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MATHEMATICAL ECONOMICS Lecture5 15445290

The document discusses linear programming and its applications. It explains key concepts in linear programming like objective functions, constraints, feasible regions and optimal solutions. It also covers solving linear programming problems using graphical and simplex methods. The document then discusses Cobb-Douglas production functions and their properties like returns to scale. It shows how to find marginal products of factors from such a production function.

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13 views28 pages

MATHEMATICAL ECONOMICS Lecture5 15445290

The document discusses linear programming and its applications. It explains key concepts in linear programming like objective functions, constraints, feasible regions and optimal solutions. It also covers solving linear programming problems using graphical and simplex methods. The document then discusses Cobb-Douglas production functions and their properties like returns to scale. It shows how to find marginal products of factors from such a production function.

Uploaded by

kyakareyar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chanakya group of economics

ONLINE BATCH
Mathematical Economics – Topic-5

Linear Programming
&
Cobb-Douglas Production
Functions Math
Introduction
uIn order to solve some practical problem, especially decision-
making by the business firms, the technique of linear
programming has been developed. First of all, an American
mathematician, George Bernard Dantzig, developed the technique
of linear programming after the second world war in 1946.

uMathematical programming is used to find the best or optimal


solution to a problem that requires a decision or set of decisions
about how best to use a set of limited resources to achieve a state
goal of objectives.
Introduction
v Steps involved in mathematical programming
Ø Conversion of stated problem into a mathematical
model that abstracts all the essential elements of the
problem.

Ø Exploration of different solutions of the problem.

Ø Finding out the most suitable or optimum solution.

v Linear programming requires that all the mathematical


functions in the model be linear functions.
Some Basic Concepts and Terms
The Linearity Assumption: The principle characteristic of a
problem that can be solved through is linearity. By Linearity
we mean that the problem which is to be analyzed through
linear programming must be formulated in terms of linear
function of two or more variables which are subject to a set
of linear constraints at least one of which must be expressed
as inequality.
Objective Function: Objective function describes the,
”determinants of the quantity to be maximized or
minimized.”
Constraints: The maximization or minimization of the
objective function is subject to certain limitation is called
constraints.
Some Basic Concepts and Terms
Feasible Region: The Feasible region contains those solutions
which meet or satisfy the constraints of the problem and
therefore it is possible to attain them. The set of all feasible
solutions defines the feasible region of the problem.
Feasible Solution : For a consumer which aims to maximize his
satisfaction, Feasible solutions are those which lie on or left of
the given budget line, which in turn is determined by the by
constraints given income and the given prices of goods.
A feasible solution is a set of values
for the decision variables that
satisfies all of the constraints in an
optimization problem.
Some Basic Concepts and Terms
Optimal Solution: The best of all feasible solution. In other words, of
all the feasible solutions, solution which maximizes or minimizes the
objective function is the optimum solution. Or, An Optimal Solution is a
feasible solution where the objective function reaches its maximum (or
minimum) value – example, the most profit or least cost. A globally
optimal solution is one where there are no other feasible solutions with
better objective function values.

Multiple Solution : In some linear programming problems we face a


situation that the final basic solution to the problem need not to be one,
but there may be alternative or infinite basic solutions i.e. with different
product mixes, we have same value of the objective function line
(namely the profit). This case when objective line is parallel to a binding
constraint line. Then the objective function takes same optimal value at
more than one basic solution. These are called multiple solution or
alternative basic solution.
The Linear Programming Model (1)
Let: X1, X2, X3, ………, Xn = decision variables
Z = Objective function or linear function

Requirement: Maximization of the linear function Z.


Z = c1X1 + c2X2 + c3X3 + ………+ cnXn …..Eq (1)
subject to the following constraints:

where aij, bi, and cj are given constants.


A manufacturer produces two types of models M1 an M2. Each M1 model requires 4 hours of grinding and 2 hours of
polishing : whereas each M2 model requires 2 hours of grinding and 5 hours of polishing. The manufacturer has 2 grinders
and 3 polishers. Each grinder works for 40 hours a week and each polisher works for 60 hours a week. Profit on M1 model
is Rs 3 and on M2 model is Rs 4. whatever produced is sold in a market. How should the manufacturer allocate his
production capacity to the two types of models so that he may make the maximum profit in a week?
The Linear Programming Model (2)
v The linear programming model can be
written in more efficient notation as:

The decision variables, xI, x2, ..., xn, represent levels of n


competing activities.
June 2014
Solution of Linear Programming
In Linear Programming there are two methods
of finding Optimum Solution.
1. Graphical Method:
2. Simplex Method:
1. Graphical Method:
The optimal solution is found by the point of
tangency of the frontier of the region of
feasible solutions to the highest possible
isoprofit curve. The optimal solution will be
a point on the frontier of the region of all
feasible solutions, because any point inside
this region lies on a lower isoprofit line. It is
clear that the optimal solution depends on
the slope of the isoprofit lines, that is, on
the ratio of the unit profits of the two
commodities. In our example the optimal
solution is point G in figure.
2. Simplex Method
Simplex Method was developed by George B. Dantzig. When
the variables whose values must be determined from the
linear programming method are more than two, the
graphical solution is difficult or impossible because we need
multidimensional diagrams. In that case simplex method is
used.
88. Simplex method of solving Linear Programming problems
was developed by: [July 2018]
(1) Koopsman (2) Dantzig (3) Leontief (4) Solow
The Dual Problem
The basic problem whose solution is attempted by the linear
programming technique is called the primal problem.

To each primal problem corresponds a dual problem, which


yields additional information to the decision-maker.

The nature of the dual problem depends on the primal


problem.

If the primal problem is a maximization problem, its dual is a


minimization problem. Similarly, if the primal is a
minimization problem its dual is a maximization problem.
Cobb Douglas Production Function

𝑸 = 𝑨𝑳𝜶 𝑲𝜷
Where Q = Output
L = quantity of labor employed
K = quantity of capital employed
A = Total Factor Productivity or Efficiency
𝛼= output elasticity of Labor
𝛽 = output elasticity of Capital
Cobb Douglas is linear Homogenous Production Function.
Linear Homogenous Production Function
Linear Homogenous production function means production
function which is homogenous to degree one.
Homogenous production function of the first degree implies
that if all factors are increased in a given proportion, output
also increases in the same proportion.
𝑄 = 𝐴𝐿! 𝐾"
𝑄 = 𝐴(𝑚𝐿)! (𝑚𝐾)"
𝑄 = 𝑚! 𝑚" 𝐴𝐿! 𝐾"
𝑄 = 𝑚!#" 𝐴𝐿! 𝐾"
𝑄 = 𝑚!#" 𝑄
If 𝛼 + 𝛽 = 1, then it is linear
Therefore, 𝑄 = 𝑚𝑄
So we have seen as inputs has been increased by m output
also increases by m.
Returns to Scale
𝑄 = 𝐴𝐿! 𝐾"
When 𝛼 + 𝛽 = 1, Constant return to scale
𝛼 + 𝛽 > 1, Increasing return to scale
𝛼 + 𝛽 < 1, Decreasing return to scale

Jan 2017

𝛼 = 0.7, 𝛽 = 0.5
𝛼 + 𝛽 = 0.7 + 0.5 = 1.2
𝑐𝑙𝑒𝑎𝑟𝑙𝑦 𝛼 + 𝛽 > 1,
∴ 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑖𝑛𝑔 𝑟𝑒𝑡𝑢𝑟𝑛 𝑡𝑜 𝑠𝑐𝑎𝑙𝑒
Marginal Product of Factors
How to find out Marginal Product of Labor and Capital of
Cobb Douglas Production Function?
Ø 𝑄 = 𝐴𝐿! 𝐾"
For finding Marginal Product of Labor(𝑀𝑃$ ) differentiate the
production function with respect to Labor(L).
%& %(($! )" )
𝑀𝑃$ = =
%$ %$
= 𝐴𝛼𝐿!+,𝐾"
This can be written as
𝛼(𝐴𝐿 ! 𝐾" )
𝑀𝑃$ = 𝐴𝛼𝐿! 𝐿+,𝐾" =
𝐿
Similarly,
%& "(($! )" )
𝑀𝑃) = %)
= 𝐴𝐿! 𝛽𝐾"+, = 𝐴𝐿! 𝛽𝐾" 𝐾 +, = )
Ans: 1

Dec 2015

,- /-
𝑄 = 2𝐾 .𝐿 .
,- /-
𝑄 = 2[8 27 .]
.
, /
𝑄=2 2. -. 3. -. = 2 2 3 / = 2 𝑋 2 𝑋 9 = 36
𝑞 = 𝐴𝐿! 𝐾"
𝛿𝑄
𝑀𝑃# = = 𝐴𝛼𝐿!$% 𝐾"
𝛿𝐿
𝛿𝑄
𝑀𝑃& = = 𝐴𝐿! 𝛽𝐾"$%
𝛿𝐾
We can clearly see both 𝑀𝑃# & 𝑀𝑃& 𝑎𝑟𝑒 𝑜𝑛𝑒 𝑑𝑒𝑔𝑟𝑒𝑒 𝑙𝑒𝑠𝑠 𝑖. 𝑒. 𝑝𝑜𝑤𝑒𝑟 𝑓𝑢𝑛𝑐𝑡𝑖𝑜𝑛 𝑎𝑟𝑒 𝛼 −
1 𝑎𝑛𝑑 𝛽 − 1 𝑟𝑒𝑠𝑝𝑒𝑐𝑡𝑖𝑣𝑒𝑙𝑦.
So, when Production Function is of degree four, Marginal product will be of 4 – 1 = 3 degree.
' %
𝑄= 5𝐿( 𝐾 (

𝜕𝑄 '1 %
𝑀𝑃& = = 5𝐿( 𝐾 ($%
𝜕𝐾 3
' ' '
( (
5 ' $' 5 𝐿 ( 5 64 ( 5 4
= 𝐿( 𝐾 ( = = =
3 3 𝐾 3 27 3 3(
'
() '
5 4 ( 5 4 5 16 80
= = = 𝑋 =
3 3 3 3 3 9 27
Chanakya group of economics
ONLINE BATCH

Mathematical Economics – Topic-6

INPUT-OUTPUT ANALYSIS

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