UNIT 7.

OPTIMIZATION WITH EQUALITY CONSTRAINTS

Contents
7.0 Aims and Objectives
7.1 Introduction
7.2 Finding the Stationary Values
7.3 Lagrange – Multiplier Method
7.4 Economic Applications
7.5 Summary
7.6 Answers to Check Your Progress Exercise
7.7 Model Examination Questions
7.8 References

7.0 AIMS AND OBJECTIVES

This unit aims at solving optimization of functions with constraints. The main objective is
then to enable students handle problems of optimization with equality constraint by the
method of Lagrange multiplier.

After completing this unit you will be able to:

- find the stationary values of the objective function subject to a constraint
- use the method of Lagrange multiplier method in solving economic problems.

7. 1 INTRODUCTION

In the previous sections we have seen optimization problems of one and two variable case.
The choice variables are independent of each other. Therefore, one can find the set of values
of the choice variables that will yield the absolute extremum (free extremum) of the objective
function.

Practically, there are certain limiting factors in problems of optimization. For instance, a
consumer may want to maximize his\her satisfaction. But the consumer has limited income.
Hence we should try to incorporate this limitation (known as budget constraint) in to the
optimization problem. Therefore, we will be dealing with optimization problems with equality
constraints only.

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7.1 FINDING STATIONARY VALUES

Here we will learn how to find the stationary values of a function with constraints by the
method of substitution and elimination. To illustrate this let us consider the following utility
function of a consumer.

Example 1: Find the stationary value of the utility function

U = x1x2 + 2x
2x1
If we were to find the free extremum, with out constraint, then the consumer can purchase any
amount of x1 and x2. In reality the consumer has a fixed budget to be spend on the two goods x1
and x2. And the consumer’s objective is to maximize his satisfaction subject to such a limited
income. The total amount of money to be spent on these two goods is birr 60. Assume that the
market price of x1 and x2 per unit are birr 4 and 2 respectively. Then the budget constraint can
be expressed by the following linear equation.

4x
4x1 + 2x
2x2 = 60

Therefore, the problem of the consumer is to maximize U subject to the above constraint.

i.e. Max U = x1x2 + 2x

2x1
Subject to: 4x
4x1 + 2 x2 = 60

The technique of substitution and elimination to solve such a problem involves reducing the
function to one variable. We solve the constraint equation for one of the variables and then
substitute the resulting expression in to the objective function (the function to be optimized).
Here is a procedure of the method.
From the constraint equation, x2 = 30-2x
30-2x1.

Substituting this in to the function to be optimized, we get

U = x1 (30-2x
(30-2x1) + 2x
2x1 = 32x -2x12
32x1-2x

Now we have got a utility function of one variable only. The next step is to find the critical
values by the method learned in unit 6.

Taking the first derivatives and setting the resulting expression equal to zero, we get

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Since the value of is

The second order derivative is equal to –4< 0.

Hence x1 = 8 corresponds to the maximum of U. The stationary value of the function is then
obtained by substituting the values of x1 and x2 in to the objective function.
U = 8(14) + 2(8)=128.

Example 2:
2: Find the extreme value of the function
Z = xy subject to the constraint x + y =1
Solution:
Solution: using the procedure learned in example 1 above solves the problem.

From the constraint equation Substituting this value of y in to the objective

function . Next find the critical values.

Setting this to zero we get

The extreme value of the function is then found by substituting the value of and in to the
objective function

i.e. (Note that this value is the maximum value of the function since

The problem of using the substitution and elimination method in solving constrained
optimization arises when we have a complicated constrained function or when there are
several constraints to consider. In such cases solving the constraint equation for one of the
variables is difficult or even impossible. In the next section we will learn another method
called Lagrange multiplier method.
method.

Check Your Progress Exercise -1

1. Find the stationary values of the following function by the method described above.
a) Subject to the constraint

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 b) Subject to
c) Subject to

7.3 LAGRANGE - MULTIPLIER METHOD

The objective of this section is to aware students with the method of Lagrange multiplier
method. This method allows you to introduce a third variable and solve the optimization
problems with constraint without solving the constraint equation for one of the variables.

In order to use this method we need to follow the following procedures.

Suppose and are functions whose first order partial derivatives exist. Now
given an objective function subject to the constraint where c is a
constant, construct a Lagrangian function by introducing a new variable λ (the Greek letter
lambda) i.e.

λ
The necessary condition for stationary values of is then to find the partial derivatives of
with respect to and λ and solve them simultaneously.

Where =

Then the critical values found from the above equations will correspond to the stationary
values of .

Example 1: To illustrate the above procedure let us take example 1 in section 7.1.
The problem is to maximize subject to the constraint .
Solution:
The Lagrangian function is constructed as follows:

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The Greek letter λ (lambda) is called Lagrange (undetermined) multiplier.
Now considering as a function of three variables, i.e. the first order
necessary condition for free extremum will consist of the set of simultaneous equations.

From 1 and 2 above, we have

and

Taking this and equation above and solving simultaneously we have

Substituting the value of in to either of the above equations we get

From this and the value of λ = 4.
Substituting the values of and in to the objective function we get .
Example 2:
2: Find the extremum of subject to the constraint
Solution:
First construct the Lagrangian function,

For a stationary value of , it is necessary that

By substituting one in to the other or by using some other method it is possible to solve the
above equations.

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From
From
Substituting this in to equation above we get

(Since )
and
The extremum or stationary value of can be found by substituting the value of and
in to the objective function

Example 3: Find the stationary value of the function subject to the constraint

Solution:
The Lagrangian function is
Taking the partial derivatives of with respect to , and λ, we get

From ,

From ,

From and

Substituting this expression in to equation above, you get

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and

The stationary value of is therefore, .

Note that the above examples on constrained optimization problems are solved without
finding the value of λ; sometimes it may be necessary to find the value of λ. But what is the
meaning of λ (the Lagrange multiplier)

Let is the extremum value of the function subject to the constraint .

The Lagrange multiplier λ is the rate of change of with respect to . That is,

This means that is approximately equal to the change in resulting from a 1-unit increase in
. It measures the sensitivity of to changes in the constraint.

Check Your Progress Exercise -2

Find the stationary values of the following functions by using the Lagrange multiplier
method.
a) , Subject to
b) Subject to
c) Subject to

d) Subject to

7.4 ECONOMIC APPLICATIONS

This section tries to show the application of Lagrange multiplier method in solving economic
problems. Below are some examples illustrating its use.

Example 1: A consumer has birr 600 to spend on two commodities, the first of which costs
birr 20 per unit and the second one costs birr 30 per unit. Suppose that the utility derived by
the consumer from units of the first commodity and units of the second commodity is

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given by the Cobb-Douglas utility function . How many units of each
commodity should the consumer buy to maximize utility?

Solution:

Max
Subject to:
The Lagrangian function is

The first order necessary conditions are:

From equation and

From the above expressions

Solving for one of the variables we get

. Substituting this in to equation

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Therefore, to maximize utility, the consumer should buy 18 units of commodity and units
of commodity . (Assume that the critical values we found are extremum that we are looking
for).

Example 2: The relationship between inputs and outputs of a firm is given by the Cobb-
Douglas production as follows:

Where is the number of units of labor and is the number of units of capital required to
produce levels of output. Each unit of labor costs birr 40 and each unit of capital costs birr
80. The producer has birr 400,000 to spend on the two inputs
a) Find the amount of labor and capital that maximize production.
b) What is the maximum production?

Solution:
Solution:
a)The problem is stated mathematically as
Max
Subject to:
The Lagrangian function is

The first order necessary conditions are:

From equations and

Substituting the value of in to equation above

units
units.

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b) To find the maximum production substitute the values of and in to the objective
function i.e.
Units.

Check Your Progress Exercise -3

1, The Cobb- Douglas production function for a product is given by , where

is the number of units of labor and is the number of units of capital required to produce
units of the product. The price of labor and capital per unit are birr 50 and 100 respectively.
The total amount of money to purchase and is birr 500,000.
a) Construct the Lagrangian function
b) Find the amount of labor and capital that will maximize output.

2) Assume that the consumer’ s utility function is given by . The prices of and
per unit are birr 1 and 4 respectively. How many units of each commodity should the
consumer buy to maximize utility?

7.5 SUMMARY

The important points on this chapter are summarized as follows:

- Optimization with constraints: finding the maximum or minimum value of the
function given some constraints or limiting factors.
- Stationary value: the extremum or optimal value of a function.
- Substitution and elimination method:
- Method of Lagrange multipliers:
To find the relative extremum of
Subject to a constraint
Lagrange function:
Then solve the first order necessary conditions.

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Lagrange multiplier, is a measure of the change in resulting from a 1-unit increase in

, where is the optimal value of subject to

-Cobb Douglas utility and Production Function.
- Utility function, where
is the total utility and x and y are the quantities of commodity and consumed.
Production function, where
is level of output and
and are the amount of labor and capital used to produce output .

7.6 ANSWERS TO CHECK YOUR PROGRESS EXERCISE

Check Your Progress Exercise - 1

a) - Stationary value.

b)

c)

Check Your Progress Exercise - 2

a) c) and
b) d)

In all the above examples and exercises the solutions we found were the extremum values.
The Lagrange multiplier method will not tell you whether it is a relative (or absolute)
maximum or minimum value of the function. This requires another technique and interested
students may consult other advanced texts.

Check Your Progress Exercise - 3

1) a) L= +
b) And
2). 60 and 15

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7.7 MODEL EXAMINATION QUESTIONS

1. Use the Lagrange-multiplier method to find the stationary values of Z:

a) Z = xy Subject to x + 2y
2y = 2
b) Z = x2 + y2 Subject to 3x
3x + 4y
4y = 25
c) 6x2 + 12y
Z = 6x 12y2 Subject to x + y = 90

2. If the utility function is given by U = xy + 3x

3x + y, subject to the constraint
8x
8x+12y
+12y = 212.
a) Construct the lagrangian function
b) Find the level of x and y that will maximize utility

3. Find the critical values for minimizing the costs of a firm producing two goods x and y
8x2 – xy + 12y
when the total cost function is C = 8x 12y2 and the firm is bound by contract to
produce a minimum combination of goods totaling 42, that is, subject to the constraint x + y =
42. Use Lagrange multiplier method.

4. The utility function is given by the Cobb-Douglas function U = x0.6y0.25. The prices of x and
y per unit are 8 and 5 respectively. If the total amounts of money to be spend on the two goods
is 680, then
a) Construct the budget constraint equation.
b) Construct the lagrangian function.
c) Find the level of x and y that maximizes utility.

5.What combination of goods x and y should a firm produce to minimize costs when the joint
6x2+10y
cost function is C = 6x +10y2-xy+30
xy+30 and the firm has a production quota of x+ y = 34.

7.8 REFERENCES

Barnett and Ziegler: Applied Calculus for Business, Economics, Life Sciences and
Social Sciences,
Sciences,
Chiang, Alpha c: Fundamental method of mathematical economics,
economics,
Applications, 5thed.
Hoffman and Bradley: Brief Calculus with Applications,
Stancl, Donald , and Stancl, Milldred L: Calculus for Management and the Life and
Social Sciences,

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Schaum,s Outlines: Introduction to Mathematical Economics,
Economics, 3rded.

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