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Presentation Mathematical Economics
Presentation Mathematical Economics
Submitted To:
-Ma’am Anam Anwar
Introduction:
– Mathematical Economics is the study of empirical observations using statiscal
methods of estimation and hypothesis testing. It is application of mathematics
to the purely theoretical aspects of economic analysis.
– Non-Linear Programming is that branch of mathematical programming in
which either the objective function or the constraints (at least one), or both
objective and constraints are non-linear.
– In mathematics, nonlinear programming (NLP) is the process of solving
an optimization problem where some of the constraints or the objective
function are nonlinear. It is the sub-field of mathematical optimization that
deals with problems that are not linear.
– A nonlinear system is a system in which the change of the
output is not proportional to the change of the input.
– Nonlinear programming is a process of solving an
optimization problem.
Economic Applications:
The first application of economics on the theorems is:
UTILITY MAXIMIZATION :
In simple maximization of utility problem we came across the equations:
U=U(X1 + X2) subject to the income constraint P1X1 + P2X2=B
The constraint appears as an equality, and the choice variables are not
specifically restricted to be non negative. It is know possible to restate the
problem in a more realistic form. Taking the n variable case, we can write it as
a linear program as :
Maximize: U(x1,X2, … , Xn), subject P1X1 + P2X2+ … + PnXn ,<=B
Where X1, X2 , … , Xn >= 0
Where all the prices are taken to be exogenous. In this new formation, the
consumer is allowed the option of spending less than Budget amount B.
UTILITY MAXIMIZATION:
Moreover, this states that the amount purchased of any commodity cannot
be negative, is explicitly stated in the problem. Since the constraint
function g’(x)=P1 X1 + P2 X2 + … +Pn Xn is linear, the constraint
qualification is satisfied, and the Kuhn tucker maximization conditions are
necessary and sufficient if the other conditions cited in either of the two
sufficiency theorems are met.
To Apply Kuhn-Tucker theorem, we would want U(x) to be
differentiable and concave and g’(x) to be differentiable and convex. The
latter is automatically satisfied since g’(x) is linear, but the former has to
taken care of by explicitly model specification.
Checking Arrow-Enthoven theorem, we note that it is only needed to
specify U(x) to be differentiable and quasi-concave _______ a less
stringent requirement, provided that the condition (d) can be duly
satisfied. There are of course, other ways to satisfy the condition (d) so as
to make the Kuhn-Tucker conditions necessary and sufficient.
UTILITY MAXIMIZATION:
Indifference curve:
Curve is downward sloping convex type rather than round & oval loops.
Rather than satiation point(equilibrium point) is non-linear due to budget.
This condition known as Arrow Einthoven Snow Theorem i.e,( d- ii)
Its show that U(x) is not necessary to increase.
The rationale for this assumption is again to be found in tangency, solution feature of
classical framework. For, although a tangency point like H would indeed represent
the best choice under the circumstances because ascent to peak of utility surface, via
a movement toward point A, in the base plan, is precluded by the budget, tangency
points on the far side of the peak.
Economic Applications:
The Second application of economics on the theorems is:
LEAST COST COMBINATION :
Let the production function of firm be of the CDPF type:
Q = k𝛼 𝐿𝛽 , where 0 < 𝛼, 𝛽 < 1. Also, let Pk > 0 be exogenously determined. Then
the least cost combination problem can be stated as the non-linear program:
Maximize C = Pk K + Pl L subject to K𝛼 𝐿𝛽 ≥ 𝑄0 , Q0 > 0 and K, L >= 0.
In latter case, each successive unit increment in output will require less than
proportionate increase in the two inputs. Geometrically, the successive isoquants
for unit increments in output will become more tightly spaced as we move away
from the point of origin on any given ray in the KL-Plane.
Accordingly the projection of such a ray on the production surface will produce a
curve showing increasingly more rapid ascent, so that the surface cannot be
concave.
Kuhn-Tucker sufficiency theorem becomes in applicable there are IRS.
LEAST COST COMBINATION :
Accordingly the projection of such a ray on the production surface will produce a curves
showing increasingly more rapid ascent, so that the surface cannot be concave.
In view of this, the Kuhn-Tucker sufficiency theorem becomes inapplicable when there are
IRS. In contrast, the Arrow-Enthoven theorem is applicable even then, For a minimation
problem, the latter theorem specifies a quasi-convex objective function and quasi-concave
constant function (s). These specifications are indeed met in the present problem. In addition,
condition (d-i) is satisfied, because for a minimization problem we are supposed to have
Fj(𝑥) > 0 for some choice variable Xj, and we do have
𝜕𝐶 𝜕𝐶
= Pk > 0 and = PK > 0
𝜕𝐾 𝜕𝐿
For all values of K and L
There exists a non-negative ordered pair (K,L) that satisfies the constraint as a strict
inequality.
Consequently, with the constraint qualification satisfied, the Kuhn tucker minimum
conditions can be taken as necessary and sufficient according to the Arrow- Ethnoven
theorem.
Nonlinear Programming via Kuhn-
tucker conditions
Introduction:
In non-linear programming there exists a similar type of first-order
condition, known as the Kuhn-Tucker Conditions .
UNIFIED TREATMENT:
These more general conditions provide a unified treatment of
constraints:
we allow for inequality constraints
there may be any number of constraints
Constraints may be binding or not binding at the solution
-Non-negativity constraints can be included.
-Boundary solutions (some 𝐱𝐢′ s = 0) are permitted;
-Non-negativity and structural constraints are treated in the
same way;
-Dual variables ( also called Lagrange multipliers ) are
shadow values (i.e, marginal values).
𝜕𝑓 𝑚 𝜕𝐺 ⅈ
(KT1) For j = 1,……n : ≦ 𝛴ⅈ=1 𝜆𝑖 with equality if 𝑥𝑗 > 0;
𝜕𝑥𝑗 𝜕𝑥𝑗