ch11-constrained-optimization

# ch11-constrained-optimization - Constrained Optimization...

This preview shows pages 1–22. Sign up to view the full content.

Constrained Optimization Professor Erkut Ozbay Economics 300

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Constraints Limited budget Li it d Limited revenue Limited hours to work • …. Scarce resources create constraints
Constrained optimization Includes an objective function and constraints Choose variables (x 1 ,x 2 ) to maximize (or minimize) bj ti f ti f( ) bj t t t i t an objective function f(x 1 ,x 2 ) subject to constraints

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Consumption problem You have \$6.00 to spend on a lunch of soup and salad Restaurant sells both soup and salad by weight An ounce of soup (S) is \$0 25 – An ounce of soup (S) is \$0.25 – An ounce of salad (V) costs \$0.50 • How many ounces of each will you purchase? How many ounces of each will you purchase?
Budget constraint Budget = \$6 Price of Soup (P S )= 0 25 ) 0.25 Price of Salad (P V )= 0.50 If you spend all on soup, then you can buy 6/.25 =24 ounces of soup If you spend all on salad, then you can buy 6/.5 = 12 ounces of salad

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Budget constraint Budget = P S S + P V V B d t 6 Budget = 6 Price of Soup (P S )= 0.25 Price of Salad (P V )= 0.50 6 = 0.25 S + 0.5 V
Objective Utility you derive from consumption of soup and salad is 1 1 ( , ) ln( ) ln( ) 2 2 U S V S V

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document