Masters/ Ph.

D maths course: Real Analysis

Witness Simbanegavi (Ph.D)
School of Economics, UCT
February 2009
This module (Real Analysis) is meant to prepare students for Ad-
vanced Microeconomics. Modern microeconomics is mathematical in na-
ture: it draws extensively from real analysis and calculus hence our need
to study this course. The pace at which we cover the material in this module
is rather hectic (5 days). Consequently, what the course hopes to achieve
is for students to have an operational understanding of the concepts cov-
ered rather than an ability to produce elaborate proofs. However, easy and
straight forward proofs are fair game. Below are the topics covered in this
module.
Propositions and theorems may be incorrectly referenced!!
OBS! Topic 7 will not be covered in this course (real analysis) but in the
Micro course
TOPICS
1: Introduction
2: Sets and Mappings
Notation
Set Theory
Mappings
1
3: Geometry and Convexity
Basic algebraic operations
Convexity
Inner product, Norm, Metric
Concavity and quasi-concavity of real valued functions
4: Topology
Openness, closedness of sets
Boundary points and cluster points
Compactness
Connectedness
5: Sequences
Denition and notation
Convergent/divergent sequences
Subsequence
6: Continuity
Characterization of continuity
Weierstrass Maximum Theorem
7: Lagrange, Kuhn-Tucker and Envelope Theorems
Partial and directional derivatives
Constrained optimization
Envelope Theorem
2
1 INTRODUCTION
Why study mathematics?
Quantitative analysis
Qualitative analysis
Training in logical and analytical thinking (intellectual gym)
Language course (precise and powerful language)
Contemporary economic paradigm
Paradigm is microeconomic in nature
Economy system of economic agents linked to each other via markets
and other economic institutions.
Examples: Problems of what to produce, how to produce and for whom
to produce.
Assumptions:
Agents are rational and behave "as if" each of them were to max-
imize some goal function.
Goal functions
preferences (utility), prots, etc.
Agents generally operate in a given environment.
Environment determines the constraint set the agent faces. For
example, market prices determine the consumers budget set or
rms revenues and costs.
All this can be summarized in the following mathematical optimization
program:
max
a2A(o)
1 (r. c) ([M])
where:
3
c = agents environment (beyond the control of the agent)
r = choice or action available to agent.
A (c) = agents opportunity set/ constraint set in environment c
set of all available courses of action.
1 = agents goal function.
Solution
Unique solution: There exist r

A (c) such that 1 (r

. c) _ 1 (r. c) \r
A (c) .
Multiple solutions: There exist at least one r

A (c) such that

1 (r

. c) _ 1 (r. c) \r A (c) .
Let A

(c) = arg max

a2A(o)
1 (r. c) . A

(c) is the solution set (solution

correspondence). Obviously, A

(c) A (c) .
Value function
Achieved value of the goal function.
(c) = max
a2A(o)
1 (r. c) = 1 (r

(c) . c)
Examples
Utility maximization
Prot maximization
4
Given program [M], our task is to address the following:
Q1: Does a solution exist?
Q2: If it exists, is it unique?
Q3: How can we nd a solution/ characterize it?
Q4: How does solution depend on environment, c?
Q5: How does the achieved value depend on c?
The tools that we are going to learn in this course should enable us to
answer these questions!
What if more than one agent (i.e., if we are studying the interaction
between agents)?
USe equilibrium analysis.
5
2 SETS AND MAPPINGS
BASIC CONCEPTS
What is a set?
A collection of objects.
Ways of describing a set
List all the "elements"/ members of the set:
For instance, = 0. 1. 2. 3
Specify a common property that characterizes the objects in the set:
For instance: 1 = r : r is a nonnegative integer not exceeding 3
Elements: objects belonging to a set (r A).
r A == r is not a member/ element of A.
Singleton set: a set containing exactly one element (just a point).
Let and 1 be some arbitrary sets. One writes = 1 if they contain
exactly the same elements.
_ 1 ( contained in 1). That is, is a subset of 1. Equivalently,
1 _ .
_ 1 and = 1 == 1 (proper subset).
Empty set: An empty set is a set that contains no element: denoted, O.
Example: A = r : r is a round square = O.
OBS!! O _ for every set . In particular, O _ O.
As we will see later, the empty set O and the real line R have some
interesting properties. In particular, they are the only two "clopen" sets!!
Finite set: has nitely many elements.
6
Let be any set. is nite i # < + (# denotes the number of
elements in ).
It follows therefore that O is nite!
Examples:
Innite sets: sets with innitely many elements
SOME USEFUL SETS
R = r : r is a real number
Can you list the real numbers for me???
R
+
=
R
++
=
Observe that we distinguish between "non-negative" and "positive"
real numbers!!
Z = r : r is an integer
N = r : r is a positive integer
Q = set of rationals = r R : r = :: for some : Z and : N .
Which of the above sets are nite (innite)?
Exercise 1 How are the sets R. Z. N and Q related?
Exercise 2 Consider the set 1 = [0. 1]. Is this set nite or innite?
Intervals
Consider the sets A and B given by:
7
= r R : c _ r _ / . and 1 = r R : c < r < / where c
and / are real numbers such that c < /. The sets A and B are
called a (bounded) intervals.
Why bounded?
The set 1 = r R : c _ r < + = [c. +) is unbounded.
Open, half open, closed intervals: Examples
A = r R : c < r < / = (c. /) .
A = r R : c _ r _ / = [c. /] .
A = r R : c < r _ / = (c. /]
A = r R : c _ r < / = [c. /)
We will discuss in detail the idea of closedness and openness of
sets in Lecture 3.
OPERATIONS ON SETS
For any sets and 1;
1 = r : r and r 1
+ A listing of only those elements that appear in both sets.
' 1 = r : r or r 1 or both
+ A listing of all the elements of the sets A and B.
Two sets A and B are said to be disjoint if their intersection is empty,
i.e., they have no element in common.
Generalizations
Let 1 be an arbitrary nonempty set to be called an index set.
For each index i 1. let
j
be a set. Then

j21

j
= r : r
j
\i 1
'
j21

j
= n : n
j
for some i 1 .
8
Examples

a2N
[: 1. :] = 0
'
a2N
[: 1. :] = R
+
'
a2N
[
1
a+1
.
a
a+1
] = (0. 1)
+ Why (0. 1) and not [0. 1]??
Compliment of a set
Given any set A. the set 1 = r A : r is called the
compliment of (relative to A).
1 =
c
1 =
1 = A.
Proposition 3 Let 1 be an arbitrary set and suppose
j
. for each i 1 is a
set. Then
'
j21

j
=
j21

j
and
j21

j
= '
j21

j
.
Proof. In class.
CARTESIAN PRODUCTS
Read in notes!
Binary relations
A binary relation 1 on a nonempty set A is a subset of its Cartesian
product with itself, A
2
= A A.
Example: the ordering _ of real numbers.
Let 1 = (r. n) R
2
: r _ n .
r _ n i (r. n) 1.
Observe that the relation 1 is complete and transitive!
9
Completeness: For any r. n R. either (r. n) 1 or (n. r) 1
or both. That is, either r _ n or n _ r.
Transitivity: If (r. n) 1 and (n. .) 1. then (r. .) 1.
Reexivity: (r. r) 1.
Consider the binary relation on R. Is this relation complete?,
transitive, reexive?
SUPREMUM PROPERTY OF R
Denition 1: Suppose A R.
A number / R is called an upper bound for A if r _ /\r A.
A number c R is called a lower bound for A if c _ r\r A.
A set which has both an upper bound and a lower bound is called
bounded.
Denition 2: Suppose A R.
A number /

R is called a least upper bound for A. or a supre-

mum of A. written /

= sup A. if /

is an upper bound for A

and no lower upper bound exists (i.e., if r _ /

\r A. and
r _ /\r A == / _ /

).
A number c

R is called a greatest lower bound for A. or an

inmum of A. written c

= inf A. if c

is a lower bound for A

and no greater lower bound exists (i.e., if c

_ r\r A. and
c _ r\r A == c

_ c).
A set A R can have at most one supremum and one inmum!!
If c

and /

are the inmum and supremum of A R. then A _ [c

. /

] .
Can I say then that A = [c

. /

]?
Axiom 4 (The Supremum Property): There exists a supremum for every
nonempty set A R which has an upper bound.
10
Is c

(/

) A?
Not necessarily!!
Examples: Find the upper bounds and supremae and inmae of
the following sets.
A = [0. 1]
A = R
A = (0. 1)
A = R
+
If /

= sup A A. then /

= max A.
Likewise, if c

= inf A A. then c

= min A.
Nested intervals property: Any nested collection of closed and bounded
intervals has at least one element in common. More formally,
Proposition 5 Suppose that, for each i N. A
j
is a nonempty, closed and
bounded interval such that A
j+1
A
j
\i. Then the intersection of these sets
is nonempty:
j2N
A
j
= O.
Illustration!
MAPPINGS
What is a function?
A rule that assigns to each element r of one set, A. a unique element
n = 1(r) of a set, ).
1 : A )
Here, A is the domain of 1 (1(1) = A) and ) is codomain of 1.
The subset of points n ) which are images of points in A is
called the range of 1 (1(1)). Thus, 1(1) = 1 (A) = n ) : n = 1(r) for some r A
11
Examples:
Consider the function 1 : R R dened by
1(r) = 2r
1(r) = r
2
What is the domain of 1; the codomain of 1; the range of 1 and the
graph of 1??
For any set A. 1() = n ) : n = 1(r) for some r A
+ Why r A?
1() = direct image of set under 1.
Inverse image (pre-image) of set 1 in ) :
1
1
(1) = r A : 1(r) 1
Surjection: 1 is surjective (onto) if the range of 1 is all of ).
Examples:
1(r) = r; A = ) = R?
1(r) = r
2
; A = ) = R?
1(r) = r
2
; r _ 0 and ) = R
+
?
Injection: 1 is injective (one-to-one) if it sends distinct elements of A
to distinct elements of ). That is, r = r
0
== 1(r) = 1(r
0
).
Examples:
1(r) = c; A = ) = R?
1(r) = r; A = ) = R?
1(r) = r
2
; A = ) = R?
1(r) = r
2
; r _ 0 and ) = R
+
?
12
A function 1 is called bijective if it is both injective and surjective!
OBS!! 1 bijective implies 1 has an inverse. That is, there exists o : )
A s.t. n = 1(r) i r = o(n) = 1
1
(n).
One can easily send back mail to the original sender!
OBS! 1
1
(1) is always well dened even if 1 does not have an inverse.
Example: 1 : R R dened by 1(r) = r
2
.
1 doesnt have an inverse. Why?
See example 5 in book!
Level sets/ contour sets for a real valued function
For any c R. the set = r A : 1(r) = c is the cisoquant of
1.
The upper level set associated with any level c R is the subset A
;
(c)
where the value of 1 is at least c.
A
;
(c) = r A : 1(r) _ c
Examples: utility function/ production function.
Increasing and decreasing functions
A function 1 is (strictly) increasing if r < r
0
== 1 (r) < 1 (r
0
)
A function 1 is (stricly) decreasing if r < r
0
== 1 (r) 1 (r
0
)
A function 1 is non-increasing if r < r
0
== 1 (r) _ 1 (r
0
)
A function 1 is non-decreasing if r < r
0
== 1 (r) _ 1 (r
0
)
Illustrations!!
13
3 GEOMETRY AND CONVEXITY
VECTOR SPACE
Denition 6 A vector space is a set A (whose elements are called vectors)
equipped with two binary operations, called vector addition and scalar
multiplication.
A vector space is closed under addition and scalar multiplication.
Properties
(i) r + n = n + r
(ii) (r + n) + . = r + (n + .)
(iii) o + r = r. where o = (0. 0. .... 0) is the origin
(iv) (r) + r = 0
(v) 1r = r
(vi) c (/r) = (c/) r
(vii) c (r + n) = cr + cn
The operations vector addition and scalar multiplication are dened
component wise.
Let r = (r
1
. ... r
a
) and n = (n
1
. ... n
a
) be vectors and c R a real
number. Then
r + n = (r
1
+ n
1
. .... r
a
+ n
a
)
and
cr = (cr
1
. .... cr
a
)
What is r n?
Denition 7 A subspace of R
a
is a set A R
a
such that cr + n A and
c R.
OBS! Straight line through the origin in R
a
is a subspace while a straight
line that does not go through the origin is not a subspace.
14
Example 8 Example
INNER PRODUCT, NORM AND METRIC
Inner product multiplication between vectors from the same space.
Denition 9 For any vectors r. n R
a
. r.n =
a

j=1
r
j
n
j
.
What if the vectors are not from the same space. That is, let r R
a
and
n R
I
; / = :. What then?
More formally, if A is a vector space, then an inner product (or dot
product) is a function on A A to R. denoted : (r. n) = r.n. with the
following properties:
: (r. r) = 0 i r = o
: (r. n) = : (n. r) \r. n A
: (r. n + .) = : (r. n) + : (r. .) \r. n. . A
: (cr. n) = c: (r. n)
If r. n R
a
are two non-zero vectors, then r.n = 0 i r and n are
orthogonal (perpendicular).
The Norm
Denition 10 If A is a vector space, then a norm on A is a function on
A to R. denoted : r A |r|
The Euclidean norm of any vector r R
a
. denoted |r| . is a nonnegative
real number. In particular,
|r| =

r.r =

j=1
r
2
j
1
2
.
OBS! The length of the vector (norm) is measured from the origin.
Properties
15
(r) = 0 i r = o
(cr) = [c[ (r)
(r + n) _ (r) + (n) (Triangle inequality).
Proposition 11 (Cauchy-Schwartz inequality) (a) r.n _ |r| |n| \r. n R
a
and (b) For r. n = o. r.n = |r| |n| i n = \r for some \ R
++
Proof of triangle inequality.
The Metric
Closely related to the concept of norm.
Measures the distance between vectors
Formally, a metric is a function d : R
a
R
a
R
+
satisfying the following
properties:
d (r. n) = 0 i r = n
d (r. n) = d (n. r)
d (r. .) _ d (r. n) + d (n. .)
Balls
Denition 12 Given any vector r R
a
and scalar \ R
++
. the open ball
with center r and radius \ is the subset:
1
A
(r) = n R
a
: d (r. n) < \ = r R
a
: |n r| < \ .
16
Closed ball similarly dened.
Boundedness
Denition 13 A set A R is bounded if there exist c. R s.t. A
[c. ] .
Euclidean spaces
Denition 14 A set A R
a
is bounded if there exist c
j
.
j
R s.t. A

a
j=1
[c
j
.
j
] .
A set A R
a
is bounded i o such that |r| _ o\r A.
In other words, no point of A is at a distance greater than o from the
origin.
CONVEXITY
Denition 15 A set A R
a
is convex if, for all vectors r and n in A and
all scalars \ [0. 1] . also the vector . = \r + (1 \) n A.
. is called a convex combination of r and n.
R
a
and O are convex sets!
OBS! There is a dierence between a linear combination and a convex
combination.
For any vectors (points) r and n in A, the relation: . = cr+n; c.
R is called a linear combination of r and n.
The only requirement of c and is that they are scalars.
Convexity is preserved under the operation of intersection.
17
Proposition 16 Let . be any collection of convex sets A R
a
. Then,
A

=
A2\
A is a convex set.
Convex hull of a set A. written co(A). is the smallest convex set con-
taining A.
Illustration!
It follows that A = co(A) i A is convex!
Hyperplanes
Denition 17 A set A R
a
is a hyperplane if there exists some vector
j R
a
. j = o. and scalar c R such that
A =

r R
a
:
a

j=1
j
j
r
j
= c

.
Vector j is the normal vector to the hyperplane.
Examples
Budget sets, costs, etc
Theorem 18 Any two disjoint convex sets in R
a
can be separated by some
hyperplane in R
a
CONCAVITY AND CONVEXITY OF REAL VALUED
FUNCTIONS
What do you understand by real-valued function?
Denition 19 Suppose A R
a
is convex. A function 1 : A R is concave
if
1 (\r + (1 \) r
0
) _ \1 (r) + (1 \) 1 (r
0
)
for all vectors r. r
0
A and all scalar \ [0. 1] .
18
OBS! 1 is convex if 1 is concave.
Denition 20 For any domain A R
a
. subgraph(1) = (r. n) A R : n _ 1 (r) .
These are the points lying on and below the graph (curve).
Concavity of a function can be characterized in terms of the convexity of
the subgrapgh of 1. Equally, a function 1 is convex if and only if its epigraph
(dened as: (r. n) A R : n _ 1 (r)) is convex.
Strict concavity/ convexity straight forward
Illustrations!!
QUASI-CONCAVITY
Upper level (contour) set for a function 1 : A R is:
A
;
(c) = r A : 1 (r) _ c
Denition 21 Suppose 1 : A R where A R is convex. Then 1
is quasi-concave if A
;
(c) is convex for all c R.
Proposition 22 1 concave implies 1 quasi-concave.
Proof. See hand outs.
Proposition 23 If 1 : A (convex) R is quasi-concave and 1 is increas-
ing, then 1 (1 (r)) is quasi-concave.
First, understand the denition of an increasing function!
Second, understand the denition of quasi-concavity!
Proof. Suppose 1 is quasi-concave and 1 is increasing. Then 1 (1 (r)) _
1 (1 (r
0
)) == 1 (r) _ 1 (r
0
) (since 1 is increasing). By denition, 1 quasi-
concave == 1 (\r + (1 \) r
0
) _ 1 (r
0
) . So, 1 (1 (\r + (1 \) r
0
)) _
1 (1 (r
0
)) (1 is increasing). Hence 1 is quasi-concave.
OBS! 1(1) = A while 1(1) = 1(1) . Thus 1 is a composite function!
19
4 TOPOLOGY
OPEN SETS AND CLOSED SETS
Denition 24 A set A R
a
is open if there for each r A exists some
positive scalar \ such that 1
A
(r) A. A set ) R
a
is closed if its comple-
ment is A =) is open.
Idea is simple: A R
a
is open if it is the case that for any ele-
ment r A. all the "neighbours" of r are also in A. That is, all the
"neighbours" at distance \ 0 (no matter how small \ is) are in A.
R
a
and O are both open and closed!!
Is the set A = r R : 0 _ r _ 1 open or closed? ( Use the denition)
Properties of open sets
The whole space R
a
and the empty set are both open.
Arbitrary unions of open sets are open.
The intersection of nitely many open sets is open.
Properties of closed sets
A set is closed if and only if its complement is open.
The whole space R
a
and the empty set are both closed.
Arbitrary intersections of closed sets are closed.
The union of nitely many closed sets is closed.
Example 25 Let A
j
=

1
j+1
.
1
j+1

. i N. Then,
j2N
A
j
= 0 . a closed
set!!
Example 26 Let A
j
=

j
j+1
.
j
j+1

. i N. Then, '
j2N
A
j
= (1. 1) . an open
set!!
20
Closure of a set
The closure of an arbitrary set A R
a
, denoted A, is the smallest closed
superset of A.
The smallest closed set containing A!
Example 27 What is the closure of the sets = (0. 1)?. 1
A
(r)?. A = R?
Interior of a set
The interior of a set A R
a
is the biggest open subset of A.
Just strip o the boundary!
It follows that i:t(A) A and i:t(A) = A i A is open.
A point r A is an interior point of A if there exists \ R
++
such
that 1
A
(r) A = O.
Elements of i:t(A) are called interior points of A.
OBS! Finite sets have no interior points.
Example 28 What is the interior of the sets = [0. 1]?. 1
A
(r)?. 1 =
1. 2. 3?. A = R?
Neighbourhood
If r R
a
, then any set which contains an open set containing r is called
a neighbourhood of r. That is, is a neighbourhood of r if r 1
and 1 is open.
If set is open, then is called an open neighbourhood of r.
The open ball 1
A
(r) is an open neighbourhood of r
The closure (
A
(r) is a neighbourhood of r.
21
BOUNDARY AND CLUSTER POINTS
Denition 29 A point r R
a
is a boundary point of a set A R
a
if every
neighbourhood of r contains some point from A and some point from its
complement,A.
No matter how small you make the neighbourhood, at least one point
in the neighbourhood is from A and at least one is not from A.
OBS! r need not belong to A! Same test for open and closed sets.
A = set of all the boundary points of set A = boundary of A.
Formally:
A = r R
a
: A = O and A = O for each nbd of r
Examples: A = [c. /). = 0. 1
For any set A R
a
. a point r A is either an interior point or a
boundary point but not both.
Formally:
i:t(A) A = O and A i:t(A) ' A
Exercise 30 What is i:t(A) ' A equal to??
Denition 31 A point r R
a
is a cluster point of A R
a
if every neigh-
bourhood of r contains some point n A such that n = r.
OBS! r need not belong to A!
It follows that, for any set A R
a
. every interior point of A is a cluster
point!
Let A
+
denote the set of cluster points of a given set A R
a
. Then,
for any set A R
a
.
i:t(A) A
+
.
22
Why containment and not equality?
Examples: Find the boundary points, interior points and cluster points
of the following sets.
A = (0. 1)
A = 0. 1. 2
A = R
+
Proposition 32 Let A R
a
. Boundary points which are not in A are
cluster points: A A A
+
. Cluster points which are not interior are
boundary points: A
+
i:t(A) A. Moreover, A ' A = A = A ' A
+
.
Corollary 33 A R
a
is closed == A A == A
+
A.
Theorem 34 (Balzano-Weierstrass) Every innite and bounded set in
R
a
has at least one cluster point.
CONNECTEDNESS
A set A R
a
is connected if it cannot be contained in (covered by)
two disjoint open sets, each of which contains some elements from A.
Denition 35 Suppose A R
a
. A separation of A is a pair of disjoint
open sets and 1 such that A = O. 1 A = O and A ' 1.
Denition 36 A set A is connected if there exists no separation of A.
Examples:
A = r R : r = 3
The set N R is not connected.
Theorem 37 The set A = R
a
is connected.
Proof. Sketch proof in class.
23
5 COMPACTNESS AND SEQUENCES
5.1 COMPACTNESS
Crucial property for establishing existence of solutions to agents deci-
sion problems.
Crucial for establishing existence of equilibria
Companion to continuity concept.
A covering of any given set A is a collection of open sets such that these
open sets together cover A.
Denition 38 Let A be any set in R
a
. A collection of open sets 1 R
a
is called a covering of A if A is contained in the union of all 1 . A subset

0
is called a subcovering from if it is a covering of A.
Finite covering: A covering consisting of nitely many open sets
Denition 39 A set A R
a
is compact if every covering of A contains a
nite subcovering.
Example 37
A =

r
1
. r
2
. .... r
I

R
a
. / N.
Innite collection = 1
a
R : (1 :. : + 1) ; : N is a covering of A
(in fact R)
Can you see that??
contains a subcovering of A. given by 1
a
for : max [r
j
[
One of the intervals the largest one.
OBS! contains no nite subcovering of R!
Example 38
Let A = R
2
and let = 1(o. :) : : N . Then is a covering of A.
24
However, has no nite subcovering.
However, the covering = ' R
2
does contain nite subcovering,
for instance,
0
= R
2
.
0
= 1(o. :) ; R
2

Denition 40 A set A R
a
is compact if every covering of A contains
a nite subcovering.
To establish compactness one needs to show that every covering of A
contains a nite subcovering (not easy).
To establish noncompactness, it suces to nd one covering that does
not contain a nite subcovering.
Revisit example 38
Is A compact??
Example 39
Let A = R and let 1 = 1
I
R : 1
I
= (/. /) ; / N .
Is 1 a covering of A?
Is A compact?
Example 40
Let A = (0. 1) and let 1 =

1
I
R : 1
I
=

1
I+3
.
I
I+3

; / N

Is 1 a covering of A?
Does 1 contain a nite subcover?
Is A compact?
25
Proposition: Every nite set is compact
OBS! O is compact while A = R
a
is not!
OBS! The union of nitely many compact sets is compact.
Proposition 41 Every closed subset of a compact set is compact.
Illustrate!
Heine-Borel Theorem
Denition of compactness dicult to apply in practice.
Good news: In Euclidean space, compactness is equivalent with being
both bounded and closed.
Theorem 42 (Heine-Borel) A set A R
a
is compact i it is closed and
bounded.
Reconsider example 37
A =

r
1
. r
2
. .... r
I

R
a
. / N.
What is i:t(A)?
What is A?
Is A bounded?
5.2 SEQUENCES
Denition 43 A sequence from any set A is a function 1 : N A
The function assigns an element r
t
= 1 (t) A to each positive integer
t.
OBS! A here is the range; that is, 1(1) = N and 1(1) = A.
Notations
r
t

1
t=1
26
r
t

t2N
r
t
= r
t
: t N A is the functions range.
Constant sequence: r
t
= r
1
\t N
Example
Let 1 : N [0. 1] be dened by 1 (t) =
1
t
\t.
Give the terms of this sequence
Is there any peculiar features?
Limit point of a sequence
Denition 44 Let A R
a
and let r
t
be a sequence from A. A point
r

R
a
is a limit point of r
t
if there for every nbd of r

exists some
1 N such that r
t
\t _ 1.
Equivalently;
Denition 45 A sequence r
t
in R
a
converges to a point r

if for each
0 there exists a natural number 1 () such that r
t
1(r

; ) \t _ 1 or
equivalently, d (r
t
. r

) 0 as t .
Idea: The terms of the sequence eventually cluster (concentrate around
r

)
A sequence which has a limit point is called convergent, otherwise it is
divergent.
Claim 46 A sequence can have at most one limit point ( prove it!!)
Subsequence
An innite sampling from a given sequence.
27
OBS! Not every sampling yields a subsequence!!
Let r
t
be any sequence in R
a
. If t
1
< t
2
< t
3
< .... is a strictly increasing
sequence of natural numbers, then
n
I

1
I=1
= r
t
k

I
is called a subsequence.
Since the sequence t
I
is strictly increasing, t
I
_ /\/.
OBS! The terms of the subsequence are all present in the original se-
quence.
Let r
t
= r
1
. r
2
. r
3.
r
4.
.... be the original sequence.
Sampling at even times yields the (sub)sequence: n
I
= r
2
. r
4.
r
6.
...
Example
Consider the sequence: r
t
=
1
t
\t N.
Give the terms of the sequence.
Can you nd subsequences of r
t
?
Consider the sequence: r
tI
=
1
4
.
1
3
.
1
2
. 1.
1
5
.
1
6
. ...
Is this a subsequence of r
t
? Why or why not?
OBS! Any sequence is a subset of itself!
Example
1 (t) = r
t
= (1)
t
\t N.
Is this sequence convergent? If so, what is the limit point?
Is this sequence constant?
28
How would you sample to get a convergent subsequence?
Proposition 47 A sequence from a set A R
a
converges to r

R
a
i all
its subsequences converge to r

R
a
.
Intuition:
Suppose r
t
r

. Then for any nbd of r

. there exists 1 such that

1 (t) \t _ 1 (clustering of the terms of the sequence). Since the terms
of the subsequence are all present in the original sequence and since t
I
_
/\/. r
t
k
must lie in \t _ 1. (just pull out some terms from r
t
and leave
everything the same).
Balzano-Weierstrass
Convergence Criteria
A sequence r
t
(of real numbers) is said to
(a) Increasing (or non-decreasing) if r
t
_ r
t+1
. for t = 1. 2. ...
(b) Strictly increasing if r
t
< r
t+1
. for t = 1. 2. ...
(c) decreasing (or non-increasing) if r
t
_ r
t+1
. for t = 1. 2. ...
(b) Strictly decreasing if r
t
r
t+1
. for t = 1. 2. ...
Monotone convergence criteria
Gives necessary and sucient condition for convergence of sequences
from R.
Cauchy Convergence criterion
Gives necessary and sucient condition for convergence of sequences
from any Euclidean space.
A sequence is bounded from above if there exists / R : r
t
_ /\t.
29
i.e., range of sequence, when viewed as a function, is bounded from
above.
Theorem 48 (Monotone convergence) An increasing sequence r
t
from
A = R is convergent i it is bounded from above.
Denition 49 A sequence r
t
is a Cauchy sequence if, for every 0.
there exists a 1 () N such that |r
t
r
c
| < \t. : 1 () .
Points suciently "far out" in the sequence are "arbitrarily close to
each other".
Theorem 50 (Cauchy Convergence) A sequence from a Euclidean space
is convergent i it is a Cauchy sequence.
30
6 CONTINUITY
In this chapter, we reach our TARGETED PEAK in the mountain range
of REAL ANALYSIS.
Functions
Suppose A R
a
and ) R
n
. A function 1 : A ) is said to be
continuous at r if its values at points r
0
near to r are near to its value at r
(= 1 (r)).
Idea: a "small movement" in the domain does not cause a "big jump" in
the range. That is, nearby points in the domain of the function should map
into nearby points in the range.
Denition 51 1 is continuous at r if there for every nbd 1 of n = 1 (r)
exists a nbd of r such that 1 (r
0
) 1\r
0
A
Denition 52 1 is continuous at r if for every 0. o 0 such that
d (1 (r
0
) . 1 (r)) < \r A with d (r
0
. r) < o. or equivalently, such that
1 (1
c
(r) A) 1
.
(1 (r)) .
Continuity and Sequences
Denition 53 A sequence r
t
converges to r R
a
if for every 0 1 ()
such that d (r
t
. r) < whenever t 1 () .
Proposition 54 Suppose 1 : A ) and r A. 1 is continuous at r if and
only if 1 (r
t
) 1 (r) for every sequence r
t
of points in A that converges
to r.
Proof. Suppose 1 is continuous at r and let r
t
be a sequence in A that
converges to r. Let 0 be given. Then there exists a o 0 such that
d (1 (r
0
) . 1 (r)) < whenever r
0
1
c
(r) A. Because r
t
r. there exists
a number 1 such that d (r
t
. r) < o for all t 1. But then r
t
1
c
(r) A
and so d (1 (r
t
) . 1 (r)) < for all t 1. In other words, 1 (r
t
) converges to
1 (r) .
A characterization of Continuity
31
Proposition 55 Suppose 1 : R
a
R
n
. Then, the following are equivalent;
(a) 1 is continuous
(b) The pre-image of every open set is open
(c) The pre-image of every closed set is closed.
Bad news!
OBS! Openness/ closedness are not generally preserved under continuous
mappings
Example 56 1 : R R dened by 1 (r) = 1\r.
Good news!!
The properties of compactness and connectedness are always preserved
under continuous mappings.
This is so great news that it warrants being stated as a theorem.
Theorem 57 Suppose 1 : R
a
R
n
is continuous. If ( R
a
is compact,
then so is 1 (() R
n
. If 1 R
a
is connected, then so is 1 (1) R
n
.
Weierstrass Maximum Theorem
Let : = 1. so that 1 is a real valued function. If A R
a
is non-empty
and compact, then so is \ = 1 (A) . In particular, since \ is bounded, it has
an inmum
0
and a supremum
1
. Moreover, because \ is closed,
0
.
1
\.
Theorem 58 (Weierstrass Maximum Theorem) If A R
a
is non-
empty and compact and 1 : A R is continuous, then 1 (r

) = sup
a2A
1 (r)
for at least one r

A.
Theorem 59 Weierstrass Maximum Theorem (general). Let 1 : A
R be continuous, A is a non-empty and compact subset of R
a
. Then there
exists vectors r

, r A such that:
1 ( r) _ 1 (r) _ 1 (r

) \r A.
32
Proof. In class.
Let us revisit our microeconomic maximization program:
max
a2A(o)
1 (r. c) (1)
What do we need on order for our program to have a solution?
(i) A (c) to be non-empty and compact
(ii) 1 (r. c) is continuous in r
Under these conditions, A

(c) is of necessity compact.

it is the pre-image of a closed set, namely the singleton set that contains
1 (r

)
It is a subset of a compact set, A (c) .
To summarize:
Proposition 60 If the opportunity set A (c) in [M] is non-empty and com-
pact and the maximand 1 (r. c) is continuous in r, then the solution set
A

(c) = arg max

a2A(o)
1 (r. c) is non-empty and compact.
Exercise 61 Consider a continuous function 1 over the set A = (1. 2) .
Does a maximum exist for 1? What then can you conclude about Weierstrass
Maximum Theorem?
Lets revisit Chapter 3
Observe that if A (c) R
a
is convex and 1 (r. c) is quasi-concave (w.r.t.
r), then A

(c) = arg max

a2A(o)
1 (r. c) is convex (though possibly empty).
This follows from the fact that A

(c) is either empty (and hence con-

vex) or it is the intersection of two convex sets, the upper contour set
and the opportunity set.
33
If A (c) R
a
is convex and 1 (r. c) is strictly quasi-concave (w.r.t. r),
then A

(c) has at most one element (OBS! it can still be empty! )

uniqueness of solution.
THE PEAK
Combining existence and uniqueness results
Theorem 62 If A (c) R
a
is convex, non-empty and compact and 1 (r. c)
is strictly quasi-concave and continuous in r. then the set A

(c) = arg max

a2A(o)
1 (r. c)
is a non-empty singleton set. That is, a unique solution exists for program
[`].
A recap
From Lecture 1, we had the following:
Given program [`], our task is to address the following:
Q1: Does a solution exist?
Q2: If it exists, is it unique?
Q3: How can we nd a solution/ characterize it?
Q4: How does solution depend on environment, c?
Q5: How does the achieved value depend on c?
We have managed to answer Q1 and Q2. In eect we have done the
dicult bit. We next try to address Q3-Q5.
34
7 SOME USEFUL (MATHEMATICAL) RESULTS
7.1 Lagrange theorem; Kuhn-Tucker theorem, Enve-
lope theorem
7.1.1 Partial derivatives and directional derivatives
Let n = 1 (r
1
. .... r
a
) . The partial derivative of 1 w.r.t. r
j
is dened as:
1 (r
1
. .... r
a
)
r
j
= lim
I!0
1 (r
1
. .... r
j
+ /. .... r
a
) 1 (r
1
. .... r
a
)
/
.
Exactly the same way we dene the derivative of a function of one vari-
able!
The partial derivative,
1 (r
1
. .... r
a
)
r
j
. measures the rate of change of
1 (r
1
. .... r
a
) in the direction of the r
j
axis (here we are holding all the other
r
;
. , = i constant).
Example 63 1 : R
2
R dened by 1 (r) =

r
1
r
2
for all r R
2
+
and
1 (r) = 0 otherwise. 1
0
1
(r
1
r
2
) exists at any point r
0
R
2
++
. Note that rst
(second) partial derivative does not exist along the r
2
cri: (r
1
cri:),
while the rst partial derivative is zero on the r
1
cri: and the second is
zero on the r
2
cri: (the function is zero along the axes).
Any dierentiable function 1 : R
a
R has : partial derivatives. The
converse however is not true. A function can have : partial derivatives at r
0
without being dierentiable at that point. Why and How?
Reason: Partial derivatives are directional derivatives along the axes.
Thus, in order for partial derivatives to exist, it suces that the function has
a well dened slope in the direction of each coordinate axis, while it need not
be well dened in other directions.
35
Example 64 1 : R
2
R dened by 1 (r) = 1 for all r such that r
1
r
2
= 0
and 1 (r) = 0 for all other r. Note that 1 takes the value 1 along the axes
and otherwise its vale is zero. In particular, the function is not continuous at
r = (0. 0) . and thus is not dierentiable at that point. However, its partials
at that point are well dened (= 0).
Proposition 65 If all partial derivatives 1
0
j
(r) =
1 (r)
r
j
. for i = 1. .... :
exist for all r in some neighbourhood of r
0
. and if all partial derivatives are
continuous in r at r = r
0
. then 1 is dierentiable at r
0
.
What about the rate of change of 1 in other directions?
Fix r
0
= (r
0
1
. .... r
0
a
) and consider the rate of change of 1 as we move away
from r
0
in the direction of . = (.
1
. .... .
a
) . Dene a directional function o by:
o (t) = 1

r
0
+ t.

; t R.
What happens to the function o as t increases? Use the chain rule to get:
o
0
(t) =
a

j=1
1 (r
0
+ t.)
r
j
.
(r
0
+ t.)
t
=
a

j=1
1 (r
0
+ t.)
r
j
.
j
Evaluating at t = 0 yields
o
0
(0) =
a

j=1
1 (r
0
)
r
j
.
j
(2)
This is the directional derivative of 1 at r
0
in the direction ..
The vector of partial derivatives

1 (r
0
)
r
1
. ....
1 (r
0
)
r
a

is called the gra-

dient of 1 at r
0
and is denoted by \1 (r
0
) . This vector (\1 (r
0
)) points in
the direction of steepest ascent of 1 at r
0
. Thus, from (2) above we can write
o
0
(0) = \1

r
0

..
36
Observe that
1 (r
1
. .... r
a
)
r
j
is a function of : variables. One can easily de-
rive the second order partials of 1 (provided
1 (r
1
. .... r
a
)
r
j
is dierentiable).
Properties of the gradient:
If \1 (r) = o (why \1 (r) = o), then:
1. \1 (r) is orthogonal to the level surface 1 (r
1
. .... r
a
) = c (level curve
in R
2
).
2. \1 (r) points in the direction of maximal increase of 1 (r
1
. .... r
a
) .
7.1.2 Constrained Optimization (One constraint): Lagrange Method
Consider the problem:
max
a2A
1 (r)
where A R and 1 : R
a
R is dierentiable. Suppose that (the constraint
set) A = r R
a
: o (r) _ 0 for a dierentiable function o : R
a
R such
that o (r) 0 for r i:t(A) and o (r) = 0 for all r A. Let A

denote
the (possibly empty) solution set.
Interior Solutions (unconstrained optimization) The constraint not
binding (i.e., constraint is slack).
Denition 66 The vector r

A is a local maximizer of 1 () if there is

an open neighbourhood of r

. A such that 1 (r

) _ 1 (r) \r . If
1 (r

) _ 1 (r) \r A (i.e., neighbourhood equal to the set A), then we say

that r

is a global maximizer of 1 () .[Local and global minimizer are dened

analogously]
Proposition 67 Suppose that 1 is dierentiable. If r

is an interior
point of A. then \1 (r

) = o.
Put dierently, r

must be a critical point of 1. If not, then we must

have that
1 (r

1
. .... r

a
)
r
j
= 0 for some i. That is, a small movement in the
37
direction of increasing r
j
or the opposite direction raises the function value.
But then r

.
Note that the F.O.Cs in the proposition above consists of : equations in
: unknowns, r

1
. .... r

a
.
OBS! The rst order conditions are necessary but not sucient for an
interior point to be a solution. Why not sucient?
Example 68 Let 1 : R R dened by 1 (r) = r
2
(r 1) . and let A =
[0. 2] . Find the solution to the maximization program?
r
2
(r 1)
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
-2
-1
0
1
2
3
4
5
6
x
y
Boundary Solutions More relevant case for microeconomics (agent faces
constraints). Recall that (the constraint set) A = r R
a
: o (r) _ 0 for a
dierentiable function o : R
a
R such that o (r) 0 for r i:t(A) and
o (r) = 0 for all r A.
38
Note that the gradient \o (r) at any point on the boundary of A is
orthogonal to the boundary (the zero level curve of o) and points inwards
from the boundary (remember o (r) 0 for r i:t(A)).
It follows that if a solution r

is a boundary of A and 1 is dierentiable

at r

. then \1 (r

) is either the zero vector (constraint not binding and

therefore r

is a critical point of 1) or \1 (r

) points in opposite direction

to the gradient \o (r

)
In other words, \1 (r

) should be some non-positive scalar of the gradient

\o (r

) at r

.
1
Theorem 69 (Lagranges Theorem) Suppose 1 : R
a
R and o : R
a

R are continuously dierentiable, and A = r R

a
: o (r) _ 0 . If r

. o (r

) = 0 and \o (r

) = o. then \ R
+
such that \1 (r

)+\\o (r

) =
o.
It is customary to write the rst order conditions as:
\1 (r

) + \\o (r

) = o (3)
o (r

) = 0 (4)
consisting of : + 1 equations in : + 1 unknowns, r
1
. .... r
a
. \.
In fact, the rst order conditions can be written as:
L(r

. \

)
r
j
= 0; i = 1. .... :
L(r

. \

)
\
= 0.
L : R
a+1
R is dened by
L(r. \) = 1 (r) + \o (r)
is the Lagrangian function.
1
Caveat: This point depends on the denition of the set X: If the set X is dened so
that g (x) _ 0; then \f (x

) should be some non-negative scalar of the gradient \g (x

)
at x

:
39
A necessary condition for a boundary point r R
a
to be a solution is
that (r. \) R
a+1
is a critical point of the Lagrangian for some \ R
+
.
OBS! The : equations Lr
j
= 0; i = 1. ...: together are equivalent to
\1 (r

) + \\o (r

) = o while L\ = 0 is equivalent to o (r

) = 0.
The scalar \ R
+
is called the Lagrange multiplier.
Whats the condition \o (r

) = o about?
This condition is known as the constraint qualication at r

. In order that
\ exist, it is necessary that the gradient \o (r

) at r

is non-zero. Note that

when the constraint is binding (o (r

) = 0), r

is not necessarily a critical

point of 1. Hence, gradient \1 (r

) need not be zero at r

(i.e., \1 (r

) = o).
But then, if \o (r

) = o. there is no scalar \ such that (3) holds!

Let A
CQ
denote the set of all choice variables satisfying the constraint
qualication. Then
A
CQ
= r A : \o (r) = o .
Recipe for solving Lagrangian problems
Consider the problem:
max(min)1 (r
1
. r
2
) s.t. o (r
1
. r
2
) = c
Step 1. Write down the Lagrangian function
L(r
1
. r
2
. \) = 1 (r
1
. r
2
) \(o (r
1
. r
2
) c)
Step 2. Take partials of L(r
1
. r
2
. \) w.r.t. r
1
. r
2
and \ and equate them
to zero.
Step 3. Solve the three rst order conditions for r
1
. r
2
and \.
Example 70 A rm uses inputs 1 and 1 of capital and labor, respec-
tively, to produce a single output ( according to the production function
( = 1 (1. 1) = 1
1
2
1
1
4
. The prices of capital and labour are : and n re-
spectively.
40
Find the cost minimizing inputs of 1 and 1 and also the minimum cost
(, as functions of :, n and (.
This generalizes straight-forwardly to the case of several variables and
several constraints (see for instance, MWG. Section MK!)
7.1.3 Nonlinear Programing
Optimization subject to inequality constraints.
Consider again the problem:
max
a2A
1 (r)
where A R and 1 : R
a
R is dierentiable. Suppose that (the constraint
set) A = r R
a
: o (r) _ 0 for a dierentiable function o : R
a
R such
that o (r) 0 for r i:t(A) and o (r) = 0 for all r A. Let A

denote
the (possibly empty) solution set.
For any r A. let
1 (r) = i 1 : o
j
(r) = 0
and let
A
CQ
= r A : \o
j
(r) : i 1 (r) is linearly independent
Observe that we worry only about those constraints that bind (Why??).
The requirement that the subset of gradients \o
j
(r) : i 1 (r) be lin-
early independent is known as the constraint qualication at r.
If 1 (r) = O, that is, all constraints are met with strict inequality, then
the constraint qualication is automatically met (no gradients to be tested!).
Theorem 71 (Kuhn-Tucker). If r

. then there exists scalars j. \

1
. .... \
n
.
not all zero such that
j\1 (r

) +
n

j=1
\
j
\o
j
(r

) = o
\
j
o
j
(r

) = 0\i 1
. If r

A
CQ
. then j can be taken to be 1 and all \
j
_ 0.
41
Recipe for solving non-linear problems Consider the problem:
max(min)1 (r
1
. r
2
) s.t. o (r
1
. r
2
) _ 0 (5)
Step 1. Write down the Lagrangian function
L(r
1
. r
2
. \) = 1 (r
1
. r
2
) + \(o (r
1
. r
2
)) (6)
Step 2. Take partials of L(r
1
. r
2
. \) w.r.t. r
1
. r
2
and equate them to
zero.
L
1
= 1
0
1
(r
1
. r
2
) + \o
0
1
(r
1
. r
2
) = 0 (7)
L
2
= 1
0
2
(r
1
. r
2
) + \o
0
2
(r
1
. r
2
) = 0 (8)
Step 3. Introduce complimentary slackness condition
\ _ 0 (= 0 if o (r
1
. r
2
) 0) ; or \o (r
1
. r
2
) = 0 (9)
Step 4: Require (r
1
. r
2
) to satisfy the constraint.
o (r
1
. r
2
) _ 0. (10)
Steps (7)-(10) are generally called the Kuhn-Tucker conditions. These
are necessary conditions for the solution of problem (5) (they are generally
not sucient).
Under what conditions will the rst order necessary conditions also be
sucient for an optimum to problem (5)?
What we pick out from the recipe is a saddle point of the Lagrangian
(r

1
. r

2
. \

). L(r
1
. r
2
. \) is maximized in r
1
and r
2
while it is minimized
in \.
Recipe for solving non-linear problems with non-negativity con-
straints Consider the problem:
max 1 (r
1
. .... r
a
) s.t.

o
1
(r
1
. .... r
a
) _ 0
............ r
1
_ 0. .... r
a
_ 0
o
n
(r
1
. .... r
a
) _ 0
(11)
42
The Kuhn-Tucker necessary conditions are:
1 (x)
r
j
+
n

;=1
\
;
o (x)
r
j
_ 0 (= 0 if r
j
0) ; i = 1. .... :
\
;
_ 0 (= 0 if o
;
(x) 0) ; , = 1. .... :
or, using vector notation:
\1 (x) +
n

;=1
\
;
\o (x) _ 0 and x

\1 (x) +
n

;=1
\
;
\o (x)

= 0
\
;
_ 0 and \
;
o
;
(x) = 0 \, 1 (r) .
The second expression in each line is the complimentary slackness condi-
tion.
Exercise 72 A single output rm produces output using nonnegative amounts
of inputs .
1
and .
2
according to the production function 1 (.
1
. .
2
) = .
2
1
+ .
2
2
.
a. Set up the rms cost minimization problem. [2]
b. Dene conditional factor demands. [2]
c. Using appropriate techniques, derive the rms conditional factor de-
mand. What is the rms minimized cost, c (n. )? [13]
d. What is the economic interpretation of \ in this case? (Support your
answer algebraically!!) [3]
Exercise 73 max
a
1
.a
2
1 (r
1
. r
2
) = r
2
1
+ r
2
2
+ r
2
1 s.t. o (r
1
. r
2
) _ 0. where
o (r
1
. r
2
) = r
2
1
r
2
2
+ 1.
Exercise 74 max
a
1
.a
2
n(r) = r
1
r
2
subject to

3c
2
r
2
1
r
2
_ 0
r
1
_ 0
r
2
_ 0
. Argue for
the use of the Lagrange Theorem (method) as opposed to the Kuhn-Tucker
Theorem in this problem (that is, explain why we dont need to invoke the
Kuhn-Tucker theorem). Solve the problem (using the Lagrange method). Ver-
ify that the constraint qualication is satised.
Recipe easily generalizes to the case of multiple inequality constraints as
well as non-negativity constraints (see for instance, MWG. Section MK!).
43
7.1.4 Envelope Theorem
Consider the maximization program:
(c) = max
a2A(o)
1 (r. c)
where A (c) R
a
. c R
I
and 1 : R
a
R
I
R.
Suppose you have computed the maximum value function, call it (c) and
it turns out that (c) is a continuous function of c. where c = (c
1.
.... c
I
) is the
environment.
2
You may then want to know what happens to the maximum
value, (c) as the environment changes. Do we need to redo the optimization
altogether to gure out the eect of a change in the environment?
If the solution set A

(c) is a singleton set and the unique solution is

a dierentiable function of the environment, then the Envelope Theorem
gives the answer!! Consider the case / = 1.i.e., the environment varies in
only one dimension. The treatment obviously diers depending on whether
the solution is interior or a boundary solution.
Interior solution As we saw above, if r

(c
0
) is an interior point
of A (c
0
) . then, assuming dierentiability, r

must be a critical point of 1

(here c
0
is the starting values of c. and thus is xed). That is, 1
0
j
(r

. c
0
) =
1 (r

. c
0
)
r
j
= 0\i. Suppose r

(c) is unique and dierentiable in c. Let

1 (r

. c
0
)
c
= 1
0
o
(r

(c
0
) . c
0
) .
By denition:

c
0

= 1

r

c
0

. c
0

.
Question: What happens to (c) if c moves slightly away from c
0
?
2
These properties of the value function are guaranteed by Berges Maximum Theorem.
We dont need to worry about it though!
44
Use the chain rule of dierentiation:

c
0

=
d1 (r

(c) . c)
dc
[
o=o
0
= 1
0
o

c
0

. c
0

+
a

j=1
1
0
j

c
0

. c
0

dr

j
(c
0
)
dc
= 1
0
o

c
0

. c
0

.
where we used the fact r

(c
0
) is a critical point of 1.
Observe that a small change in the environment, c aects the value
function, (c) in two ways; a direct eect via 1s dependence on c and an
indirect eect via the induced change in the vector r

(c) .
What the envelope theorem tells us is that this latter eect is zero, since
the original decision r

(c
0
) was optimal. In other words, in the neighbour-
hood of c
0
. r

is still optimal. Thus, small shifts in the solution point have

no rst order eects on the value function.
Boundary solutions Suppose r

(c) is a boundary point, for all c in

the neighbourhood of c
0
. By Lagrange Theorem,
1
0
j

. c
0

+ \o
0
j

. c
0

= 0; i = 1. ... : (12)
By hypothesis, r

(c) is a boundary point of A (c) for every c . so,

in particular, o (r

(c) . c) = 0. Since its an identity, we can dierentiate the

L.H.S. and the R.H.S. and equate the derivatives. Doing so we get:
do (r

(c) . c)
dc
[
o=o
0 = o
0
o

c
0

. c
0

+
a

j=1
o
0
j

c
0

. c
0

dr

j
(c
0
)
dc
= 0
This gives
o
0
o

c
0

. c
0

=
a

j=1
o
0
j

c
0

. c
0

dr

j
(c
0
)
dc
(13)
45
Now consider the value function: (c
0
) = 1 (r

(c
0
) . c
0
) . Dierentiating
with respect to c gives:

c
0

=
d1 (r

(c) . c)
dc
[
o=o
0
= 1
0
o

c
0

. c
0

+
a

j=1
1
0
j

c
0

. c
0

dr

j
(c
0
)
dc
= 1
0
o

c
0

. c
0

\
a

j=1
o
0
j

c
0

. c
0

dr

j
(c
0
)
dc
= 1
0
o

c
0

. c
0

+ \o
0
o

c
0

. c
0

=
L
c
o=o
0 .
where the rst equality follows from the denition of and the third equality
follows from (12) while the penultimate equality follows from (13).
Obs! In the special case when 1
0
o
(r

(c
0
) . c
0
) = 0 for all r and c (the
environment does not directly aect the evaluation function) and the con-
straint function o is of the form o (r. c) = c /(r) . for some dierentiable
function / : R
a
R. then A = r R
a
: c _ /(r) . and thus

0
(c) = \.
The Lagrangian multiplier \ then is the shadow price of the constraint
/(r) _ c. in the sense that a small increase in the constraining quantity c
0
results in an increase in the maximum value of 1 by the amount / = \/c.
In this sense, \ is the price, expressed in units of the evaluation function
1 that the economic agent would be willing to pay per unit for a marginal
relaxation of the constraint.
Theorem 75 (Envelope Theorem) Suppose r
0
is the unique solution when
the environment is c = c
0
. Under the dierentiability assumptions above:
(c
0
)
c
=
1 (r
0
. c
0
)
c
if r
0
i:tA

c
0

(c
0
)
c
=
1 (r
0
. c
0
)
c
+ \
0
o (r
0
. c
0
)
c
if r
0
A

c
0

46