraint.

Theorem 5.8 (Lagrange) Let X Rn , and assume f : X R, g1 : Rn R,

. . . , gm : Rn R are continuously differentiable in an open neighborhood around x,

37

interior to X. Assume the gradients of the constraints, {Dg1 (x), . . . , Dgm (x)}, are

linearly independent. If x is a local constrained maximizer of f subject to g1 (x) =

c1 , . . . , gm (x) = cm , then there are unique multipliers 1 , 2 , . . . , m R such that

Df (x) =

m

X

j Dgj (x).

(5)

j=1

Of course, the first order condition can be written in terms of partial derivatives:

m

X

f

gj

j

(x) =

(x)

xi

x

i

j=1

can solve for all of the solutions of this system, then we have an upper bound on

the interior constrained local maximizers. The numbers 1 , . . . , m are the Lagrange

multipliers corresponding to the constraints. The linear independence condition is

the general constraint qualification.

The main difference when we move to multiple equality constraints is the form of

the constraint qualification. Previously, we assumed only that Dg(x) 6= 0, and now

we assume that {Dg1 (x), . . . , Dgm (x)} is linearly independent, which means that no

gradient Dgi (x) can be written as a linear combination of the remaining ones, i.e.,

there do not exist scalars j for all j 6= i such that

X

Dgi(x) =

j Dgj (x).

j6=i

When there is one constraint (m = 1), the requirement is that Dg1 (x) 6= 0 (the same

as before); when there are two constraints (m = 2), the requirement is that the two

gradients, Dg1 (x) and Dg2 (x), are not collinear; when there are three constraints

(m = 3), the gradients of the constraints do not lie on the same plane.

As for the case of a single equality constraint, the constraint qualification is needed

for the result. To provide some geometric insight into the condition, consider the

case of two constraints in Figure 11. Here, x is a constrained local maximizer of f

(in fact, it is the unique element of the constraint set), but Df (x) cannot be written

as a linear combination of Dg1 (x) and Dg2 (x), which are linearly dependent.

Put differently, Lagranges theorem says that if x is an interior constrained local

maximizer, there exist 1 , . . . , m R such that (x, 1 , . . . m ) is a critical point of

the Lagrangian function L : X Rm R, now defined by

L(x, 1 , . . . , m ) = f (x) +

m

X

j=1

38

j (cj gj (x)).

x2

Dg1(x)

Df (x)

x

g 1 = c1

Dg2(x)

g 2 = c2

x1

Figure 11: Constraint qualification needed

The analysis of second order conditions and envelope theorems is very much the

same as with a single equality constraint. Indeed, the interpretation of the Lagrange

multipliers is the same: j tells us the rate at which the maximized value of f changes

if we increase cj in the j th constraint.

Example Consider the problem of a social planner in an exchange economy. There

are n consumers and K commodities. The social endowment (the amount in existence)

of good k is Wk . The planner has to decide on an allocation of the goods to consumers,

where xi = (xi1 , xi2 , . . . , xiK ) is the bundle for consumer i and x1k + x2k + + xnk = Wk

for each good k. Given continuously differentiable utility functions u1 , u2 , . . . , un

representing the preferences of consumers and non-negative weights 1 , . . . , n (not

all zero), the planner solves

max

i=1,...,n

xik R+ k=1,...,K

s.t.

n

X

n

X

i=1

xik = Wk k = 1, 2, . . . , K.

i=1

This is a maximization problem subject to multiple equality constraints, one for each

commodity. The Lagrangian for the problem is

L(x1 , . . . , xn , ) =

n

X

i ui (xi1 , . . . , xiK ) +

i=1

K

X

k=1

39

k (Wk

n

X

i=1

xik ).

L

xik

n

X

ui i

(x , . . . , xiK ) = k

xik 1

i = 1, . . . , n, k = 1, . . . , K

= i

xik = Wk

k = 1, . . . , K.

i=1

ui

(xi1 , . . . , xiK )

xk

ui

(xi1 , . . . , xiK )

x

k

.

That is, if we look at any is marginal rate of substitution between any goods k and

(measuring the value of k for i in terms of ), it is k . This is independent of i, so

the marginal rates of substitution of the consumers are equal. Indeed, recall that k

is the rate at which maximized social welfare increases with an increase in the total

amount of good k (and similarly for ). So k is the social value of good k in terms

of good , i.e., an extra unit of good k is worth roughly kl units of good . The first

order condition says that the planner must equate the individual values of the goods

to the social value. Second, the first order conditions imply

ui

(xi1 , . . . , xiK )

i x

k

= 1.

good k and js consumption (measuring the value of is consumption in terms of j).

Interestingly, this is equal to one for all pairs of consumers and for all goods. Third,

rewriting the above formulation of the first order condition, we have

ui

(xi1 , . . . , xiK )

xk

uj

(xj1 , . . . , xjK )

xk

j

.

i

The lefthand side compares the increased utility consumer i would get from more

of good k to the increased utility consumer j would get. If it is high, is weight in

the welfare function must be low compared to js. Is this the opposite of what you

expected? If is weight werent relatively low, the planner would go ahead and give

more of good k, and that would raise social welfare but then the original allocation

couldnt have been optimal! To continue the example, recall the definition of a Walrasian equilibrium allocation (

x1 , . . . , xn ): there exist prices p1 , p2 , . . . , pK such that

1. for all i = 1, . . . , n, xi = (

xi1 , . . . , xiK ) solves

maxxi1 ,...,xiK 0 ui (xi1 , . . . , xiK )

i

s.t. p1 xi1 + + pK xiK p1 w1i + + p1 wK

.

40

2. for all k = 1, . . . , K, Wk =

Pn

i=1

xik .

xi1 , . . . , xiK ) satisfies

ui i

(

x , . . . , xiK ) = i p1

xi1 1

..

.

ui i

(

x , . . . , xiK ) = i pK ,

xik 1

where i is the Lagrange multiplier for is problem. Now reconsider the planning

problem with welfare weights i = 1i (one over is marginal utility of money) for

each consumer:

max

i=1,...,n

xik R+ k=1,...,K

s.t.

n

X

n

X

i=1

xik = Wk k = 1, 2, . . . , K.

i=1

i

ui i

(x1 , . . . , xiK ) = k ,

xk

or equivalently,

ui i

(x1 , . . . , xiK ) = i k .

xk

Clearly, the Walrasian allocation (

x1 , . . . , xn ) satisfies the first order conditions with

multipliers k = pk . Adding concavity of consumer utilities (see Theorem 5.9), we can

conclude that the Walrasian allocation is indeed the social optimum given weights 1i ,

and then the multiplier pk represents the social value of good k.

Other results from the analysis of a single equality constraint carry over to the case of

multiple constraints. First, we note the implications of quasi-concave objective and

linear constraints. Again, the result follows from Theorem 6.2.

Theorem 5.9 Let X be open and convex, let f : X R be quasi-concave and

continuously differentiable, and let g1 : Rn R, . . . , gm : Rn R be be linear. If

g1 (x) = c1 , . . . , gm (x) = cm , and there exists 1 , . . . , m R such that the first order

condition (5) holds with respect to x, then x is a constrained global maximizer of f

subject to g1 (x) = c1 , . . . , gm (x) = cm provided either of two conditions holds:

1. Df (x) 6= 0, or

41

2. f is concave.

With quasi-concavity, a constrained strict local maximizer is the unique constrained

(global) maximizer.

Theorem 5.10 Let X Rn be convex, let f : X R be quasi-concave, and let

g1 : Rn R, . . . , gm : Rn R be linear. If x X is a constrained strict local

maximizer, then it is the unique constrained global maximizer, i.e., it is the unique

maximizer of f subject to g1 (x) = c1 , . . . , gm (x) = cm .

Moving to the second order analysis, the necessary condition is again that the second

directional derivative of the Lagrangian be non-positive, now in every direction that

is orthogonal to the gradient of each constraint function.

Theorem 5.11 Let f : X R and g1 : Rn R, . . . , gm : Rn R be twice continuously differentiable in an open neighborhood around x, an interior point of X.

Assume the gradients {Dg1 (x), . . . , Dgm (x)} are linearly independent. Assume x is

a constrained local maximizer of f subject to g1 (x) = c1 , . . . , gm (x) = cm , and let

1 , . . . , m R satisfy the first order condition (5). Consider any direction t such

that Dgj (x)t = 0 for all j = 1, . . . , m. Then

"

#

m

X

2

2

j D gj (x) t 0.

t D f (x)

j=1

Again, strengthening the weak inequality to strict gives us a second order condition

that, in combination with the first order condition, is sufficient for a constrained strict

local maximizer. Note that, in contrast to the analysis of necessary conditions, the

next result does not rely on the constraint qualification.

Theorem 5.12 Let f : X R and g1 : Rn R, . . . , gm : Rn R be twice differentiable in an open neighborhood around x, an interior point of X. Assume x satisfies

the constraints g1 (x) = c1 , . . . , gm (x) = cm and the first order condition (5) with

multipliers 1 , . . . , m R. Assume that for all directions t with Dgj (x)t = 0 for all

j = 1, . . . , m, we have

"

#

m

X

j D 2 gj (x) t < 0.

(6)

t D 2 f (x)

j=1

cm .

42

and can provide conditions under which a constrained local maximizer is a welldefined, smooth function of the parameter. We now reinstate the constraint qualification.

Theorem 5.13 Let I be an open interval and X Rn , and let f : X I R

and g1 : Rn I R, . . . , gm : Rn I R be twice continuously differentiable in

an open neighborhood of (x , ), an interior point of X I. Assume the gradients

{Dx g1 (x , ), . . . , Dx gm (x , )} are linearly independent. Assume x satisfies the

constraints g1 (x , ) = c1 , . . . , gm (x , ) = cm and the first order condition at ,

i.e.,

Dx f (x , )

m

X

j Dx gj (x , ) = 0,

j=1

j = 1, . . . , m, we have

"

#

m

X

j Dx2 gj (x , ) t < 0.

t Dx2 f (x , )

j=1

and continuously differentiable mappings : J Y , 1 : J R, . . . , m : J R

such that for all J, (i) () is the unique maximizer of f (, ) subject to g1 (x, ) =

c1 , . . . , gm (x, ) = cm belonging to Y , (ii) the unique multipliers for which () satisfies the first order condition (1) at are 1 (), . . . , m (), and (iii) () satisfies

the second order sufficient condition (6) at with multipliers 1 (), . . . , m ().

Fortunately, the statement of the envelope theorem carries over virtually unchanged.

Theorem 5.14 Let I be an open interval and X Rn , and let f : X I R and

g1 : Rn I R, . . . , gm : Rn I R be twice continuously differentiable in an open

neighborhood of (x , ), an interior point of X I. Let : I Rn and 1 : I R,

. . . , m : I R be continuously differentiable mappings such that for all I, () is

a constrained local maximizer satisfying the first order condition (5) with multipliers

1 (), . . . , m () at . Let x = ( ) and j = j ( ), j = 1, . . . , m, and define the

mapping F : I R by

F () = f ((), )

for all I. Then F is continuously differentiable and

DF ( ) =

L

(x , , ).

43

Again, we can use the envelope theorem to characterize j as the marginal effect of

increasing the value of the jth constraint.

6

6.1

Inequality Constraints

First Order Analysis

are different possible first order conditions for a constrained local maximizer, depending on which constraints are met with equality. Given x Rn , we say the j th

constraint is binding if gj (x) = cj , and if gj (x) < cj , then the constraint is slack.

Figure 12 illustrates a problem with two inequality constraints and depicts three possibilities, depending on whether none, one, or two constraints are binding. In the first

case, we could have a constrained local maximizer such as x, for which no constraints

bind. Such a vector must be a critical point of the objective function. In the second

case, we could have a single constraint binding at a constrained local maximizer such

as y, and here the gradients of the objective and constraint are collinear. Interestingly, these gradients actually point in the same direction. Lastly, we could have a

constrained local maximizer such as z, where both constraints bind. Here, the gradient of the objective is not collinear with the gradient of either constraint, and it may

appear that no gradient restriction is possible. But in fact, Df (z) can be written

as a linear combination of Dg1(z) and Dg2(z) with non-negative weights; and if the

picture were a three-dimensional picture of optimization over three variables, then we

would have drawn the three gradients lying on the same plane.

The restrictions evident in Figure 12 are formalized in the next theorem. Although

normally attributed to Kuhn and Tucker, the result was derived independently by

Karoush. Note that we now assume the domain of f is the entire Euclidean space

Rn . To capture maximization over a smaller domain X Rn , we would formalize X

in terms inequality constraints. For example, if we want the domain of the objective

function to be Rn+ , then we impose the non-negativity restrictions x1 0, . . . , xn 0

by adding them explicitly as inequality constraints: we specify g1 (x) = x1 , . . . ,

gm (x) = xm and c1 = = cm = 0.

Theorem 6.1 (Karoush-Kuhn-Tucker Theorem) Let f : Rn R, g1 : Rn

R,. . . , gm : Rn R be continuously differentiable in an open neighborhood around

x. Suppose the first k constraints are the binding ones at x, and assume the gradients

of the binding constraints, {Dg1(x), . . . , Dgk (x)}, are linearly independent. If x is a

constrained local maximizer of f subject to g1 (x) c1 , . . . , gm (x) cm , then there

44

x2

Dg1 (z)

Dg2 (z)

Df (z)

Dg1 (y)

Df (y)

y

Df (x) = 0

C

x

g 1 = c1

g 2 = c2

x1

Figure 12: Kuhn-Tucker conditions

are unique multipliers 1 , . . . m R such that

Df (x) =

m

X

j Dgj (x)

(7)

j = 1, . . . , m

j = 1, . . . , m.

(8)

(9)

j=1

j (cj gj (x)) = 0

j 0

Proof Under the conditions of the theorem, suppose x is a constrained local maximizer. By Gales (1960) Theorem 2.9, either there exist 0 , 1 , . . . , k 0 (not all

zero) such that

0 Df (x) +

k

X

j (Dgj (x)) = 0,

j=1

or there exists a direction t such that Df (x)t > 0 and Dgj (x)t > 0 for all j =

1, . . . , k. In the latter case, however, we can choose > 0 sufficiently small so that

f (x + t) > f (x) and gj (x + t) < gj (x) = cj for all j = 1, . . . , k, but then x is not

a constrained local maximizer, a contradiction. In the former case, note that linear

independence of {Dg1 (x), . . . , Dgk (x)} implies that 0 6= 0, and so we can define

45

Again, linear independence implies that these coefficients are unique.

Geometrically, the first order condition from the Karush-Kuhn-Tucker theorem means

that the gradient of the objective function, Df (x), is contained in the semipositive cone generated by the gradients of binding

constraints, i.e., it is contained in the set

( m

)

X

Dg2 (x)

j Dgj (x) | 1 , . . . , m 0 ,

j=1

Dg1 (x)

essentially a form of the separating hyperplane theox

rem, but one known as a theorem of the alternative that is especially adapted for

problems exhibiting a linear structure. In turn, there are different versions of the

theorem of the alternative, depending on the types of inequalities involved. (Some

versions involve all strict inequalities, some all weak, etc.) We use Gales (1960) Theorem 2.9, which states that a vector y lies in the semi-positive cone of a collection

{a1 , . . . , ak } if and only if it is not the case that there exists a vector t such that

aj t > 0 for all j = 1, . . . , k.

In practical terms, the first order conditions (7) and (8) give us n + m equations in

n + m unknowns. If we can solve for all of the solutions of this system, then we have

an upper bound on the interior constrained local maximizers. Typically, one goes

through all combinations of binding constraints; given one set of binding constraints

meeting the constraint qualification, solve the problem as though it were just one of

multiple equality constraints. Furthermore, if any solutions involve j < 0, then the

non-negativity conditions (9) allow us to discard them as possible constrained local

maximizers. Typically, some combinations of binding constraints will be impossible,

so those can be skipped. After doing this for all possible combinations of binding

constraints, one hopefully has a small set of possible candidates for constrained local

maximizers satisfying the constraint qualification. The numbers 1 , . . . , m are still

referred to as Lagrange multipliers, and the linear independence condition is still

referred to as the constraint qualification.

As with equality constraints, we can define the Lagrangian L : Rn Rm R by

L(x, 1 , . . . , m ) = f (x) +

m

X

j=1

j (cj gj (x)),

and then condition (7) from Theorem 6.1 is the requirement that x is a critical point

of the Lagrangian given multipliers 1 , . . . , m .

An important difference from the case of equality constraints is that the constraint

qualification now holds only for the gradients of binding constraints. (With equality

46

constraints, every constraint is binding, but now some may not be.) Another important difference, touched on above, is that the multipliers are non-negative. Indeed,

the interpretation of j is as before it tells us the rate of change of the maximized value of the objective function as we increase constrained value cj of the jth

constraint but now only the inequality gj (x) cj needs to be maintained, so

increasing cj cant hurt, so the multipliers are non-negative. Yet another difference is

that the equality constraints gj (x) = cj have been replaced in (8) by the conditions

j (cj gj (x)), j = 1, . . . , m, which are called the complementary slackness conditions.

Put differently, complementary slackness says that

j > 0 cj gj (x) = 0

j = 0 cj gj (x) > 0.

In words, the multiplier of every slack constraint is zero, and every constraint with a

positive multiplier is binding.

Referring back to Figure 12, first consider a constrained local maximizer such as x.

Assuming the constraint qualification holds, the Karoush-Kuhn-Tucker theorem says

that the gradient of f at x can be written as

Df (x) = 1 Dg1 (x) + 2 Dg2 (x),

and since both constraints are slack, complementary slackness implies 1 = 2 = 0,

which gives us Df (x) = 0. At y, the second constraint is slack, so 2 = 0, and we

have Df (y) = 1 Dg1 (y) for 1 0, as depicted. At z, the first order condition (7)

implies that the gradient of the objective lies in the semi-positive cone generated by

the binding constraints, as depicted.

To see why the constraint qualification is needed, consider Figure 13, a simple adaptation of Figure 11. Again, x is a local constrained maximizer of f (in fact, it is the

unique element of the constraint set), but Df (x) cannot be written as a non-negative

linear combination of Dg1 (x) and Dg2 (x), because they are linearly dependent.

Example The consumers problem is most accurately formulated in terms of inequality constraints. We can now think of u defined on all R2 and impose non-negativity

constraints on the consumers choice. The problem is

max2

xR

u(x1 , x2 )

s.t. p1 x1 + p2 x2 I

x1 0

x2 0.

Defining g1 (x1 , x2 ) = p1 x1 + p2 x2 , g2 (x1 , x2 ) = x1 , and g3 (x1 , x2 ) = x2 , this is

a maximization problem subject to the inequality constraints (1) g1 (x1 , x2 ) I,

47

x2

Dg1(x)

Df (x)

x

g 1 c1

Dg2(x)

g 2 c2

x1

Figure 13: Constraint qualification needed

(2) g2 (x1 , x2 ) 0, and (3) g3 (x1 , x2 ) 0. Note the constraints cannot bind simultaneously. First, consider the possibility that only (2) binds, i.e., p1 x1 + p2 x2 < I,

x1 = 0, and x2 > 0. Note that Dg2 (x) = (1, 0) 6= 0, so the constraint qualification

is met. By complementary slackness, it follows that 1 = 3 = 0, so the first order

condition becomes

g2

u

(x1 , x2 ) = 2

(x1 , x2 ) = 2

x1

x1

g2

u

(x1 , x2 ) = 2

(x1 , x2 ) = 0

x2

x2

g2 (x1 , x2 ) = 0, 2 0,

but this is incompatible with monotonicity of u, so we discard this case. Similarly for

the case in which only (3) binds, the case in which (2) and (3) both bind, and the case

in which no constraints bind. Next, consider the case in which (1) and (2) bind, i.e.,

p1 x1 + p2 x2 = I, x1 = 0, x2 > 0. Note that Dg1(x) = (p1 , p2 ) and Dg2(x) = (1, 0)

are linearly independent, so the constraint qualification is met. Since x2 > 0, complementary slackness implies 3 = 0, so the first order conditions are

u

g1

g2

(x1 , x2 ) = 1

(x1 , x2 ) + 2

(x1 , x2 )

x1

x1

x1

u

g1

g2

(x1 , x2 ) = 1

(x1 , x2 ) + 2

(x1 , x2 )

x2

x2

x2

g1 (x1 , x2 ) = I,

g2 (x1 , x2 ) = 0, 1 , 2 0.

48

the bundle (0, pI2 ) is one possible optimal bundle for the consumer. Similarly, when

(1) and (3) bind, we find the possible bundle ( pI1 , 0). Finally, we consider the case in

which only (1) binds. Then complementary slackness implies 2 = 3 = 0, and the

first order conditions are

u

g1

(x1 , x2 ) = 1

(x1 , x2 )

x1

x1

u

g1

(x1 , x2 ) = 1

(x1 , x2 )

x2

x2

g1 (x1 , x2 ) = I, 1 0.

I

I

and x2 = +

, and

When u is Cobb-Douglas, these equations yield x1 = +

p1

p2

checking the three possible solutions, youll see that this one indeed solves the consumers problem. Assume, instead, that the two goods are perfect substitutes, i.e.,

u(x1 , x2 ) = ax1 + bx2 with a, b > 0, and consider the case in which only (1) binds.

The first order conditions imply a = 1 p1 and b = 1 p2 , so this case is only possible

when the consumers marginal rate of substitution (measuring the value of good 1 in

terms of good 2) is equal to the relative price of good 1: ab = pp12 . Then every bundle

(x1 , x2 ) satisfying the budget constraint with equality yields utility

ap2 I p1 x1

aI

bI

I p1 x1

= ax1 +

=

=

,

ax1 + b

p2

p1

p2

p1

p2

so all such bundles are optimal. If the razors edge condition on marginal rates of substitution and relative prices does not hold, then either ab > pp12 or the opposite obtain,

and the only possible optimal bundles are the corner solutions. In the former case,

aI

bI

I

I

,

,0

=

>

= u 0,

u

p1

p1

p2

p2

so the consumer optimally spends all of his money on good 1, and in the remaining

case he spends everything on good 2.

6.2

Concave Programming

inequality constraints are simplified under concavity conditions. In fact, such problems are even more amenable to this structure. We first extend our earlier results

for concave objective and linear constraints. First, we establish a general result that

implies our earlier results for quasi-concave objective and linear equality constraints.

Now, it is enough that constraints are quasi-concave: the full strength of linearity is

not needed for inequality constraints.

49

let g1 : Rn R, . . . , gm : Rn R be quasi-convex. Suppose there exist 1 , . . . , m

R such that the first order condition (7)(9) holds with respect to x. Then x is a

constrained global maximizer of f subject to g1 (x) c1 , . . . , gm (x) cm provided

either of two conditions holds:

1. Df (x) 6= 0, or

2. f is concave.

Proof Note that either Df (x) 6= 0 or, under the assumptions of the theorem,

Df (x) = 0 and f is concave, which implies that x is an unconstrained (and therefore

a constrained) global maximizer. Thus, we consider the Df (x) 6= 0 case. Let y be any

element of the constraint set C, i.e., y satisfies gj (y) cj for j = 1, . . . , m, and let t =

1

(y x) be the direction pointing to the vector y from x. Given (0, 1], define

||yx||

z() = x + (y x) = (1 )x + y,

a convex combination of x and y. Note that gj (x) cj and gj (y) cj for each j, and

so by quasi-convexity, we have

gj (z()) max{gj (x), gj (y)} cj .

For each binding constraint j, we then have gj (z()) cj = gj (x), and therefore

gj (z()) gj (x)

0,

0

||y x||

Dt gj (x) = lim

and of course, for each slack constraint, we have j = 0. Combining these observations, we conclude

m

X

Dt f (x) =

j Dt gj (x) 0.

j=1

Now suppose in order to derive a contradiction that f (y) > f (x). Then there exists

(0, 1] such that

Dt f (z()) = Df (z())t > 0,

and by quasi-concavity of f , we have f (z()) f (x). See Figure 14 for a visual

depiction. By continuity of the dot product, there exists > 0 sufficiently small that

1

Df (z())(t Df (x)) > 0. Letting t = ||t+Df

(t Df (x)) point in the direction

(x)||

of the perturbed vector t Df (x), it follows that the derivative of f at z() in this

direction is positive, i.e., Dt f (z()) > 0. This means that for sufficiently small > 0,

we can define w = z()+t such that f (w) > f (z()) f (x). Given (0, 1], define

v() = x + (w x) = (1 )x + w,

50

from x to w, and note that

1

(w

||wx||

f (v()) f (x)

0.

0

||w x||

Ds f (x) = lim

(10)

Ds f (x) = Df (x)s

1

=

Df (x)[w x]

||w x||

1

Df (x)[z() + t x]

=

||w x||

1

=

Df (x)[(y x) + t ]

||w x||

Df (x)t

||w x||

Df (x)[t Df (x)]

=

||w x|| ||t + Df (x)||

||w x|| ||t + Df (x)||

< 0,

where the first line follows from the definition of directional derivative, the second

from the definition of s, the third from the definition of w, the fourth from the definition of z(), the fifth from Df (x)t 0, the sixth from the definition of t , the

seventh from Df (x)t 0, and the final line follows from Df (x) 6= 0. This contradicts Ds f (x) 0 from (10), and we conclude that f (x) f (y), i.e., x is a constrained

global maximizer.

Returning to Theorems 5.2 and 5.9, note that a linear constraint g(x) = c can be

reformulated as two linear inequality constraints: g(x) c and g(x) c. Since

Theorem 6.2 does not rely on a constraint qualification, we can map the earlier

results to the framework of this section and apply the current theorem. The only

slight gap is that in the earlier results, we assumed an open, convex domain X Rn ,

rather than assuming f is defined on the entire Euclidean space, but that difference

is inconsequential.

As in the analysis of equality constraints, if f is quasi-concave and x is a constrained

strict local maximizer, then it is the unique global maximizer. A difference from

equality constraints is that we can allow the constraints to be quasi-convex, rather

than actually linear.

51

replacemen

x2

Df (x)

t

x

z()

y

t

w

level

set of f

x1

Theorem 6.3 Let X Rn be convex, let f : X R be quasi-concave, and let

g1 : Rn R, . . . , gm : Rn R be quasi-convex. If x X is a constrained strict

local maximizer, then it is the unique constrained global maximizer of f subject to

g1 (x) c1 , . . . , gm (x) cm .

We end this section with an analysis that is particular to inequality constraints. Under

a weak version of the constraint qualification, and with concave objective and convex

constraints, solutions to the constrained maximization problem can be re-cast as

unconstrained maximizers of the Lagrangian, with appropriately chosen multipliers.

Formally, writing = (1 , . . . , m ) for a vector of multipliers, we say (x , ) is a

saddlepoint of the Lagrangian if for all x Rn and all Rm

+,

L(x, ) L(x , ) L(x , ).

Pm

In words,

given

x

,

minimizes

j

j=1 j (cj gj (x )); and given , x maximizes

Pm

f (x) + j=1 j (cj gj (x)). Note that the maximization problem over x is unconstrained, but if (x , ) is a saddlepoint, then x will indeed satisfy gj (x ) cj for each

j; indeed, if cj gj (x ) < 0, then the term j (cj gj (x )) could be made arbitrarily

negative by choice of arbitrarily large j , so (x , ) could not be a saddlepoint.

Theorem 6.4 Let f : Rn R be concave, let g1 : Rn R, . . . , gm : Rn R be

convex, and let x Rn . If there exist 1 , . . . , m R such that (x , ) is a saddlepoint of the Lagrangian, then x is a global constrained maximizer of f subject to

g1 (x) c1 , . . . , gm (x) cm . Conversely, assume there is some x Rn such that

g1 (

x) < c1 , . . . , gm (

x) < cm . If x is a constrained local maximizer of f subject to

g1 (x) c1 , . . . , gm (x) cm , then there exist 1 , . . . , m R such that (x , ) is a

saddlepoint of the Lagrangian. Furthermore, if f, g1 , . . . , gm are differentiable at x,

then the first order condition (7)(9) holds.

52

The condition g1 (

x) < c1 , . . . , gm (

x) < cm is called Slaters condition. To gain an

intuition for the saddlepoint theorem and the need for Slaters condition, consider

Figure 15. Here, we consider maximizing a function of any number of variables, but

to illustrate the problem in a two-dimensional graph, we assume there is a single

inequality constraint, g(x) c. On the horizontal axis, we graph values of f (x) as x

varies over Rn , and on the vertical axis, we graph cg(x) as x varies over the Euclidean

space. When f is concave and g is convex (so c g(x) is concave), you can check

that the set {(f (x), c g(x)) | x Rn }, which is shaded in the figure, is convex. The

values (f (x), c g(x)) corresponding to vectors x satisfying the constraint g(x) c

lie above the horizontal axis, the darker shaded regions in the figure. The ordered

pairs (f (x ), c g(x )) corresponding to solutions of the constrained maximization

problem are indicated by the black dots.

Consider the problem of minimizing f (x ) + (c g(x )) with respect to , holding

x fixed. This simply means that at a saddlepoint, (i) if c g(x ) > 0, then = 0,

and (ii) if c g(x ) = 0, then can be any non-negative number. Figure 15 depicts

the first possibility in Panel (a) and the second possibility in Panels (b) and (c). Now

consider the problem of maximizing f (x) + (c g(x)) with respect to x, holding

fixed. Lets write the objective function as a dot product: (1, ) (f (x), c

g(x)). Viewed this way, we can understand the problem as choosing the ordered pair

(f (x), c g(x)) in the shaded region that maximizes the linear function with gradient

(1, ). This is depicted in Panels (a) and (b). The difference in the two panels is

that in (a), the constraint is not binding at the solution to the optimization problem

(so Df (x ) = g(x ) = 0), while in (b) it is (so may be positive).

The difference between Panels (b) and (c) is that Slaters condition is not satisfied in

the latter: there is no x such that g(x) < c; graphically, the shaded region does not

contain any points above the horizontal axis. The pair (f (x ), cg(x)) corresponding

to the solution of the maximization problem is indicated by the black dot; we then

must choose such that (f (x ), cg(x )) maximizes the linear function with gradient

(1, ). The difficulty is that for any finite , the pair (f (x ), c g(x )) does not

maximize the linear function; instead, the maximizing pair will correspond to a vector

x that violates the constraint, i.e., c g(x) < 0. To make (f (x ), c g(x )) the

maximizing pair, the gradient of the linear function must be pointing straight up,

which would correspond to something like infinite (whatever that would mean). In

other words, if Slaters condition is not satisfied, then there may be no way to choose

a multiplier to solve the saddlepoint problem.

Example For a formal example demonstrating the need for Slaters condition, let

n = 1, f (x) = x, m = 1, c1 = 0, and g(x) = x2 . The only point in R satisfying

g1 (x) 0 is x = 0, so this is trivially the constrained maximizer of f . But Df (0) = 1

and Dg1 (0) = 0, so there is no 0 such that Df (0) = Dg1 (0).

53

a)

c g(x)

(f (x ), c g(x ))

(1, 0)

= 0

f (x)

b)

c g(x)

(1, )

> 0

(f (x ), c g(x ))

c)

c g(x)

(1, )

f (x)

(1, )?

f (x)

(f (x ), c g(x ))

54

Indeed, suppose the gradients of the constraints

Dg2 (x)

convex

{Dg1(x), . . . , Dgm(x)} are linearly independent; in

hull

particular, there do not exist non-negative coefficients 1 , . . . , m summing to one such that

P

m

j=1 j Dgj (x) = 0. In geometric terms, the zero

Dg1 (x)

0

vector does not belong to the convex hull of the set

p

of gradients. By the separating hyperplane theorem,

there is a direction p such that p Dgj (x) > 0 for

j = 1, . . . , m, and this means the derivative in direction p is negative for each constraint: Dp gj (x) < 0. Then we can choose > 0 sufficiently small that z = x p

satisfies gj (z) < gj (x) cj for j = 1, . . . , m, fulfilling Slaters condition. In fact, this

argument shows that we can fulfill Slaters condition using vectors arbitrarily close

to the constrained local maximizer.

6.3

The second order analysis parallels that for multiple equality constraints, modified to

accommodate the different first order conditions. Again, the necessary condition is

that the second directional derivative of the Lagrangian be non-positive in a restricted

set of directions. A difference is that now the inequality must hold only for directions

orthogonal to the gradients of binding constraints.

Theorem 6.5 Let f : Rn R, g1 : Rn R, . . . , gm : Rn R be twice continuously differentiable in an open neighborhood around x. Suppose the first k constraints are the binding ones at x, and assume the gradients of the binding constraints,

{Dg1(x), . . . , Dgk (x)}, are linearly independent. Assume x is a constrained local maximizer of f subject to g1 (x) c1 , . . . , gm (x) cm , and let 1 , . . . , m R+ satisfy

the first order conditions (7)(9). Consider any direction t such that Dgj (x)t = 0 for

all binding constraints j = 1, . . . , k. Then

"

#

m

X

j D 2 gj (x) t 0.

t D 2 f (x)

j=1

Note that the range of directions for which the above inequality must hold is the

set of directions that are orthogonal to the gradients of binding constraints. One

might think it should hold as well for directions t such that Dgj (x)t 0 for all

j = 1, . . . , m, since any direction with Dgj (x)t < 0 is feasible for that constraint. In

fact, the stronger version of the condition (using the larger range of directions) is not

necessary.

Example Let n = 1, f (x) = ex , m = 1, g1 (x) = x, and c1 = 0. Clearly, x = 0

maximizes f subject to g1 (x) 0, and the first order condition Df (0) = 1 Dg1 (0)

55

Nevertheless,

D 2 f (0) 1 D 2 g1 (0) = 1 > 0,

violating the stronger version of the condition.

Again, strengthening the weak inequality to strict gives us a second order condition

that, in combination with the first order condition, is sufficient for a constrained strict

local maximizer. In contrast to the analysis of necessary conditions, the next result

does not rely on the constraint qualification.

Theorem 6.6 Let f : Rn R, g1 : Rn R, . . . , gm : Rn R be twice continuously

differentiable in an open neighborhood around x. Assume x satisfies the constraints

g1 (x) c1 , . . . , gm (x) cm and the first order condition with multipliers 1 , . . . , m

R+ satisfying (7)(9). Assume that for all directions t with Dgj (x)t 0 for all binding

constraints j = 1, . . . , k, we have

"

#

m

X

2

2

j D gj (x) t < 0.

(11)

t D f (x)

j=1

cm .

Note that, in contrast to Theorem 6.5, the range of directions over which the inequality

holds in Theorem 6.6 is now larger, also holding for directions in which binding

constraints are decreasing: it holds for all t such that Dgj (x)t 0 rather than

Dgj (x)t = 0. This subtlety does not arise in the analysis of equality constraints, and

the next example demonstrates that it plays a critical role.

Example Let n = 1, f (x) = x2 , m = 1, c1 = 0, and g1 (x) = x. Obviously,

x = 0 is not a local maximizer of f subject to g1 (x) 0, and the first order condition

from Theorem 6.1 holds with = 0. Nevertheless, it is vacuously true that for all

directions t such that Dg1 (0)t = 0, the inequality (11) holds.

As with equality constraints, we can consider the parameterized optimization problem

and can provide conditions under which a constrained local maximizer is a welldefined, smooth function of the parameter. As before, we reinstate the constraint

qualification. A change from the previous result is that we strengthen the first order

condition by assuming strict complementary slackness, which entails that j > 0 if

and only if gj (x) = cj . That is, whereas complementary slackness means gj (x) = cj

if j > 0, we now add the converse direction of this statement.

56

. . . , gm : Rn I R be twice continuously differentiable in an open neighborhood of

(x , ). Assume x satisfies the constraints g1 (x , ) c1 , . . . , gm (x , ) cm ,

suppose the first k constraints are the binding ones at x , and assume the gradients

of the binding constraints, {Dx g1 (x , ), . . . , Dx gk (x , )}, are linearly independent.

Assume x satisfies the first order condition at , i.e.,

Dx f (x , ) =

m

X

j Dx gj (x , )

j=1

j (cj

gj (x , )) = 0

j 0

j = 1, . . . , m

j = 1, . . . , m,

j > 0 if and only if j k. Assume that for all t with Dx gj (x , )t 0 for all

binding constraints j = 1, . . . , k, we have

"

#

m

X

2

2

j Dx gj (x , ) t < 0.

t Dx f (x , )

j=1

Then there are an open set Y Rn with x Y , and open interval J R with J,

and continuously differentiable mappings : J Y , 1 : J R, . . . , m : J R

such that for all J, (i) () is the unique maximizer of f (, ) subject to g1 (x, )

c1 , . . . , gm (x, ) cm belonging to Y , (ii) the unique multipliers for which ()

satisfies the first order necessary condition (1) with strict complementary slackness at

are 1 (), . . . , m (), and (iii) () satisfies the second order sufficient condition

(11) at with multipliers 1 (), . . . , m ().

Fortunately, the statement of the envelope theorem carries over virtually unchanged.

Theorem 6.8 Let I be an open interval, and let f : Rn I R and g1 : Rn I R,

. . . , gm : Rn I R be twice continuously differentiable in an open neighborhood of

(x , ). Let : I Rn and 1 : I R, . . . , m : I R be continuously differentiable

mappings such that for all I, () is a constrained local maximizer satisfying the

first order condition (7)(9) at with multipliers 1 (), . . . , m (). Let x = ( )

and j = j ( ), j = 1, . . . , m, and define the mapping F : I R by

F () = f ((), )

for all I. Then F is continuously differentiable and

DF ( ) =

L

(x , , ).

57

Again, we can use the envelope theorem to characterize j as the marginal effect

of increasing the value of the jth constraint; with inequality constraints, of course,

this cannot diminish the maximized value of the objective, so the multipliers are

non-negative.

We now return to the topic of characterizing Pareto optimal alternatives and explore

an alternative approach using the framework of constrained optimization. First, we

give a general characterization in terms of inequality constrained optimization. Second, we establish a necessary first order condition for Pareto optimality that adds a

rank condition on gradients of individual utilities to the assumptions of Theorem 3.9

to deduce strictly positive coefficients and provides an interpretation of the coefficients

in terms of shadow prices of utilities. Finally, we establish that with quasi-concave

utilities, the first order condition is actually sufficient for Pareto optimality as well.

This gives us a full characterization that, in comparison with Corollary 3.7, weakens the assumption of concavity to quasi-concavity but adds the rank condition on

gradients.

The next result is structure free, extending our earlier analysis by dropping all convexity, concavity, and differentiability conditions. It gives a full characterization: an

alternative is Pareto optimal if and only if it satisfies n different maximization problems (one for each individual) subject to inequality constraints. The proof follows

directly from definitions and is omitted.

Theorem 7.1 Let x A be an alternative, and let ui = ui (x) for all i. Then x is

Pareto optimal if and only if it solves

maxyX ui (y)

s.t. uj (y) uj , j = 1, . . . , i 1, i + 1, . . . , n

for all i.

Note that the sufficiency direction of Theorem 7.1 uses the fact that the alternative

x solves n constrained optimization problems, one for each individual. Figure 16

demonstrates that this feature is needed for the result: there, x maximizes u2 (y)

subject to u1 (y) u1 , but it is Pareto dominated by x . Obviously, x is Pareto

optimal, as it maximizes u1 (y) subject to u2 (y) u2 and it maximizes u2 (y) subject

to u1 (y) u1 .

Of course, we can use our analysis of maximization subject to multiple inequality constraints to draw implications of Theorem 7.1. Consider a Pareto optimal alternative

58

utility for 2

(u1 (x), u2 (x))

u1

U

u1

(u1 (x ), u2(x ))

(u1 (x ), u2(x ))

u2

u2

utility

for 1

x, as in Figure 16, for which the constraint qualification holds for the optimization

problem corresponding to each i. In this context, note that all constraints are binding

by construction: uj (x) = uj for all j 6= i. Thus, the constraint qualification is that

the gradients

Du1(x), . . . , Dui1(x), Dui+1(x), . . . , Dun(x)

are linearly independent. One implication of the constraint qualification is that the

set of alternatives has dimension at least n 1. Furthermore, an implication of the

constraint qualification holding for all i is that all individuals gradients are non-zero

at x. When there are just two individuals, the qualification becomes Du2 (x) 6= 0 for

individual 1s problem and Du1 (x) 6= 0 for individual 2s problem, i.e., the condition

of non-zero gradients is necessary and sufficient for the constraint qualification.

Note that for each i, x is a constrained local maximizer of ui subject to uj (x) uj ,

j 6= i. Then the first order condition from Theorem 6.1 holds, as stated in the

next theorem, where we omit the complementary slackness conditions because all

constraints are binding.

Theorem 7.2 Assume A Rd , let x be an alternative interior to A, and assume each

ui : Rd R is continuously differentiable in an open neighborhood around x. Suppose

that for each i, the gradients {Duj (x) | j 6= i} are linearly independent. If x is Pareto

optimal, then for each i, there exist unique multipliers i1 , ii1 , ii+1 , . . . , in 0, j 6= i,

such that

X

Dui(x) =

ij Duj (x).

(12)

j6=i

59

Recall that the multiplier on a constraint has the interpretation of giving the rate of

change of the maximized objective function as we increase the value of the constraint.

In this context, the multiplier ij has a special meaning: it is the rate at which we

can increase i utility by taking utility away from individual j. Put differently, it is

the rate at which is utility would decrease if we increase js utility (holding all other

individuals at the constraint). Thus, it is the shadow price of utility for j in terms

of utility for i. Geometrically, viewed in Rd , the gradient Dui(x) of individual i lies

on the (n 1)-dimensional hyperplane spanned by the other individuals gradients.

Now recall the mapping u : X Rn defined by u(x) = (u1 (x), . . . , un (x)). Then

u(X) is the set of possible utility vectors, and the linear independence assumption in

Theorem 7.2 is equivalent to the requirement that the derivative of u at x, which is

the matrix

u1

u1

(x) x

(x)

x1

d

..

..

..

,

.

.

.

un

(x)

x1

un

(x)

xd

has rank n1. This means that there is a uniquely defined hyperplane that is tangent

to u(X) at the point u(x). When there are just two individuals, this implies there is

a unique tangent line at (u1 (x), u2 (x)), as in Figure 16. See Figure 7 for the case of

three individuals. This hyperplane has a normal vector p that is uniquely defined up

to a non-zero scalar. The first order condition (12) from Theorem 7.2 can be written

in matrix terms as

u1

1

(x) u

(x)

x1

xd

i

..

..

..

1 ii1 1 ii+1 in

= 0,

.

.

.

un

(x)

x1

un

(x)

xd

and we conclude that p is, up to a non-zero scalar, equal to the vector of multipliers

(with a coefficient of one for i) for individual is problem.

An implication of the above analysis is that the vectors (i1 , . . . , ii1 , 1, ii+1, . . . , in )

of multipliers corresponding to individuals i = 1, . . . , n are collinear. Indeed, they

are each normal to the tangent hyperplane at u(x), and the set of normal vectors is

one-dimensional, so the claim follows. The claim can also be verified mechanically by

multiplying both sides of

X

Dui(x) =

ij Duj (x)

j6=i

by

1

ij

Duj (x) =

X i

1

k

Du

(x)

Duk (x).

i

i

j

i

k6=i,j j

60

k 6= i, j, jk =

ik

,

ij

1

ij

as claimed.

Three interesting conclusions follow from these observations. First, the multipliers

from Theorem 7.2 are actually strictly positive. Second, the utility shadow prices for

any two individuals are reciprocal: we can transfer utility from j to i at rate ij , and

we can transfer utility from i to j at rate ji = 1i . Third, the relative prices of any

j

two individuals are independent of the problem we consider. To see this, consider any

two individuals h, i, and let j and k be any two individuals. Then from the analysis

in the preceding paragraph, we have

ij

hj /hi

hj

= h h = h.

ik

k /i

k

If, for example, it is twice as expensive, in terms of is utility, to increase js utility

as it is to increase ks utility, then it is also twice as expensive in terms of hs utility.

A finaland importantgeometric insight stems from the sign of the multipliers;

they are all non-negative, and at least one is strictly positive. Thus, the tangent

hyperplane to u(X) has a normal vector with all non-negative coordinates, at least

one positive. When there are just two individuals, this means that the utility frontier

is sloping downward at (u1 (x), u2 (x)), as in Figure 16, and the idea extends to a

general number of individuals, as in Figure 7. We conclude that at a Pareto optimal

alternative for which the constraint qualification is satisfies, the boundary of u(X) is

sloping downward, in a precise sense.

This is only a necessary condition, as Figure 17 illustrates: the boundary of u(X)

is downward sloping at (u1 (x), u2 (x)), but x is Pareto dominated by y. Although

conceptually possible, however, the anomaly depicted in the figure is precluded under

the typical assumption of quasi-concave utility. Recall that, by Theorem 6.2, the first

order condition is sufficient for a maximizer when the objective and constraints are

quasi-concave. With Theorem 7.1, this yields the following result.

Theorem 7.3 Assume A Rd is convex, let x A be an alternative, and assume

each ui : Rd R is continuously differentiable and quasi-concave. Suppose that for

each i, Dui(x) 6= 0 and there exist multipliers i1 , ii1 , ii+1 , . . . , in 0, j 6= i, such

that

X

Dui(x) =

ij Duj (x).

j6=i

Thus, under quite general conditions, the first order condition (12) is necessary and

sufficient for Pareto optimality.

61

utility for 2

p

(u1 (x), u2 (x))

u(X)

utility

for 1

Figure 17: Violation of Pareto optimality

Corollary 7.4 Assume A Rd is convex, let x be an alternative interior to A, and

assume each ui : Rd R is continuously differentiable and quasi-concave. Suppose

that for each i, the gradients {Duj (x) | j 6= i} are linearly independent. Then x is

Pareto optimal if and only if there exist strictly positive multipliers 1 , . . . , n > 0

such that

n

X

i Dui (x) = 0.

i=1

the rank condition, and then we select any i in Theorem 7.2 and manipulate (12)

to obtain the simpler first order condition in the above corollary. For the other

direction, obviously all gradients must be non-zero, and we can manipulate the first

order condition and set ij = j /i to fulfill the assumptions of Theorem 7.3.

Mixed Constraints

The goal of this section is simply to draw together results for equality constrained

and inequality constrained maximization into a general framework. Conceptually,

nothing new is added.

Let f : Rn R, g1 : Rn R, . . . , g : Rn R, and h1 : Rn R, . . . , hm : Rn R.

62

maxxRn f (x)

s.t gj (x) = cj , j = 1, . . . ,

hj (x) dj , j = 1, . . . , m,

incorporating any restrictions on the domain of f into the constraints.

The first order analysis extends from the previous sections. See Theorem 1 and

Corollary 3 of Fiacco and McCormick (1968).

Theorem 8.1 Let f : Rn R, g1 : Rn R,. . . , g : Rn R, h1 : Rn R, . . . ,

hm : Rn R be continuously differentiable in an open neighborhood around x. Suppose the first k inequality constraints are the binding ones at x, and assume the

gradients

{Dg1 (x), . . . , Dg (x), Dh1 (x), . . . , Dhk (x)}

are linearly independent. If x is a constrained local maximizer of f subject to g1 (x) =

c1 , . . . , g (x) = c and h1 (x) d1 , . . . , hm (x) dm , then there are unique multipliers

1 , . . . , 1 , . . . , m R such that

Df (x) =

j Dgj (x) +

j Dhj (x)

(13)

j=1

j=1

j (dj hj (x)) = 0

j 0

m

X

j = 1, . . . , m

j = 1, . . . , m.

(14)

(15)

L(x, 1 , . . . , , 1 , . . . , m ) = f (x) +

X

j=1

j (cj gj (x)) +

m

X

j=1

j (dj hj (x)),

and condition (13) from Theorem 8.1 is then the requirement that x is a critical point

of the Lagrangian given multipliers 1 , . . . , , 1 , . . . , m .

Our results for quasi-concave objective functions with non-zero gradient go through

in the general setting, now with the assumption that all equality constraints are linear

and all inequality constraints are quasi-convex. Again, we rely on Theorem 6.2 for

the proof.

63

g1 : Rn R, . . . , g : Rn R be linear, and let h1 : Rn R, . . . , hm : Rn R be

quasi-convex. Suppose there exist 1 , . . . , , 1 , . . . , m R such that the first order

condition (13)(15) holds with respect to x. Then x is a constrained global maximizer

of f subject to g1 (x) = c1 , . . . , g (x) = c and h1 (x) d1 , . . . , hm (x) dm provided

either of two conditions holds:

1. Df (x) 6= 0, or

2. f is concave.

With the above convexity conditions on the objective and constraints, if x is a constrained strict local maximizer, then it is the unique global maximizer.

Theorem 8.3 Let f : Rn R be quasi-concave, let g1 : Rn R, . . . , g : Rn R be

linear and h1 : Rn R, . . . , hm : Rn R be quasi-convex. If x Rn is a constrained

strict local maximizer, then it is the unique constrained global maximizer of f subject

to g1 (x) = c1 , . . . , g (x) = c and h1 (x) d1 , . . . , hm (x) dm .

Next, we have the standard second order necessary condition. See Theorems 2 and 3

in Fiacco and McCormick (1968).

Theorem 8.4 Let f : Rn R, g1 : Rn R,. . . , g : Rn R, h1 : Rn R, . . . ,

hm : Rn R be twice continuously differentiable in an open neighborhood around x.

Suppose the first k inequality constraints are the binding ones at x, and assume the

gradients

{Dg1 (x), . . . , Dg (x), Dh1 (x), . . . , Dhk (x)}

are linearly independent. Assume x is a constrained local maximizer of f subject to

g1 (x) = c1 , . . . , g (x) = c and h1 (x) d1 , . . . , hm (x) dm , and let 1 , . . . ,

1 , . . . , m R satisfy the first order conditions (13)(15). Consider any direction t

such that Dgj (x)t = 0 for all j = 1, . . . , and Dhj (x)t = 0 for all j = 1, . . . , k. Then

"

#

m

X

X

j D 2 gj (x)

j D 2 hj (x) t 0.

t D 2 f (x)

j=1

j=1

Again, strengthening the weak inequality to strict yields the second order sufficient

condition for a local maximizer. See Theorem 4 of Fiacco and McCormick (1968).

64

hm : Rn R be twice continuously differentiable in an open neighborhood around x.

Assume x satisfies the constraints g1 (x) = c1 , . . . , g (x) = c and h1 (x) d1 , . . . ,

hm (x) dm and the first order condition with multipliers 1 , . . . , 1 , . . . , m R

satisfying (13)(15). Assume that for all directions t with Dgj (x)t = 0 for all j =

1, . . . , and Dhj (x)t 0 for all j = 1, . . . , k, we have

"

#

m

X

X

j D 2 gj (x)

j D 2 hj (x) t < 0.

(16)

t D 2 f (x)

j=1

j=1

c and h1 (x) d1 , . . . , hm (x) dm .

Adding strict complementary slackness, we obtain conditions under which solutions

to mixed problems vary smoothly with respect to parameters. See Theorem 5.1 in

Fiacco and Ishizuka (1990).

Theorem 8.6 Let I be an open interval, and let f : Rn I R, g1 : Rn I R,. . . ,

g : Rn I R, h1 : Rn I R, . . . , hm : Rn I R be twice continuously differentiable in an open neighborhood around (x , ). Assume x satisfies the constraints

g1 (x , ) = c1 , . . . , g (x , ) = cm and h1 (x , ) d1 , . . . , hm (x , ) dm ,

suppose the first k inequality constraints are the binding ones at x, and assume the

gradients

{Dx g1 (x , ), . . . , Dx g (x , ), Dx h1 (x , ), . . . , Dx hk (x , )}

are linearly independent. Assume x satisfies the first order condition at , i.e.,

Dx f (x , ) =

j Dx gj (x , )

j=1

j (dj

hj (x , )) = 0

j 0

m

X

j Dx hj (x , )

j=1

j = 1, . . . , m

j = 1, . . . , m,

holds, i.e., j > 0 if and only if j k. Assume that for all directions t with

Dx gj (x , )t = 0 for all j = 1, . . . , and Dx hj (x , )t 0 for all j = 1, . . . , k,

we have

#

"

m

X

X

j Dx2 hj (x , ) t < 0.

j Dx2 gj (x , )

t Dx2 f (x , )

j=1

j=1

Then there are an open set Y Rn with x Y , and open interval J R with

J, and continuously differentiable mappings : J Y , 1 : J R, . . . , : J

65

maximizer of f (, ) subject to g1 (x, ) = c1 , . . . , gm (x, ) = c and h1 (x, ) d1 ,

. . . , hm (x, ) dm belonging to Y , (ii) the unique multipliers for which () satisfies

the first order necessary condition (1) with strict complementary slackness at are

1 (), . . . , (), 1 (), . . . , m (), and (iii) () satisfies the second order sufficient

condition (16) at with multipliers 1 (), . . . , (), 1 (), . . . , m ().

Next is our last version of the envelope theorem. See Theorem 4.1 in Fiacco and

Ishizuka (1990).

Theorem 8.7 Let I be an open interval, and let f : Rn I R, g1 : Rn I R,. . . ,

g : Rn I R, h1 : Rn I R, . . . , hm : Rn I R be twice continuously

differentiable in an open neighborhood around (x , ). Let : I Rn and 1 : I

R, . . . , : I R and 1 : I R, . . . , m : I R be continuously differentiable

mappings such that for all I, () is a constrained local maximizer satisfying the

first order condition (7)(9) at with multipliers 1 (), . . . , (), 1 (), . . . , m ().

Let x = ( ) and = (1 ( ), . . . , ( )) and = (1 ( ), . . . , m ( )). Define

the mapping F : I R by

F () = f ((), )

for all I. Then F is continuously differentiable and

DF ( ) =

L

(x , , , ).

Finally, we can again use the envelope theorem to characterize j as the marginal

effect of increasing the value of the jth equality constraint; and j as the marginal

effect of increasing the value of the jth inequality constraint, which of course cannot

reduce the maximized value of the objective.

References

[1] A. Fiacco and Y.Ishizuka (1990) Sensitivity and Stability Analysis for Nonlinear

Programming, Annals of Operations Research, 27: 215236.

[2] A. Fiacco and G. McCormick (1968) Nonlinear Programming: Sequential Unconstrained Minimization Techniques, McLean, VA: Research Analysis Corporation.

[3] D. Gale (1960) The Theory of Linear Economic Models, Chicago, IL: University

of Chicago Press.

66

[4] C. Simon and L. Blume (1994) Mathematics for Economists, New York, NY:

Norton.

[5] R. Sundaram (1996) A First Course in Optimization Theory, New York, NY:

Cambridge University Press.

67

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