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Concave Functions of Two Variables: X XX X

The document defines three equivalent definitions of a concave function of two variables and discusses some properties of concave functions. It proves four propositions: 1) The sum of concave functions is concave. 2) The upper contour sets of a concave function are convex. 3) If a function g is strictly increasing and h(x)=g(f(x)) is concave, then the upper contour sets of f are convex. 4) For a differentiable concave function, the first order conditions are both necessary and sufficient for a maximum.

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61 views

Concave Functions of Two Variables: X XX X

The document defines three equivalent definitions of a concave function of two variables and discusses some properties of concave functions. It proves four propositions: 1) The sum of concave functions is concave. 2) The upper contour sets of a concave function are convex. 3) If a function g is strictly increasing and h(x)=g(f(x)) is concave, then the upper contour sets of f are convex. 4) For a differentiable concave function, the first order conditions are both necessary and sufficient for a maximum.

Uploaded by

askazy007
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© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Concave functions of two variables

While we will not provide a proof here, the following three definitions are equivalent if the
function f is differentiable.1
Definition 1: Concave Function
The function f is concave on X

if for any x0 , x1 X and any (0,1)

f ( x ) (1 ) f ( x0 ) f ( x1 )

Definition 2: Concave function


The differentiable function f is concave on X if for any x0 , x1 X and any (0,1)

f ( x1 ) f ( x 0 )

f 0 1 0
f 0 1
( x )( x1 x1 )
( x )( x2 x20 )
x1
x2

Definition 3: Concave function


A twice continuously differentiable function f is concave if and only if
2 f
2 f
2 f
2 f
2 f
(i)
( x) 0, i 1, 2 and (ii)
( x)
( x)
( x)
( x) 0
xi xi
x1x1
x2x2
x1x2
x2x1

In the one variable case a function is concave if the derivative of the function is decreasing. We
can use this result and the following proposition to define a class of concave function in higher
dimensions.
Proposition 1: The sum of concave functions is concave

See Module 4 for a proof of the equivalence of D1 and D2.

Exercise: Complete the following argument to prove Proposition 1.


Suppose that f1 ( x) and f 2 ( x) are both concave. Then for any x 0 , x1 and convex combination

x ,
f1 ( x ) (1 ) f1 ( x0 ) f1 ( x1 ) and f 2 ( x ) (1 ) f 2 ( x0 ) f 2 ( x1 )
Define g ( x) f1 ( x) f 2 ( x) . You need to show that g ( x ) (1 ) g ( x0 ) g ( x1 ) .

Remark: If follows that if u1 ( x1 ) and u2 ( x2 ) are both concave then U ( x) u1 ( x1 ) u2 ( x2 ) is


concave.
In economics we very often assume that a set is convex. Consider for example a
consumer whose preferences are represented by the utility function U ( x1 , x2 ) . For any x , the
set of points having utility equal to that at x is called a contour set.

C {x | U ( x) U ( x0 )}
Economists call this an indifference curve. The set of points that are preferred to x is called an
upper contour set.

CU {x | U ( x) U ( x)} .
Consider the figure below showing three contour sets of an increasing function. The upper
contour set is the shaded region.

Economists typically assume that upper contour sets are strictly convex. The following
result establishes that the is property holds for all convex function
Proposition 2: The upper contour sets of a concave function are convex

Exercise: Complete the following argument to prove Proposition 2.


The upper contour set CU {x | U ( x) U ( x )} is convex if for any x 0 , x1 in this set each convex
combination x lies in the set as well. Thus it must be shown that if U ( x0 ) U ( x ) and

U ( x1 ) U ( x) then U ( x ) U ( x) . Now appeal to Definition 1 for a concave function.


Example: Concave function
Suppose f ( x) 1 ln x1 2 ln x2 . Note that

d
1
ln( x j )
. This is a decreasing
dx j
xj

function of x j . Therefore j ln x j is concave and so, by Proposition 1, f ( x) is concave.


By Proposition 2 it follows that the upper contour sets of f are convex.

Proposition 3: Sufficient condition for the upper contour sets of a function to be convex
Suppose that g () is a strictly increasing function and that h( x) g ( f ( x) is concave. Then the
upper contour sets of f are convex.

Exercise: Proof of Proposition 3


Complete the following argument to prove Proposition 3
Proof: Appealing to Proposition 2, the upper contour sets of h are convex. That is, for any x
the set CU {x | h( x) h( x)} is convex. That is, for any x the set CU {x | g ( f ( x)) g ( f ( x))}
is convex. Then argue that g ( f ( x)) g ( f ( x )) if and only if f ( x) f ( x) .

Example: f ( x) x11 x22 where x

Define h( x) ln f ( x) 1 ln x1 2 ln x2 . As argued above, this is concave and hence


has convex upper contour sets. Since ln() is strictly increasing it follows from
proposition 3 that the upper contour sets of f are convex.
Just as in the one variable case we now show that if f is concave, the FOC for a
maximum are both necessary and sufficient.
Proposition 4: Necessary and sufficient conditions for a maximum
If f is a differentiable concave function then the following conditions are both necessary and
sufficient for f to take on its maximum value at x 0 .
f 0
f 0
(x )
(x ) 0 .
x1
x2

FOC

Proof: If f takes on its maximum at x 0 consider changes only in x j , j 1, 2 . This reduces the
problem to a one variable problem so we know that the FOC must hold.
f 0
f 0
(x )
(x ) 0 .
x1
x2

From Definition 2, for any x1 x0 ,


f ( x1 ) f ( x 0 )

f 0 1 0
f 0 1
( x )( x1 x1 )
( x )( x2 x20 ) f ( x 0 )
x1
x2

Thus f takes on its maximum at x 0 .


QED

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