Math Camp 2022

Redina Tahaj

Northeastern University

August 21, 2022

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Derivatives

df (x) f (x + h) f (x)
= lim (1)
dx h!0 h
Derivative rules
Higher order derivatives

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Extreme values

1 FOC: A point x ⇤ in the closed interval [a,b], such that f 0 (x)|x⇤ = 0 is

a local extreme value.
2 SOC:
I f 00 (x)|x ⇤ > 0 then x ⇤ is a local minimum.
I f 00 (x)|x ⇤ < 0 then x ⇤ is a local maximum.
Example: f (x) = x 3 + 12x 2 + 36x + 8

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Concave and convex functions
Definition
A function f is concave i↵ x, x 0 2 X we have that
f (ax + (1 a)x) af (x) + (1 a)f (x 0) for all a 2 [0, 1]

The function is strictly concave if the above inequality is strictly satisfied.

Definition
A function f is convex i↵ x, x 0 2 X we have that
f (ax + (1 a)x)  af (x) + (1 a)f (x 0) for all a 2 [0, 1]

The function is strictly convex if the above inequality is strictly satisfied.

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 Task: Prove that sum of two concave functions is a concave function

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Concave Functions and the First Derivative
Theorem: A function is concave i↵:

f 0 (x 0)(x x 0) + f (x 0)  f (x) (2)

Let’s prove this preposition:

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Concave Functions and Globality
Theorem:
If the function f (x) is concave, then an extreme value in the domain of
the function is a global maximum.

Proof: Using the condition for concavity evaluated at x 0,

f (x)  f (x 0) + f 0 (x 0)(x x 0) (3)

Because x 0 is an extreme value, we know that f 0 (x 0) = 0. Then we have:

f (x)  f (x 0) (4)

Remember that the definition of concavity is for every fair of points in the
domain of the function: thus it has to be that x 0 is greater than or equal
to the value of the function at any other point
Similarly we say that if the function is convex and it has an extreme value,
then that extreme value is a global minimum.
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Uniqueness

Strict Concavity and Uniqueness

Theorem: If x 0 is the global maximum of a strictly concave function then
x 0 is the unique global maximum.

Proof: By contradiction:
Suppose f has two maximizers, x and y, then tx + (1 t)y 2 G , and by the
definition of strict concavity, for 0 < t < 1 we have that:
f (tx + (1 t)y ) > tf (x) + (1 t)f (y ) = f (x) = f (y )
This contradicts the assumption that both x and y are global maximizers.

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Quasi-concave functions

Quasi-Concave Function
If f is quasi-concave then f (ax + (1 a)y ) min[f (x), f (y )]

Examples: f (x) = x , g (x, y ) = xy etc.

Quasi-Convex Function
If f is quasi-convex then f (ax + (1 a)y )  max [f (x), f (y )]

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Quasi-concavity and the first derivative
Theorem: A function f is quasi-concave i↵:

f 0 (x 0)(x x 0) > 0 (5)

Let’s prove it:

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Globality, uniqueness, and quasi-concave/quasi-convex
functions

1 Strict quasi-concavity and global maximum: If f (x) is strictly

quasi-concave and x 0 is an extreme value in the domain of the
function, then x 0 is a global maximum.
2 Strict quasi-concavity and uniqueness: If x 0 is the global
maximum of a strictly quasi-concave function, we know that x 0 is the
unique maximum.
3 Likewise, for strictly quasi-convex functions, if there exists an extreme
value it is the unique global minimum.
4 Globality and uniqueness are not determined for extreme values of
quasi-concave or quasi-convex functions.

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Practice:
p
Determine if the function f (x) = x is concave, convex, or not.

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Summary
Function Globality Uniqueness
Concave
Convex
Strictly Concave
Strictly Convex
Quasi-concave
Quasi-convex
Strictly quasi-concave
Strictly quasi-convex

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Gradients and Hessians
Gradient is the vector of first derivatives.

© x 1™
f
≠ fx 2 Æ
5f (x) = ≠≠ . ÆÆ
≠ .. Æ̈
´fx n
Hessian is the matrix of second derivatives.
© x1.x1 ™
f . . . fx1 xk
≠
H (f (x)) = ≠ .. Æ
Æ̈
´fxk x1 . . . fxk xk
Young’s Theorem fxy = fyx

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Finding Extreme Values of Functions with n variables
FOC: A vector x ⇤ in the closed set A, such that 5f (x) = 0 is a local
extreme value.
SOC: A vector x ⇤ in the closet set A, such that H (x ⇤ ) is negative
semidefinite is a local maximum, while a vector x ⇤ in the closet set A, such
that H (x ⇤ ) is positive semidefinite is a local minimum. Further if f (x) is
concave or strictly quasi-concave, then the extreme value is a global
maximum and if f (x) is convex or strictly quasi-convex, the extreme value
is a global minimum. As in the case of functions with one variable,
uniqueness is guaranteed by strictly concave, strictly convex, strictly
quasi-concave or strictly quasi-convex functions.

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Constrained Optimization with equality constraints
Equality constraint
An equality constraint is a condition that must be satisfied in a constrained
optimization problem such that: g (x) = c where c is a constraint.

Maximization with equality constraints

Given a set of M equality constraints, an objective function f (x) with
domain R N . The problem of maximization with equality constraints is
defined as: Max f (x) subject to, g1 (x) = c1 ... gM (x) = cM

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Lagrange Method

Lagrangian:
Given the maximization problem with equality constraints, the
corresponding Lagrangian L(x, _) is defined as:
ÕM
L(x, _) = f (x) + i=1 _i (ci gi (x))

_ is a set of M variables called Lagrange multipliers.

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Lagrangian Sufficiency Theorem:
If x ⇤ and _⇤ are local maximizers of the Lagrangian then x ⇤ has satisfied
the constraints and locally maximized f (x).
FOC: 5L = 0
To make sure that x ⇤ is a local maximum we need to use a SOC: If the
Bordered Hessian is negative semidefinite we have a local maximum.
Globality: f (x) has to be at least concave or strictly quasi-concave and
the upper contour set of g (x) be compact and convex.
Uniqueness: f (x) be at least strictly concave or strictly quasi-concave
and the upper contour set of g (x) be compact and convex

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Steps:
Consider optimizing f (x, y ) s.t. g (x, y ) = c.
1 Define L(x, y , _) = f (x, y ) + _(g (x, y ) c)
2 FOC: 5L = 0
© ™
Lxx Lxy Lx_
3 Form the bordered-Hessian: BH= ≠ Lyx Lyy Ly _ Æ̈
´L_x L_y L__
4 Evaluate BH at critical points and find its determinant
5 If the determinant is postive then we have a local maximum, if
negative then we have a local minimum.
6 To determine whether the optimal solution is unique or global you
would have to check the features of function f (x, y )

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Example:
p
Maximize xy s.t. x + y = 2

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Constrained Optimization with Inequality Constraints
Given a set of M inequality constraints, an objective function f (x) with
domain RN , the problem of maximization with inequality constraints is
defined:
Max f (x) s.t. gM (x)  cM
Solve using a generalization of the Lagrange method
The Karush-Khun-Tucker (KKT) Method:
If x ⇤ and _⇤ are local maximizers of the Lagrangian and satisfy the
conditions:
1 _⇤ (c g (x)) 0
2 _⇤ 0
Then x ⇤ is a local maximizer

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KKT

With this method we need two conditions to be satisfied:

Õm
1 FOC: 5f (x) =
i=1 _ i 5 gi (x)
2 Slackness conditions:

I If _ i 0 and _i (c g (x)) = 0 we have a maximum.

I If _ i  0 and _i (c g (x)) = 0 we have a minimum.

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Let’s look into an example:
A consumer lives on an island where she produces two goods, x and y,
according to her production possibility frontier x 2 + y 2  200, and she
consumes all goods herself. Her utility function is xy 3 . The consumer also
faces environmental constraint on her total output of both goods. The
environmental constraint is given by x + y  20.
1 Write the KKT first order conditions
2 Find the optimal solution. Determine which restrictions are binding.

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’Cont.

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The Envelope Theorem

Theorem: Suppose that the constraint optimization problem

max F (x, y , b) s.t. g (x, y , b) = c (6)

admits a unique solution (x ⇤ (b), y ⇤ (b), b) with an associated Lagrange

multiplier _⇤ (x ⇤ , y ⇤ , b). If L(x, y , _, b) denotes the Lagrangian then,

dF (x ⇤ (b), y ⇤ (b), b)/d b = mL/mb | (x ⇤ ( b ),y ⇤ ( b ), b ) (7)

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Applications of the Envelope Theorem

It is used in policy analysis in general, e/g e↵ects of wealth redistribution

on welfare.
Microeconomic theory: Hicksian demand and Expenditure Function (MWG
p.69), Roy’s Identity (MWG p.74), Shephard’s Lemma (MWG p.141),
Hotelling’s Lemma (MWG p.138)

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Implicit Function Theorem

Let F (x; U) be a function in a neighborhood of (x ⇤ , U⇤ ) in R 2 . Suppose

that F (x ⇤ ; U⇤ ) = 0 and consider the expression:

F (x, U) = 0 (8)

If mF (x ⇤ , U⇤ )/mx < 0, then there exists a function x = x (U) defined on an

open interval I about a point U = U⇤ such that:
1 F (x (U), U) = 0 for all U 2 I
2 x (U⇤ ) = x
3 dx
(U ⇤) = mF
[x (U ⇤ ); U ⇤ ]/ mF [x (U⇤ ); U]
dU mU mx

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Example

Let us consider a firm that produces a good y by using a single input x.

The firm sells the output and acquires the input in competitive markets:
The market price of y is p, and the cost of each unit of x is just w. Its
technology is given by f : R+ ! R+; where f (x) = x a and a 2 (0; 1). Its
profits are given by
c(x, p, w ) = px a wx (9)
The firm selects the input level, x; in order to maximize profits. We would
like to know how its choice of x is a↵ected by a change in w.

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 Assuming an interior solution, the FOC of this optimization problem is:

Notice that F (x, p, w ) = pa(x ⇤ ) a 1 w

mF (x ⇤ ,p,w )
Since mx = pa(a 1) (x ⇤ ) a 1 < 0 we can use the above theorem and
get:
dx
(p, w ) = (10)
dw

Thus if the price of the input increases, then the firm will acquire less of it.
That is the unconditional input demand is decreasing in the input price.
See examples and further discussion in Dropbox folder notes.

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Review of Integration Rules
π
d
F (x) = f (x) and f (x)dx = F (x) + c (11)
dx
Basic Rules of Integration
Power Rule

Exponential Rule

Logarithmic Rule
1 π
0
f (x)e f (x) dx = e f (x) + c (12)
2
π 0
f (x)
d (x) = ln | f (x) | +c (13)
f (x)
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’Cont.
Integral of a sum

Integral of a multiple

Substitution Rule

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Integration by parts
π π
vdu = uv udv (14)
Ø Ø
Example: x (x + 1) 1/2 dx and lnxdx

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Definite Integrals
π b
f (x)dx = F (x) | ba = F (b) F (a) (15)
a
Properties of Definite Integrals
Øa Øb
1
b
f (x)dx = a f (x)dx

Øa
2
a
f (x)dx = 0

Ød Øb Øc Ød
3
a
f (x)dx = a
f (x)dx + b
f (x)dx + c
f (x)dx

4 Besides these, the same rules that apply to indefinite integrals also
apply to definite integrals.

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Improper Integrals
π 1 π b
f (x)dx or f (x)dx (16)
o 1
π 1 π b
f (x)dx = lim f (x)dx (17)
a b!1 a
If this limit exists integral is said to be convergent, while if the limit does
not exist it is said to be divergent (meaningless).
Infinite Integrand: Even with finite bounds an integral can still be
improper is the integrand becomes infinite somewhere in [a,b].
Ø11
e/g. 0 x dx As x ! 0 x1 ! 1
Ø1 1
To solve we still use limits. a x
dx = ln | 1a = ln1 lna = lna (diverg.)
Economic Applications of using integrals involve finding total functions when
marginal ones are given, finding the present value of cash flows etc.

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First-Order Di↵erential Equations
Contains only the first derivative (but it may have various powers). The
highest power is called the degree.
1 Constant coefficient and constant term.
dy
+ u(t)y = w (t) (18)
dt

dy
I Homogeous case dt + ay = 0

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First-Order Di↵erential Equations
Non-homogenous case dydt + ay = b Solution consists of the
complementary function (solution to the reduced function) and the
particular integral.

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Example
dy
Solve dt + 2y = 6

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An Economic Application
Dynamics of Market Price:

Qd = U VP and Qs = W + XP (19)
If P (0) < P ⇤ does the time path of P (t) converge to P ⇤ as t ! 1 ?
dP
Assume dt = j (Qd Qs )

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An Economic Application
P (t) = [P (0) P ⇤ ]e kt + P⇤
k > 0 P (t) ! 0 as t ! 1

Dynamic Stability requires the asymptotic vanishing of the complementary

function as t becomes infinite. So to assure dynamic stability in this
setting we must have that k < 0 or j (V + X) > 0.

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Di↵erence Equations
Discrete time means that the value of y will change only when
variable t changes from one integer value to the next, referring to as
periods. The discrete-time version of economic dynamics is often
referred to as period analysis.
The pattern of change of the variable y over time will be represented
by the di↵erence quotient yt which is the discrete-time counterpart
of dy
dt . Since t = 1 , can be simplified to y = yt+1 yt called the
first di↵erence of y .
Iterative Method of solving a first order di↵erence equation:
Example: yt+1 = yt + 2 and y0 = 15

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 General Method: yt+1 + ayt = c where a and c are constants. The
solution involves a particular solution (any solution to our equation)
and the complementary solution (solution to the reduced form). Here
yp represents again the inter-temporal equilibrium level of y while yc
represents the deviation of the time path from that equilibrium.

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General Method
To find the solution to the complementary function here too we try a
solution of the form yc = Ab t
Thus yt+1 = Ab t+1

For yp we need any solution to the given equation. We try the simplest
form, a constant. yt = k Thus yt+1 = k too.

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General Method
Now if a = 1 we must try another kind of solution such as yt = kt. Let’s
see how this works.

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Example
Solve yt+1 5yt = 1 y0 = 7/4

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Dynamic Stability of the Equilibrium

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Dynamic Stability of the Equilibrium

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Dynamic Stability of the Equilibrium

Whether the equilibrium is dynamically stable is whether or not Ab t will

tend to vanish as t ! 1.

The time path of b t will be:

1 Non oscillatory if b > 0
2 Oscillatory if b < 0
3 Divergent if | b |> 1
4 Convergent if | b |< 1

The constant A produces a scale e↵ect without changing the basic

configuration of the time path. If A is negative the time path will be a
mirror image.

In sum, the solution yt = Ab t + yp will be convergent i↵ | b |< 1

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Example
4 t
Example: Time path described by yt = 2( 5) +9

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An Economic Application: the Cobweb Model
Consider a model where the quantity supplied is a function if the price in
the preceding time period.
Take Qst = W + XPt 1 while Qdt = U VPt
Market clearing: Qst = Qdt
Shift by one period: VPt+1 + XPt = U + W

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The Cobweb Model
Lets see the graphs of the time path of this model in two cases, when the
supply curve is steeper than the demand curve (explosive oscillation) and
vice-versa (convergence to inter-temporal price).

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Resources

If interested, please find further readings on the Dropbox folder under

Chiang’s (Dynamic Optimization).

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