This document discusses using Lagrange multipliers to optimize a Cobb-Douglas production function given a fixed total input cost. It provides an example of maximizing output for a firm with a production function of q=30x^2/3y^3/10, costs of €5/unit of capital and €6/unit of labor, and a total cost of €7250. It then calculates the new maximum output with increased total costs of €7300 using the marginal productivity of money.
This document discusses using Lagrange multipliers to optimize a Cobb-Douglas production function given a fixed total input cost. It provides an example of maximizing output for a firm with a production function of q=30x^2/3y^3/10, costs of €5/unit of capital and €6/unit of labor, and a total cost of €7250. It then calculates the new maximum output with increased total costs of €7300 using the marginal productivity of money.
This document discusses using Lagrange multipliers to optimize a Cobb-Douglas production function given a fixed total input cost. It provides an example of maximizing output for a firm with a production function of q=30x^2/3y^3/10, costs of €5/unit of capital and €6/unit of labor, and a total cost of €7250. It then calculates the new maximum output with increased total costs of €7300 using the marginal productivity of money.
This document discusses using Lagrange multipliers to optimize a Cobb-Douglas production function given a fixed total input cost. It provides an example of maximizing output for a firm with a production function of q=30x^2/3y^3/10, costs of €5/unit of capital and €6/unit of labor, and a total cost of €7250. It then calculates the new maximum output with increased total costs of €7300 using the marginal productivity of money.
This is a follow on sheet to Lagrange Multipliers 1 and as promised, in this sheet we will look at an example in which the Lagrange multiplier λ has a concrete meaning and this will enable us to find the answer to a related optimization problem without having to go through the whole process of solving the Lagrange equations again.
Cobb-Douglas Production Functions
Let q denote the quantity produced of a good. In general this will depend on the amount of capital and labour employed in the production. As a first approximation, we will assume that
q = f (K, L),
where K denotes capital and L denotes labour.
A Cobb-Douglas production function relates the quantities q, K , and L in the following way:
q = cK α Lβ ,
where α, β and c are constants and α and β are such that 0 < α < 1 and 0 < β < 1.
Example
Consider the Cobb-Douglas production function
q = 30x2/3 y 3/10 ,
where x represents the number of units of capital and y represents the number of units of labour. Suppose that a firm’s unit capital and labour costs are e5 and e6 respectively.
1. Find the values of x and y that maximise output if the total input costs are fixed at e7250.
2. Find the new maximum output if the input costs are increased to e7300. Solution 2 3 1. We have to maximize q = 30x 3 y 10 subject to 5x + 6y = 7250.
We let our constraint equation be g(x) = 5x + 6y − 7250 = 0.
Since ∇g = (5, 6) 6= (0, 0), there exists a λ ∈ R such that ∇q = λ∇g .
Substituting this in the constraint equation, we obtain
3 29 5x + 6 · x = 7250 =⇒ x = 7250 =⇒ x = 1000 and then y = 375. 8 4 We now check the value of q at (1000, 375) and also at the endpoints of the constraint line 5x + 6y = 7250 to determine where the maximum occurs. Since we are only interested in non-negative values of x and y , the endpoints of the constraint line 5x + 6y = 7250 lie where where it cuts the x and y axes, that is at (1450, 0) and 0, 3625 3 .
Now 3625 q(1450, 0) = q 0, = 0 and q(1000, 375) ≃ 17755. 3 Thus the maximum is indeed attained at x = 1000, y = 375.
2. We will use the fact that if the input costs are increased by e1 then the maximum output is increased by the Lagrange multiplier λ, which in this context is called The Marginal Productivity of Money. So in this case the marginal productivity of money is
3 4(375) 10 λ= 1 ≃ 2.37. (1000) 3 Since we are increasing the input costs by e50, the new maximum output is the old maximum output plus 50λ, so it is q(1000, 375) + 50λ ≃ 17873.
