Mathematics For Economics: Euncheol Shin
Mathematics For Economics: Euncheol Shin
Euncheol Shin
Optimization Theory
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Recall
Exponential function
Logarithmic function
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Outline
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Terminology
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General form: y = f (x).
[Figures 9.1]
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First-Order Condition
Proposition
Suppose f 0 (x0 ) = 0. Then, f (x0 ) is
(a) a local maximum if the derivative f 0 (x) changes its sign from
positive to negative from the immediate left of x0 to its immediate
right.
(b) a local minimum if f 0 (x) changes its sign from negative to positive
from the immediate left of x0 to its immediate right.
(c) Neither a local maximum nor a local minimum if f 0 (x) has the
same sigh on both the immediate left and the right of x0 .
f 00 (x) > 0 means that the slope of the graph tends to increase.
f 00 (x) < 0 means that the slope of the graph tends to decrease.
[Figure 9.5]
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Concave and Convex Functions
f is called concave if f 00 (x) < 0 for all x.
[Figures Here]
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Second-Order Condition
If a function is concave around x0 , then the first-order condition is
sufficient to obtain a local maximum.
That is, f 0 (x0 ) = 0 and f 00 (x0 ) < 0 imply that f (x0 ) is a local
maximum.
[Figure Here]
That is, f 0 (x0 ) = 0 and f 00 (x) < 0 everywhere imply that f (x0 ) is
the global maximum. [Proof Here]
[Figure Here]
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Application: Firm’s Problem
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Application: Firm’s Problem
A = 5 and c = 1
4
Profit (Π(q))
0
0 1 2 3 4 5
Quantity (q)
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Application: Firm’s Problem
Cookbook Approach:
Π0 (q) = (A − c) − 2q.
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Economist’s Viewpoint
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Next Week
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