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Lagrangian Method

This document discusses using the Lagrangian method to solve optimization problems with constraints. It defines the Lagrangian function as the objective function minus the Lagrange multiplier multiplied by the constraint. Taking the partial derivatives of the Lagrangian and setting them equal to zero provides a system of equations that can be solved to find the optimal values. The Lagrange multiplier represents the shadow price of the constraint, showing how much the objective would change if the constraint was relaxed. Examples are provided of utility maximization with a budget constraint and cost minimization with a utility constraint.

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89 views3 pages

Lagrangian Method

This document discusses using the Lagrangian method to solve optimization problems with constraints. It defines the Lagrangian function as the objective function minus the Lagrange multiplier multiplied by the constraint. Taking the partial derivatives of the Lagrangian and setting them equal to zero provides a system of equations that can be solved to find the optimal values. The Lagrange multiplier represents the shadow price of the constraint, showing how much the objective would change if the constraint was relaxed. Examples are provided of utility maximization with a budget constraint and cost minimization with a utility constraint.

Uploaded by

Sadia 55
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Using the Lagrangian Method to Solve

Optimization Problems
Mathias Herzing, Department of Economics, Stockholm University

The Optimization Problem


Assume that we want to maximize (minimize) a function f (x1 ; x2 ) (e.g. a
utility function that we want to maximize, or a cost function that we want to
minimize), subject to the constraint g(x1 ; x2 ) = c (e.g. a budget constraint,
or a utility level constraint):

max f (x1 ; x2 ) s.t. g(x1 ; x2 ) = c:


x1 ;x2

The Lagrangian function is then de…ned as

L(x1 ; x2 ; ) = f (x1 ; x2 ) [g(x1 ; x2 ) c]:

The Lagrangian equals the objective function f (x1 ; x2 ) minus the La-
grange mulitiplicator multiplied by the constraint (rewritten such that the
right-hand side equals zero). It is a function of three variables, x1 , x2 and .
By calculating the partial derivatives with respect to these three variables,
we obtain the …rst-order conditions of the optimization problem:

@L(x1 ; x2 ; ) @f (x1 ; x2 ) @g(x1 ; x2 )


= = 0;
@x1 @x1 @x1
@L(x1 ; x2 ; ) @f (x1 ; x2 ) @g(x1 ; x2 )
= = 0;
@x2 @x2 @x2
@L(x1 ; x2 ; )
= [g(x1 ; x2 ) c] = 0:
@
We thus have three equations with three unknowns. By solving this sys-
tem of three equations we obtain the optimal solutions x1 ; x2 ; . (Actually
one should check the second-order conditions as well to see if the obtained so-
lutions are optimal. Here, we will take for granted that the obtained solutions
are optimal.)

Note that the Langrangian is constructed such that L(x1 ; x2 ; ) = f (x1 ; x2 ),


because [g(x1 ; x2 ) c] = 0 = 0.

1
Why Is this Method Applied?
The Lagrange method is frequently used in economics, mainly because
the Lagrange multiplicator(s) has an interesting interpretation. The La-
grange multiplicator represents the shadow price of the constraint that it
is multiplied with; it measures how much the optimal value of the objective
function f (x1 ; x2 ) would change if the constraint would be relaxed marginally
(i.e. if the constant c would increase marginally).

Example: Utility Maximization


We want to maximize u(x1 ; x2 ) = x1 x2 subject to the budget constraint
p1 x1 + p2 x2 = m:

max x1 x2 s.t. p1 x1 + p2 x2 = m:
x1 ;x2

The Lagrangian is thus given by

L(x1 ; x2 ; ) = x1 x2 [p1 x1 + p2 x2 m]:

The optimal solutions are given by


m
x1 = ;
2p1
m
x2 = ;
2p2
m
= :
2p1 p2

In this case measures the marginal utility of income, i.e. mea-


sures how much utility would increase at the optimal values x1 and x2 if the
individual’s income were increased marginally:
m2
u(x1 ; x2 ) = x1 x2 = u (p1; p2 ; m)
4p1 p2
du m
) = = :
dm 2p1 p2

2
Example: Cost Minimization
The utility function is given by u(x1 ; x2 ) = x1 x2 . We want to minimize
the expenditures, given by E(x1 ; x2 ) = p1 x1 + p2 x2 , for attaining utility level
u:
min p1 x1 + p2 x2 s.t. x1 x2 = u:
x1 ;x2

The Lagrangian is thus given by

M (x1 ; x2 ; ) = p1 x1 + p2 x2 [x1 x2 u]:

The optimal solutions are given by


r
h p2 u
x1 = ;
p1
r
h p1 u
x2 = ;
p2
r
h p 1 p2
= :
u

In this case h measures the marginal cost of u, i.e. h measures how


much expenditures would increase at the optimal values xh1 and xh2 if the
individual’s utility level u were increased marginally:
p
E(xh1 ; xh2 ) = p1 xh1 + p2 xh2 = 2 p1 p2 u E h (p1 ; p2 ; u)
r
dE h p1 p2
) = = h:
du u

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