Intermediate Microeconomics · free preview
Constrained Optimization: Substitution and Lagrange
Optimization in economics is optimization under a budget, and two equivalent methods solve it, eliminate a variable by substitution or introduce a Lagrange multiplier that prices the constraint itself.
1. The problem economics actually asks
The problem economics actually asks
2. Method one: substitution
Method one: substitution
3. Method two: Lagrange
Method two: Lagrange
4. The multiplier has a meaning
The multiplier has a meaning
5. What substitution eliminates
In the substitution method for maximizing subject to , what exactly does the first move accomplish?
6. The Lagrangian's first-order conditions
For , what do the conditions and state economically?
7. Tangency in numbers
At the optimum of with , what is the marginal rate of substitution ?
8. The multiplier's question
The Lagrange multiplier at an optimum equals 10. Which statement interprets it correctly?
9. The substitution optimum
Maximizing by the first-order condition, compute the optimal , and write the number.
10. The multiplier at the optimum
For the problem maximize subject to , compute the Lagrange multiplier at the optimum, and write the number.
11. The raised budget
If income rises from 20 to 21 with both prices at one, where does the optimum of x1 x2 move?
12. The equalized margin per dollar
The condition MU1 over p1 equals MU2 over p2 says which practical sentence?
13. Stripping lambda
Why divide one first-order condition by the other in the Lagrange setup?
14. Substitution versus Lagrange
When is the Lagrange method the more convenient route over substitution?
15. Utility after the raise
At the budget of 21 the optimum is (10.5, 10.5). Compute the new maximum utility and write the number with two decimals.
16. The shadow price of the budget
Lambda equals 10 at the optimum. Predict the utility gain from one more dollar and write that prediction.
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