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Lagrange
Lagrange
APPLICATIONS TO ECONOMICS In the next two examples, the method of Lagrange multipliers is used to solve con-
strained optimization problems from economics.
MAXIMIZATION OF UTILITY A utility function U(x, y) measures the total satisfaction or utility a consumer receives
from having x units of one particular commodity and y units of another. The problem is
to determine how many units of each commodity the consumer should buy to maximize
utility while staying within a fixed budget. The application of the method of Lagrange
multipliers to the utility problem is illustrated in the next example.
EXAMPLE 4.4
A consumer has $600 to spend on two commodities, the first of which costs $20 per
unit and the second $30 per unit. Suppose that the utility derived by the consumer
from x units of the first commodity and y units of the second commodity is given by
the Cobb-Douglas utility function U(x, y) 5 10x0.6y0.4. How many units of each
commodity should the consumer buy to maximize utility?
Solution
The total cost of buying x units of the first commodity at $20 per unit and y units of
the second at $30 per unit is 20x 1 30y. Since the consumer has only $600 to spend,
the goal is to maximize utility U(x, y) subject to the budgetary constraint that 20x 1
30y 5 600.
The three Lagrange equations are
6x20.4y0.4 5 20l 4x0.6y20.6 5 30l and 20x 1 30y 5 600
From the first two equations you get
6x20.04y0.4 4x0.6y20.6
5 5l
20 30
9x20.4y0.4 5 4x0.6y20.6
4
9y 5 4x or y5 x
9
Substituting this into the third equation, you get
20
x
30
Recall from Section 1 that the level curves of a utility function are known as
indifference curves. A graph showing the relationship between the optimal indiffer-
ence curve U(x, y) 5 C, where C 5 U(18, 8) and the budgetary constraint 20x 1 30y
5 600, is sketched in Figure 7.22.
ALLOCATION OF RESOURCES An important class of problems in business and economics involves determining an
optimal allocation of resources subject to a constraint on those resources. Here is an
example in which sales are maximized subject to a budgetary constraint.
EXAMPLE 4.5
An editor has been allotted $60,000 to spend on the development and promotion of
a new book. It is estimated that if x thousand dollars is spent on development and y
thousand on promotion, approximately f(x, y) 5 20x3/2y copies of the book will be
sold. How much money should the editor allocate to development and how much to
promotion in order to maximize sales?
Solution
The goal is to maximize the function f(x, y) 5 20x3/2y subject to the constraint
g(x, y) 5 60, where g(x, y) 5 x 1 y. The corresponding Lagrange equations are
30x1/2y 5 l 20x3/2 5 l and x 1 y 5 60
Chapter 7 ■ Section 4 Constrained Optimization: The Method of Lagrange Multipliers 559
60
(36, 24)
Budget line: x + y = 60
x
60
THE SIGNIFICANCE OF THE You can solve most constrained optimization problems by the method of Lagrange
LAGRANGE MULTIPLIER l multipliers without actually obtaining a numerical value for the Lagrange multiplier
l. In some problems, however, you may want to compute l. This is because l has
the following useful interpretation.
EXAMPLE 4.6
Suppose the editor in Example 4.5 is allotted $61,000 instead of $60,000 to spend on
the development and promotion of the new book. Estimate how the additional $1,000
will affect the maximum sales level.
Solution
In Example 4.5, you solved the three Lagrange equations
30x1/2y 5 l 20x3/2 5 l and x 1 y 5 60
to find that the maximum value M of f(x, y) subject to the constraint x 1 y 5 60
occurred when x 5 36 and y 5 24. To find l, substitute these values of x and y into
the first or second Lagrange equation. Using the second equation, you get
l 5 20(36)3/2 5 4,320
which means that maximal sales will increase by approximately 4,320 copies (from
103,680 to 108,000) if the budget is increased from $60,000 to $61,000.
WHY THE METHOD Although a rigorous explanation of why the method of Lagrange multipliers works
OF LAGRANGE involves advanced ideas beyond the scope of this text, there is a rather simple geo-
MULTIPLIERS WORKS metric argument that you should find convincing. This argument depends on the fact
that for the level curve F(x, y) 5 C, the slope is given by
dy Fx
52
dx Fy
Chapter 7 ■ Section 4 Constrained Optimization: The Method of Lagrange Multipliers 561
This result is true for any level curve of a function F whose partial derivatives exist
(provided Fy Þ 0). An example justifying the formula is outlined in Problem 48.
Now, consider the constrained optimization problem:
Maximize f(x, y) subject to g(x, y) 5 k
Geometrically, this means you must find the highest level curve of f that intersects the
constraint curve g(x, y) 5 k. As Figure 7.24 suggests, the critical intersection will occur
at a point where the constraint curve is tangent to a level curve; that is, where the slope
of the constraint curve g(x, y) 5 k is equal to the slope of a level curve f(x, y) 5 C.
y
Direction in which C increases
Point of tangency
According to the formula stated at the beginning of this discussion, you have
Slope of constraint curve 5 Slope of level curve
gx fx
2 52
gy fy
or, equivalently,
fx fy
5
gx gy