EC 400 Notes For Class 1 PDF

Chapter 6
Vectors
6.1 What is a Vector?
For most purposes economists think of vectors as an array of real numbers
(r
1
, r
2
.....r
q
). The set of all : vectors is written as
q
, pronounced R n. You
have to distinguish between row and column vectors when doing matrix and
vector algebra. In this book all vectors are column vectors.
x =
3
E
E
C
r
1
r
2
:
r
q
4
F
F
D
.
The corresponding row vector is written as:
x
0
= (r
1
, r
2
.....r
q
) .
The vector x
0
is sometimes pronounced as "x prime". Pure mathematicians
work with a more abstract denition of a vector and a vector space. Physicists
think of vectors as things that have both size and direction, for example velocity
and force.
6.2 Vector Addition and Multiplication
6.2.1 Vector Addition
If x and y are two vectors in
q
x +y =
3
E
E
C
r
1
r
2
:
r
q
4
F
F
D
+
3
E
E
C
j
1
j
2
:
j
q
4
F
F
D
=
3
E
E
C
r
1
+ j
1
r
2
+ j
2
:
r
q
+ j
q
4
F
F
D
.
47
48 CHAPTER 6. VECTORS
0 x
y
x + y
Figure 6.1: Vector Addition
Figure 6.1 illustrates vector addition with the vectors x and y shown nose to
tail. The alternative is to show vector addition as a parallelogram as in Figure
6.2.
Vector addition is commutative, that is x +y = y +x. This is because
x +y =
3
E
E
E
E
C
r
1
+ j
1
r
2
+ j
2
.
.
r
q
+ j
q
4
F
F
F
F
D
=
3
E
E
E
E
C
j
1
+ r
1
j
2
+ r
2
.
.
j
q
+ r
q
4
F
F
F
F
D
= y +x
If x
q
and y
p
and : and : are dierent you cannot add x and y. In
mathematical language the sum of x and y is undened.
6.2.2 Scalar Multiplication
If / is a real number (called a scalar in this context)
/x = /
3
E
E
C
r
1
r
2
:
r
q
4
F
F
D
=
3
E
E
C
/r
1
/r
2
:
/r
q
4
F
F
D
= x/.
Figure 6.3 illustrates a vector x multiplied by 2, 1 and 2. Multiplying a
vector by a positive number keeps it pointing in the same direction but makes
it longer or shorter. Multiplying a vector by a negative number makes it point
in the opposite direction.
Scalar multiplication is distributive over vector addition, that is
6.2. VECTOR ADDITION AND MULTIPLICATION 49
0 x
y
x + y
Figure 6.2: Vector Addition Illustrated with a Parallelogram
0
x
- x
- 2x
2x
Figure 6.3: Multiplying a Vector by a Scalar
/(x +y) = /x + /y for all : vectors x and y.
To see why observe that
/ (x +y) = /
3
E
E
E
E
C
r
1
+ j
1
r
2
+ j
2
.
.
r
q
+ j
q
4
F
F
F
F
D
=
3
E
E
E
E
C
/ (r
1
+ j
1
)
/ (r
2
+ j
2
)
.
.
/ (r
q
+ j
q
)
4
F
F
F
F
D
= /
3
E
E
E
E
C
r
1
r
2
.
.
r
q
4
F
F
F
F
D
+ /
3
E
E
E
E
C
j
1
j
2
.
.
j
q
4
F
F
F
F
D
= /x+/y.
The denition of vector addition also implies that if / and / are scalars and x
a vector
(/ + /) x =/x + /x
that is scalar multiplication is distributive over scalar addition.
6.2.3 Inner product
The inner product of two vectors x and y in
q
is
x
0
y =
q
X
l=1
r
l
j
l
.
The inner product is sometime called the "scalar product" or "dot product"
and written as x y. The properties of the inner product are:
1. The inner product is commutative, that is
x
0
y = y
0
x
for all : vectors x and y. This is because x
0
y =
P
q
l=1
r
l
j
l
=
P
q
l=1
j
l
r
l
=
y
0
x.
2. If x and y are : vectors and / is a scalar
/(x
0
y) = (/x)
0
y = x
0
(/y)
because /(x
0
y) = / (
P
q
l=1
r
l
j
l
) =
P
q
l=1
(/r
l
)j
l
= (/x)
0
y =
P
q
l=1
r
l
(/j
l
) =
x
0
(/y) .
6.3. LENGTH AND NORM 51
3. If t, u, v and w are : vectors
t
0
(u +v) = (u +v)
0
t = t
0
u +t
0
v
because t
0
(u +v) = (u +v)
0
t =
P
q
l=1
t
l
(n
l
+
l
) =
P
q
l=1
t
l
n
l
+
P
q
l=1
t
l
l
=
t
0
u +t
0
v.
4. Also
(t +w)
0
(u +v) = t
0
u +w
0
u +t
0
v +w
0
v = u
0
t +u
0
w+v
0
t +v
0
w
because (t +w)
0
(u +v) =
P
q
l=1
(t
l
+ n
l
) (n
l
+
l
) =
P
q
l=1
(t
l
n
l
+ n
l
n
l
+ t
l
l
+ n
l
l
) .
5. Similarly If t, u, v and w are : vectors and a, /, c, d are scalars
(at+/w)
0
(cu+dv) = (at)
0
(cu+dv) + (/w)
0
(cu+dv)
= (at)
0
(cu) + (at)
0
(dv) +(/w)
0
(cu) +(/w)
0
(dv)
= act
0
u+adt
0
v+/cw
0
u+/dw
0
v. (6.1)
6.3 Length and Norm
6.3.1 Denition
For all : vectors x, x
0
x =
P
q
l=1
r
2
l
. As r
2
l
_ 0 for all r
l
and r
2
l
= 0 if and
only if r
l
= 0,
x
0
x _ 0 for all x and x
0
x = 0 if and only if x = 0
where 0 is an : vector with every element 0. Dene |x| as
|x| = (x
0
x)
1
2
.
so |x| _ 0 and |x| = 0 if and only if x = 0. Pythagoras Theorem implies
that in 2 and 3 dimensions |x| is the length of x. Pure mathematicians call
|x| the norm of x. It is also called the length of x.
6.3.2 Properties of the Length |x|
These are things you need to remember. The rst property follows directly from
the denition. The others are proved in sections 6.5 and 6.6 of this chapter.
1. If r is a scalar |rx| = [r[ |x| where [r[ is the absolute value of r, so [r[ = r
if r _ 0 and [r[ = r if r < 0.
2. x
0
y = |x| |y| cos 0 where 0 is the angle between x and y.
3. Cauchy-Schwarz inequality:
[x
0
y[ _ |x| |y| .
4. Triangle inequality
|x +y| _ |x| +|y|
|x y| _ |x| +|y| .
5. If x
0
y = 0, x ,= 0 and y ,= 0 the angle between x and y is 90
because
cos 90
= 0. The vectors x and y are said to be orthogonal.

6. If x
0
y = |x| |y|, x and y are parallel and point in the same direction
because cos 0 = 1.
7. If x
0
y = |x| |y|, x and y are parallel and point in opposite directions
because cos 180
= 1.
6.4 The Least Squares Problem
6.4.1 The Least Squares Problem With Vector Notation
You will become very familiar with least squares problems in econometrics. This
section of notes covers the simplest case. It also generates inequality 6.3 which
is an essential step on the way to the Cauchy-Schwarz inequality. The problem
here is nding the value of / that minimizes
1(/, x, y) =
W
X
w=1
(j
w
/r
w
)
2
.
You will come to think of this as the regression of j onto a single variable r
without an intercept. Suppose x and y are T vectors. Given the denition of
the norm |y /x|
1(/, x, y) =
W
X
w=1
(j
w
/r
w
)
2
= |y /x|
2
= (y /x)
0
(y /x)
Expanding the brackets using the result in equation 6.1 on inner products gives
1(/, x, y) = (y /x)
0
(y /x)
= y
0
y /x
0
y /y
0
x + /
2
x
0
x
= y
0
y 2/x
0
y + /
2
x
0
x
because x
0
y = x
0
y.
Assume that r
w
,= 0 for some t so x ,=0. This implies that x
0
x 0. Then
completing the square
1(/, x, y) = y
0
y2/x
0
y + /
2
x
0
x (6.2)
= x
0
x
/ (x
0
x)
1
(x
0
y)
2
+y
0
y(x
0
x)
1
(x
0
y)
2
_ y
0
y(x
0
x)
1
(x
0
y)
2
6.4. THE LEAST SQUARES PROBLEM 53
for all / and
1(/, x, y)= y
0
y(x
0
x)
1
(x
0
y)
2
if and only if / = (x
0
x)
1
(x
0
y). Thus 1(/, x, y) is minimized by setting
/ = (x
0
x)
1
(x
0
y)
and has a minimum value of
y
0
y(x
0
x)
1
(x
0
y)
2
.
Recall that 1(/, x, y) is a sum of squares, so 1(/, x, y) _0 for all / includ-
ing / = (x
0
x)
1
(x
0
y) at which point 1(/, x, y) =y
0
y(x
0
x)
1
(x
0
y)
2
. Thus
y
0
y _ (x
0
x)
1
(x
0
y)
2
. Recall that by assumption x ,= 0 so x
0
x 0. Multiply-
ing by x
0
x and rearranging gives
(x
0
y)
2
_ (x
0
x) (y
0
y) . (6.3)
6.4.2 The Least Squares Problem Without Vector Nota-
tion
You can also solve this simple least squares problem without using vectors. The
problem is to nd / that minimizes the sum of squares.
q
X
w=1
(j
w
/r
w
)
2
.
Expanding the brackets
q
X
w=1
(j
w
/r
w
)
2
=
q
X
w=1
j
2
w
2/j
w
r
w
+ /
2
r
2
w
=
q
X
w=1
j
2
w
2/
q
X
w=1
r
w
j
w
!
+ /
2
q
X
w=1
r
2
w
!
.
Assume that at least one of the r
0
w
: is not zero, so
P
q
w=1
r
2
w
0. Completing
the square
q
X
w=1
(j
w
/r
w
)
2
=
q
X
w=1
r
2
w
!
3
C
/
q
X
w=1
r
2
w
!
1
q
X
w=1
r
w
j
w
!
4
D
2
+
q
X
w=1
j
2
w

q
X
w=1
r
2
w
!
1
q
X
w=1
r
w
j
w
!
2
which is minimized by setting
/ =
q
X
w=1
r
2
w
!
1
q
X
w=1
r
w
j
w
!
= (x
0
x)
1
(x
0
y) .
and has a minimum value of
q
X
w=1
j
2
w

q
X
w=1
r
2
w
!
1
q
X
w=1
r
w
j
w
!
2
= y
0
y(x
0
x)
1
(x
0
y)
2
.
Notice that expressions like
P
q
w=1
r
w
j
w
take longer to write down and are harder
to work with than the corresponding vector expression x
0
y. The algebra
becomes even worse if you are working with the general least squares problem
of minimizing
q
X
w=1
j
w

n
X
n=1
r
wn
/
n
!
2
.
If you are to survive your econometrics course you must make the switch from
the notation
P
q
w=1
r
w
j
w
to vector notation x
0
y as rapidly as possible.
6.5 Inequalities for Vectors
6.5.1 The Cauchy-Schwarz Inequality
The Cauchy-Schwarz inequality says that for any vectors x and y with the same
number of elements
[x
0
y[ _|x| |y| . (6.4)
Here |x| and |y| are the norm or length of x and y, so |x|
2
= x
0
x and
|y|
2
= y
0
y. The expression [x
0
y[ is the absolute value of x
0
y. (The absolute
value of a number j is j if j _ 0 and j if j < 0. Note that this implies that
j
2
= [j[
2
)
The Cauchy-Schwarz inequality is derived from inequality 6.3 which states
that (x
0
y)
2
_ (x
0
x) (y
0
y). From the denitions of absolute value and norm
[x
0
y[
2
= (x
0
y)
2
, (x
0
x) = |x|
2
and y
0
y =|y|
2
so the inequality (x
0
y)
2
_
(x
0
x) (y
0
y) can be written as
[x
0
y[
2
_|x|
2
|y|
2
(6.5)
which implies the Cauchy-Schwarz inequality [x
0
y[ _|x| |y| . Inequality 6.3
was proved under the assumption that x ,= 0, but as both sides of the Cauchy-
Schwarz inequality are zero when x =0 it also holds when x =0.
6.5. INEQUALITIES FOR VECTORS 55
x
y
x + y
Figure 6.4:
6.5.2 The Triangle Inequality
The triangle inequality states that
|x +y| _ |x| +|y| .
Geometrically you can think of x +y, x and y as three sides of a triangle. The
inequality simply states that one side of a triangle cannot be longer than the
sum of the other two sides, as illustrated in Figure 6.4.
The triangle inequality is a direct consequence of the Cauchy-Schwarz in-
equality. From the denition of |x +y|
|x +y|
2
= (x +y)
0
(x +y) = x
0
x +2x
0
y +y
0
y
T
O bx x
C
y
B
Figure 6.5:
From the Cauchy-Schwarz inequality [x
0
y[ _|x| |y|. As . _ [.[ for any num-
ber . this implies that x
0
y _|x| |y| so
|x +y|
2
= x
0
x +2x
0
y +y
0
y
_ |x|
2
+2|x| |y| +|y|
2
= (|x| +|y|)
2
.
As |x +y| , |x| and |y| are all non negative this implies the triangle inequality
|x +y| _ |x| + |y| . Replacing y by y and noting that |y| = |y| the
triangle inequality implies that
|x y| _ |x| +|y| .
6.6 The Angle Between Two Vectors
6.6.1 Showing That x
0
y = |x| |y| cos
Think of x and y as non zero vectors and / as a scalar. In Figure 6.5 /x is
a scalar multiple of the vector x. The least squares problem is nding / to
minimize |y/x| which is the distance between the point C at the end of the
vector y and the horizontal straight line from the origin 0 that goes through
the end of the vector x. Geometrically you nd the point /x on the line 0x that
6.6. THE ANGLE BETWEEN TWO VECTORS 57
0 90 180 270 360
T
cosT
1
- 1
Figure 6.6: The Graph of cos 0
minimizes the length of y/x by drawing the line from C to 1 that is at 90
to the vector x..

As / = (x
0
x)
1
(x
0
y) solves the least squares minimization problem the
length of the line O1 is the length of the vector /x where / = (x
0
x)
1
(x
0
y) .
Think about the case where / is positive as shown in Figure 6.5. As |x| =
(x
0
x)
1
2
the length of O1 is |x| / = |x| (x
0
x)
1
(x
0
y) = (x
0
x)
1
2
(x
0
y) . Ele-
mentary trigonometry and Figure 6.5 imply that if 0 is the angle between the
vectors x and y
cos 0 =
01
0C
=
(x
0
x)
1
2
(x
0
y)
|y|
=
x
0
y
|x| |y|
(6.6)
where cos 0 is the cosine of the angle 0. Equation 6.6 implies that
x
0
y =|x| |y| cos 0.
In words this says that the inner product of the vectors x and y is the product
of their lengths and the cosine of the angle between the two vectors. The
relationship also holds when / is negative, so the angle between the two vectors
is more than 90
and, as the graph of cos 0 in Figure 6.6 shows, cos 0 < 0.

One of the properties of the cosine is that for all 0 with 0
_ 0 _ 360
cos 0 = cos (360 0) .

This has the useful implication that it does not matter which way round you
think of the angle between the two vectors, as shown in Figure 6.7 . If you
think of the angle between the two vectors as the smaller of the two angles
between the two vectors, so it lies between 0
and 180
. The graph of the

function cos 0 in Figure 6.6 shows that
0 < cos 0 < 1 if 0 < 0 < 90
T
360 - T
x
y
Figure 6.7:
and
1 < cos 0 < 0 if 90
< 0 < 180
which gives a result su!ciently useful to be stated formally.

Proposition 1 x
0
y 0 if the angle between x and y is between 0 and
90
.
x
0
y < 0 if the angle between x and y is between 90
and 180
.
6.6.2 Orthogonal Vectors
Suppose x and y are non zero vectors, so |x| 0 and |y| 0. Suppose
also that x
0
y = 0. This implies that x
0
y = |x| |y| cos 0 = 0 where 0 is the
angle between the vectors x and y. As |x| 0 and |y| 0 this implies that
cos 0 = 0. Given the graph of cos 0 this implies that 0 = 90
or 0 = 270
.
As Figure 6.8 shows you can measure the angle between x and y as 90
or 270
. It is convenient to choose the smaller angle 90
. In mathematical
language the vectors x and y are said to be orthogonal if x
0
y = 0 so the vectors
are at an angle of 90
to each other. In everyday English an angle of 90
is
called a "right angle".
6.6.3 Parallel vectors
If
x
0
y = |x| |y| cos 0 = |x| |y|
then cos 0 = 1 so 0 = 0. The angle between x and y is 0
. The two vectors are

parallel and point in the same direction.
If
x
0
y = |x| |y| cos 0 = |x| |y|
6.6. THE ANGLE BETWEEN TWO VECTORS 59
90
270
x
y
Figure 6.8:
then cos 0 = 1 so 0 = 180
. The two vectors are parallel and point in opposite

directions.
6.7 Vectors, Lines, Planes and Hyperplanes
6.7.1 Vectors and Lines in
2
The objective of this section is to introduce the idea of a hyperplane, which
is a generalization of a line in two dimensional space, and a plane in three
dimensional space. Hyperplanes are important for an intuitive understanding
of partial derivatives, and also for the theory of concavity and convexity that
underlies optimization theory.
One of microeconomics favorite equations is the budget line; with two
goods r
1
and r
2
, with prices j
1
and j
2
this is the set of points satisfying
j
1
r
1
+ j
2
r
2
= : (6.7)
where : is the amount the consumer has to spend. This is straight line; if
j
2
,= 0 equation 6.7 can be written as
r
2
=
:
j
2
j
1
j
2
r
1
so the slope of the budget line is
s
1
s2
. If j
2
= 0 the line is vertical. In vector
notation equation 6.7 can be written as
p
0
x = :.
Another way at looking at this equation is to choose any point x
0
on the line
so p
0
x
0
=: and write the equation as p
0
x = p
0
x
0
, or rearranging
p
0
(x x
0
) = 0.
Recall that the inner product p
0
(x x
0
) = |p| |x x
0
| cos 0 where 0 is the
angle between the two vectors p and x x
0
. Thus as cos 90
= 0, if the inner
product is 0, the angle is 90
and the two vectors are said to be "orthogonal".

The line, that is the set of points satisfying p
0
(x x
0
), is precisely the set of
points for which x x
0
is orthogonal to p. This is illustrated in Figure 6.9.
The vector p orthogonal to the line is called the normal vector.
6.7.2 Vectors and Planes in
3
With three goods the budget equation becomes
j
1
r
1
+ j
2
r
2
+ j
3
r
3
= :.
The vector notation appears unchanged as p
0
(x x
0
) = 0, but now you have
to think of the vectors as living in three dimensional space
3
rather than two
6.7. VECTORS, LINES, PLANES AND HYPERPLANES 61
x
0
x
1
x
2
p
x - x
0
p( x - x
0
) = 0
Figure 6.9: The vector p is orthogonal to the line p
0
(x x
0
) = 0.
dimensional space
2
. Geometrically, in three dimensional space, given a xed
vector p, the set of vectors orthogonal to p is a plane. The vector p is again
called the normal vector to the plane.
You can perhaps imagine the plane and its normal vector p by thinking of
your pen as p. If you put one end of the pen on the table top, and point the pen
vertically upwards, all the vectors in the plane of the table top are horizontal,
so are orthogonal to the pen. It is possible to lift up a corner of the table so
the table top is no longer horizontal, whilst keeping the angle between pen and
table top xed at 90
, so the vector is still orthogonal to the plane. (Take your

coee mug o the table before trying this.)
6.7.3 Vectors and Hyperplanes in
q
With : goods the budget equation becomes
j
1
r
1
+ j
2
r
2
+ ..... + j
q
r
q
= :.
Again the budget equation can be written as p
0
(x x
0
) = 0, but p and x x
0
are now : vectors. A hyperplane is dened as follows:
Denition 2 A hyperplane in
q
is a set of the form
x : x
q
, p
0
(x x
0
) = 0
where p is a non-zero vector in
q
, and x
0
is a vector in
q
.
In two dimensional space a hyperplane is a straight line, and in three di-
mensional space a hyperplane is a plane. For any : all the vectors x x
0
are
orthogonal to p, and p is still called the normal vector.
6.8 First Thoughts on Constrained Maximiza-
tion
This section is not part of the LSE Revision Maths course.
Constrained maximization problems are central to economics. This section
works with a very simple problem, that of maximizing q
0
x subject to the con-
straint that p
0
x _ c. As this is the rst constrained maximization problem in
this book I will give a formal denition.
Denition 3 If p and q are : vectors the element x
0
of
q
solves the prob-
lem of maximizing q
0
x on
q
subject to the constraint that p
0
x _ c
if
p
0
x
0
_ c
and q
0
x
0
_ q
0
x for all elements x of
q
satisfying p
0
x _ c.
The results that I am about to derive are almost obvious, and not interesting
in themselves, but the insight gained from thinking about these results are very
helpful once you come to think about Lagrangians and partial derivatives. The
rst result is
Proposition 4 If p is a non zero vectors in
q
, q is a vector in
q
, there is
a real number ` _ 0 such that
q = `p
and there is a vector x
0
in
q
such that
p
0
x
0
= c
then x
0
solves the problem of maximizing q
0
x on
q
subject to the constraint
that p
0
x _ c.
The result is pretty obvious from Figure 6.10. If p =`q where ` 0, and
p
0
x
0
= c, any x that gives a higher value of the objective q
0
x than x
0
, must
also give a higher value of p
0
x than x
0
. As p
0
x
0
= c this implies that p
0
x c,
so x does not satisfy the constraint. The formal proof is:
Proof. Suppose that there is a number ` _ 0 and a vector x
0
satisfying the
conditions of the proposition. Let x be any element of
q
satisfying the
constraint p
0
x _ c. As p
0
x _ c and p
0
x
0
= c, p
0
x _ p
0
x
0
. As ` _ 0 this
implies that
(`p)
0
x = `p
0
x _ `p
0
x
0
= (`p)
0
x
0
so as q = `p
q
0
x _ q
0
x
0
.
Thus I have shown that if p
0
x _ c then q
0
x _ q
0
x
0
so x
0
solves the constrained
maximization problem.
The other result is:
6.8. FIRST THOUGHTS ON CONSTRAINED MAXIMIZATION 63
x
0
x
1
x
2
p = Oq
x - x
0
p( x - x
0
) = 0
q
Figure 6.10:
q
, q is a vector in
q
, there is
no real number ` _ 0 such that q = `p, then for any : vector x
0
there is an :
vector x
1
such that
p
0
x
1
< p
0
x
0
and
qx
1
q
0
x
0
.
Figure 6.11 illustrates this result. The trick is to nd a vector x
1
with the
property that the angle between x
1
x
0
and q is less than 90
and the angle

between x
1
x
0
and p is more than 90
, so from Proposition 1 p
0
(x
1
x
0
) < 0
and q(x
1
x
0
) 0. The intuition is obvious from the diagram, but the
result is so important that it merits a formal proof.
Proof. Let
r = q (p
0
p)
1
(p
0
q) p (6.8)
and note that
p
0
r = 0. (6.9)
so as shown in Figure 6.12 r is orthogonal to p. Thus from equations 6.8 and
6.9 r
0
r = r
0
q (p
0
p)
1
(p
0
q) r
0
p = r
0
q so
r
0
r = r
0
q = q
0
r. (6.10)
Let
x
1
= x
0
+r p
where j 0. Then
p
0
x
1
= p
0
x
0
+p
0
r p
0
p = p
0
x
0
p
0
p (6.11)
because from equation 6.9 p
0
r = 0. By assumption j 0 and p ,= 0, so p
0
p 0.
Thus from equation 6.11
p
0
(x
1
x
0
) < 0. (6.12)
x
1
x
2
p
q
p( x - x
0
) = 0
q( x - x
0
) = 0
x
1
0
x
0
Figure 6.11:
x
1
x
2
p
q
p( x - x
0
) = 0
q( x - x
0
) = 0
r
r
x
1
0
x
0
q r = Dp
-Pp
Figure 6.12:
6.8. FIRST THOUGHTS ON CONSTRAINED MAXIMIZATION 65
Also
q
0
x
1
= q
0
x
0
+q
0
r q
0
p = q
0
x
0
+r
0
r q
0
p
because from equation 6.10 q
0
r = r
0
r. Thus
q
0
(x
1
x
0
) = r
0
r q
0
p. (6.13)
As j 0 the right hand side of equation 6.13 can be made strictly positive if
either r ,= 0 so r
0
r 0 and j is su!ciently small, or r = 0 and q
0
p < 0. In
either case
q
0
(x
1
x
0
) 0. (6.14)
If r = 0 and q
0
p = p
0
q _ 0 equation 6.8 implies that
q =`p
where ` = (p
0
p)
1
(p
0
q). As p
0
p 0 and p
0
q _ 0, ` _ 0. Thus either there
is a vector x
1
satisfying conditions 6.12 and 6.14 or there is a number ` _ 0
such that q =`p.
Proposition 5 implies that if p ,= 0, p
0
x
0
= c, and there is no number
` _ 0 such that q = `p, then x
0
cannot solve the problem of maximizing q
0
x
subject to the constraint p
0
x _ c, because p
0
x
1
< p
0
x
0
= c and q
0
x
1
q
0
x
0
.
Proposition 4 states that if p
0
x
0
= c and there is a real number ` _ 0 such that
q = `p then x
0
solves the constrained maximization problem. Taken together
these results imply that
Proposition 6 If p and x
0
are : vectors, p ,= 0 and p
0
x
0
= c then x
0
solves
the problem of maximizing q
0
x subject to p
0
x _ c if and only if there is a number
` _ 0 such that q = `p.
The number ` is of course a Lagrange multiplier.
Chapter 7
Open Sets, Closed Sets and
Continuous Functions
7.1 Why This Matters to Economists
The mathematics in this chapter matters to economists for several reasons.
There is a big result, that a function that is continuous on a closed and bounded
subset of
q
has a maximum and a minimum, which is important because maxi-
mization and minimization crop up very frequently in economics. You will meet
the mathematics discussed in this chapter very early in your microeconomics
course in the form of the continuity assumptions for consumer preferences and
its implication, the existence of a continuous utility functions that captures the
preferences. Continuity is also central to theorems on the existence of general
competitive equilibrium.
Sections 1-4 are very useful. The rest of the chapter is harder going and less
widely used in economics. Section 9 is the background you need to understand
the material on continuity in consumer theory. This is quite hard; if you
are struggling it would be reasonable to skip this and accept that this bit of
consumer theory will not mean much to you.
7.2 Vector Length and Open Balls
Remember from the previous chapter that in
q
we have a concept of the length
or norm of a vector
|x| =
q
X
l=1
r
2
l
!1
2
.
In one dimensional space : = 1, and |r| = [r[ , the absolute value of r. In two
and three dimensional space Pythagoras Theorem implies that this is indeed
67
68CHAPTER7. OPENSETS, CLOSEDSETS ANDCONTINUOUS FUNCTIONS
the length of the vector. The norm has the property that
|x| _ 0 for all x (7.1)
|x| = 0 if and only if x = 0. (7.2)
The distance between two vectors x and x
0
in
q
is dened as
|x x
0
| =
q
X
l=1
(r
l
r
0l
)
2
!1
2
.
In one dimensional space this reduces to the absolute value [r r
0
[ which is the
distance between the numbers r and r
0
. In two and three dimensional space
Pythagoras Theorem implies that |x x
0
| is the distance between x and x
0
.
I therefore refer to |x x
0
| as distance, even when : 3. Properties 7.1
and 7.2 imply that
|x x
0
| _ 0 for all x
|x x
0
| = 0 if and only if x = x
0
.
Now think about the set of points that are closer to x
0
than some strictly
positive number c. In one dimensional space x
0
is a number and this is the
open interval (r
0
c, r
0
+ c) . In two dimensional space it is a circle centred
on x
0
with radius c. In three dimensional space this is a sphere or ball. In
fact we use the term ball regardless of the dimension of the space, using the
following denition.
Denition 7 If c is a strictly positive number and x
0
is an element of
q
the
open ball 1(x
0
, c) centred on x
0
with radius c is the set of points that are
closer than c to x
0
, that is
1 (x
0
, c) = x : x
q
, |x x
0
| < c .
Note that the inequality in this denition < is strict. I have used the
word "open" many times before when writing about "open intervals" and I
will explain shortly what the word "open" means in general. In order to do
this I will introduce some more terms that mathematicians have borrowed from
elsewhere.
7.3 Boundaries
Imagine yourself standing on the equator. Take a tiny step to the north; you
are in the northern hemisphere. Take a tiny step to the south; you are in the
southern hemisphere. The equator is the boundary of the two hemispheres.
Mathematicians have borrowed the term boundary from geographers and use
it much the same sense, applying it to the : dimensional space of real number
q
.
7.4. OPEN AND CLOSED SETS AND BOUNDARIES 69
Denition 8 A point x
0
in
q
is an element of the boundary of a subset o
of
q
if for any number c 0 the open ball 1 (x
0
, c) contains both points that
are elements of o and points that are in the complement o
F
of o.
You may recall that the denition of complement:
Denition 9 The complement o
F
of a subset o of
q
is the set of elements
of
q
that are not in o, that is
o
F
= x : x
q
, x , o .
The fact that the radius c of the open ball 1 (x
0
, ) can be a very small posi-
tive number captures the idea that a step to the north, however tiny, moves you
from the equator to the northern hemisphere. The denitions of the boundary
and the complement of a set immediately imply a result that is useful later.
Proposition 10 The boundary of a set o and the boundary of its complement
o
F
are the same.
The idea of a boundary may become clearer with an example.
Example 11 The boundary of the set
o =
(r
1
, r
2
) : (r
1
, r
2
)
2
, r
1
r
2
is the straight line r

1
= r
2
.
This example is illustrated in Figure 7.1. Any open ball such as centered
on a point on the line r
1
= r
2
has points that are in o and points that are not
in o, so lies in the boundary of o. However any open ball such as 1 centered
on a point that lies in o does not contain any points that are not in o if its
radius is small enough. Similarly an open ball such as C that is centered on a
point that does not lie in o or on the line r
1
= r
2
does not contain any points
that are in o if its radius is small enough. Thus points that are not on the
line r
1
= r
2
are not on the boundary of o.
7.4 Open and Closed Sets and Boundaries
British suburban gardens usually have something physical marking the bound-
ary, a fence, a hedge or a wall; you could describe them as closed. Suburban
gardens in the USA often have nothing visible to mark the boundary; you could
describe them as open. Mathematicians use the terms open and closed in a
somewhat similar way.
0 x
1
x
2
A
B
C
x
1
= x
2
S
Figure 7.1:
0 x
1
x
2
S
1
Figure 7.2:
7.5. OPEN SETS 71
0 x
1
x
2
S
2
Figure 7.3:
A subset o of
q
is open if none of the points in the boundary of o lie
in o.
A subset o of
q
is closed if all the points in the boundary of o lie in o.
For example the boundary of the set o
1
=
(r
1
, r
2
) : (r
1
, r
2
)
2
, r
1
0, r
2
0
in Figure 8.3 is the set of points (r

1
, 0) with r
1
_ 0, and the set of points
(0, r
2
) with r
2
_ 0. The boundary and the set do not intersect; the set is
open.
On the other hand the boundary of the set o
2
=
(r
1
, r
2
) : (r
1
, r
2
)
2
, r
1
_ 0, r
2
_ 0
in Figure 8.4 is the same as the boundary of o

1
, that is the set of points (r
1
, 0)
with r
1
_ 0, and the set of points (0, r
2
) with r
2
_ 0. However here the
boundary lies in the set; the set is closed.
Some sets are neither open nor closed. The boundary of the set o
3
=
(r
1
, r
2
) : (r
1
, r
2
)
2
, r
1
0, r
2
_ 0
in Figure 7.4 is the same as the bound-

ary of o
1
and o
3
. However the boundary points (r
1
, 0) with r
1
0 lie in o
3
whereas the boundary points (0, r
2
) with r
2
_ 0 do not lie in o
3
.
7.5 Open Sets
7.5.1 Denition
The denition of an open set as a set for which none of the points in the boundary
of o lie in o is good for an intuitive understanding of what an open set is.
0 x
1
x
2
S
3
Figure 7.4:
However this denition is not good for proving results about open sets, for
which the "o!cial" denition works better. This is:
Denition 12 A subset o of
q
is open if for every element x of o there is
an open ball 1 (x, c) that is a subset of o.
The rst result about open sets has to be that the "o!cial" denition is
equivalent to the denition in terms of the set boundary. This is:
Proposition 13 A subset o of
q
is open if and only if it does not contain
any points in its boundary.
Proof. As o is open then for any element x of o there is an open ball 1 (x, c)
that is a subset of o so does not contain any element of the complement o
F
of o. Thus x cannot be a boundary point of o, so no points in o are in the
boundary of o.
Now suppose that o does not contain any of its boundary points, but is not
open. As o is not open there is an element x of o with the property that every
open ball 1 (x, c) contains a point in o
F
. As x is in o this implies that x is in
the boundary of o, contradicting the assumption that o does not contain any
of its boundary points. Thus if o does not contain any of its boundary points
o must be open.
7.5.2 Open Intervals, Open Balls and Open Sets
7.5. OPEN SETS 73
I have used the term "open interval" frequently. I dened open intervals as sets
of the form
(a, /) = r : r , a < r < /
(a, ) = r : r , a < r
(, /) = r : r , r < / .
The next proposition, which is proved in the appendix to this chapter establishes
that this is a sensible form of words.
Proposition 14 An open interval is an open subset of .
The next bit of tidying up of the use of the word open is:
Proposition 15 An open ball is an open set.
Again this is proved in the appendix to this chapter.
7.5.3 Unions and Intersections of Open Sets
There are two important results here. The rst is
Proposition 16 The union of a nite or innite number of open subsets of
q
is open.
Proof. If x is an element of the union it is an element of one of the open sets
o, so there is an open ball 1 (x, c) that is a subset of o, and thus a subset of
the union of the sets. Thus the union is open.
The second result is:
Proposition 17 The intersection of a nite number of open sets of
q
is
open.
Proof. Let the subsets be o
1>
o
2
....o
q
, and let x be a point in their intersection.
As o
l
is open there is a number c
l
0 such that the open ball 1 (x, c
l
) is a
subset of o
l
, that is
1 (x, c
l
) o
l
(7.3)
Let
c = min(c
1
, c
2
, ....c
q
) .
Thus 0 < c _ c
l
for all i so the open ball 1 (x, c) is a subset of the open ball
1 (x, c
l
) for all i, that is 1 (x, c) 1 (x, c
l
). Given relationship 7.3 this
implies
1 (x, c) o
l
for i = 1, 2...:
implying that 1 (x, c) is a subset of the intersection of o
1>
o
2
....o
q
, so the inter-
section is itself open.
Note that the fact that this result applies to a nite number of open sets
is important. For example that sets 1
0,
1
q
for : = 1, 2, 3..... are open, but

their intersection is 0 which is not an open set, because no open ball centred
on 0 is a subset of 0.
7.6 Closed Sets
7.6.1 Formal Denition
I introduced closed sets as sets that include their boundaries. The "o!cial"
denition is
Denition 18 A set is closed if its complement is open.
The next proposition is that this denition is equivalent to the denition in
terms of the set boundary.
q
is closed if and only if its boundary is a
subset of o.
Proof. Assume the set o is closed so its complement o
F
is open. From
Proposition 13 as o
F
is open none of the points in its boundary lie in o
F
, so
all the points in the boundary of o
F
lie in o. As the boundary of o and the
boundary of its complement o
F
are the same (Proposition 10) this implies that
the boundary of the closed set o lies in o.
Conversely if the boundary of o lies in o there is no point in the boundary of
o that lies in o
F
. As the boundaries of o and o
F
are the same this implies that
no point in the boundary of o
F
lies in o
F
. From Proposition 13 this implies
that o
F
is an open set so o is a closed set.
7.6.2 Closed Sets and Innite Sequences
You may have seen a dierent denition of a closed set in terms of limits of
innite sequences. The intuitive idea of the limit of an innite sequence is that
points in the innite sequence get closer and closer to the limit as you move
further and further along the sequence. The formal denition is:
Denition 20 The innite sequence x
1
, x
2
, x
3
....... in
q
tends to a limit
x
O
in
q
if for any number - 0 there is an integer such that |x
l
x
O
| < -,
or equivalently x
l
1 (x
O
, -) , for all i .
The result linking innite sequences and closed sets is:
q
is closed if and only if, for any innite
sequence x
1
, x
2
, x
3
....... whose points are all o that tends to a limit, that limit
is in o.
The proof of this proposition is in the appendix to this chapter. This result
shows that I could have dened closed sets in
q
in terms of innite sequences,
as is sometimes done. However the denition of closed sets as sets whose
complements are open is easier to work with.
7.7. CONTINUOUS FUNCTIONS 75
4 3 2 1 0
8
6
4
2
0
x
y
x
y
Figure 7.5: This function is not continuous at r = 2.
7.7 Continuous Functions
7.7.1 Continuous Functions of a Single Variable
Intuitively a function is continuous if ) (x) is very close to ) (x
0
) when x is very
close to x
0
. Informally a function of a single variable is continuous if you can
draw its graph without taking your pen o the paper. The function j = r for
r _ 2 and j = 2r for r 2 illustrated in Figure 7.5 is not continuous. The
formal denition of continuity for a function of a single variable dened on an
open
1
set is:
Denition 22 If o is an open subset of the function ) : o is continu-
ous if for any r
0
and any - 0 there is a number c 0 with the property
that if [r r
0
[ < c, then [) (r) ) (r
0
) [ < -.
Figure 7.1 illustrates the denition for the function ) (r) = 2r, where it is
easy to check that if c =
1
2
- then [2r 2r
0
[ < - when [r r
0
[ < c.
7.7.2 Continuous Functions of Several Variables
The notation for a function of : variables is ) (x) where x is an : vector, that
is an element of
q
. The intuitive idea of continuity for functions of several
variables is the same as the intuition for functions of a single variable; if x is very
1
At this point I work with a function dened on an open set V because then if x is in the
set any open ball E (x> ) with a small enough lies entirely in the set. If the set is not open
there are boundary points x in V for which E (x> ) is not a subset of V for any , and the
function may not be dened at some points in the open ball.
4 3 2 1 0
4
3
2
1
0
x
y
x
y
1 - G 1 1 +G
2+ H
2
2 - H
2x
Figure 7.6: The function ) (r) = 2r is continuous.
close to x
0
then ) (x) is very close to ) (x
0
) . The formal denition of continuity
for functions of several variables requires cutting and pasting the denition for
functions of a single variable, replacing by
q
where appropriate, [r r
0
[ by
|x x
0
| and ) (r) ) (r
0
) by ) (x) ) (x
0
).
Denition 23 (Continuity for a Function of Several Variables 1) If o is
an open subset of
q
the function ) : o is continuous if for any x
0
o
and any - 0 there is a number c 0 with the property that if |x x
0
| < c,
then [) (x) ) (x
0
) [ < -.
It is somewhat easier to visualize with an equivalent denition
an open subset of
q
the function ) : o is continuous if for any x
0
o
and any - 0 there is a number c 0 with the property that if x 1 (x
0
, c)
then [) (x) ) (x
0
) [ < -.
To see that the two denitions are equivalent observe that the set of values
of x for which |x x
0
| < c is the open ball 1 (x
0
, c).
Figure 7.7 illustrates this denition for one of economists favorite func-
tions and diagrams, a utility function and indierence curves. There is an
open ball 1 (x
0
, c) that lies in the set between the two indierence curves with
n(x) = n(x
0
) - and n(x) = n(x
0
) - . For all points in this open ball
[n(x) n(x
0
)[ < -.
7.8. CLOSEDSETS, BOUNDEDSETS, COMPACT SETS ANDCONTINUOUS FUNCTIONS77
u(x) = u(x
0
) + H
u(x) = u(x
0
) - H
x
0
B(x
0,
G)
x
1
x
2
0
u(x) = u(x
0
)
Figure 7.7: Indierence Curves for a Continuous Utility Function
7.8 Closed Sets, Bounded Sets, Compact Sets
and Continuous Functions
For economists one of the most important results on continuous functions is:
Theorem 25 If o is a closed and bounded subset of
q
and the function
) : o is continuous the function has a maximum and a minimum
on o, that is there are elements x
min
and x
max
of o with the property that
) (x
min
) _ ) (x) _ ) (x
max
)
for all x in o.
The theorem is important due to economists obsession with maximization
as it gives conditions under which you can be sure that the function has a
maximum and minimum. The proof is somewhat complicated and I do not
give it here.
This denition is no use without a denition of a bounded set:
Denition 26 A subset o of
q
is bounded if there is an element j of with
the property that
|x| < j for all x in o.
Another way of saying this is that the distance between x and 0 is less than
j for all elements of o. If : = 1 this simply means that j < r < j for all r in
o. If : = 2 this means that o lies inside a circle with radius j centered on the
origin. More generally it means that all x in o lie in the open ball 1 (0, j).
It is important that o be both closed and bounded. For example the interval
(0, 1) is bounded but not closed, the function ) (r) = r
1
is continuous on (0, 1)
but has no maximum, as ) (r) grows without limit as r gets closer and closer to
0. The interval [0, ) is closed but not bounded, and the continuous function
) (r) = r
2
grows without limit as r tends to innity.
If you have done some general topology you will have come across the term
"compact". There is a general denition of a compact set and then a theorem
(the Heine-Borel Theorem) which states that the sets in
q
that are compact
are the sets that are closed and bounded, so when working in
q
you should
interpret compact as meaning closed and bounded. If you have never done
any general topology ignore this comment.
7.9 Continuity for Consumer Theory
7.9.1 The Denition
Continuity is important at one point in consumer theory, showing that the
continuity assumption on preferences implies the existence of a continuous utility
function that represents the preferences. In order to understand this result
you need to know that continuity can be dened in the following way.
a subset of
q
the function ) : o is continuous if for all elements j of
the sets x : x o, ) (x) _ j and x : x o, ) (x) _ j are both closed.
For this to make sense this denition has to be equivalent to Denitions 23
and 24 of continuous functions. The rest of the chapter demonstrates that this
is indeed so. This is very much an exercise in pure mathematics with a number
of real analysis type arguments with - and c. I suggest skipping this section if
you have never seen any real analysis.
7.9.2 Level Sets, Upper Contour Sets, Lower Contour Sets
It is useful to have some terminology.
Denition 28 If o is a subset of and the function ) : o , the set
x : x o, ) (x) = j
of elements of o for which ) (x) = j is called a level set.
This may be a new piece of vocabulary, but economists are very familiar
with level sets; we call the level set of a utility function an indierence curve,
and the level set of a production function an isoquant.
7.9. CONTINUITY FOR CONSUMER THEORY 79
x
1
x
2
0
u(x) = y
level set
indifference curve
u(x) > y
the upper contour set
u(x) < y
the lower contour set
Figure 7.8: Level Set, Upper Countour Set and Lower Contour Set for a Utility
Function
Denition 29 If o is a subset of
q
and the function ) : o , the set
x : x o, ) (x) j
of elements of o for which ) (x) is greater than j is called an upper contour
set.
q
x : x o, ) (x) < j
of elements of o for which ) (x) is less than j is called a lower contour set.
Figure 7.8 illustrates these sets for a utility function.
7.9.3 Open Set and Closed Set Denition of Continuity
The argument that Denition 27 of continuity is equivalent to Denitions 23
and 24 starts from the following proposition.
Proposition 31 If o is an open subset of
q
the function ) : o is contin-
uous if and only if for all elements j of the upper contour set x : x o, ) (x) j
and the lower contour set x : x o, ) (x) < j are both open.
x
1
x
2
0
x
2
B(x
1,
G
1
)
B(x
2,
G
2
)
x
1
u(x) = y
level set
indifference curve
u(x) > y
the upper contour set
u(x) < y
the lower contour set
Figure 7.9: The Upper and Lower Contour Sets are Open
Figure 7.9 illustrates the conditions of this thereon for a utility function.
As the lower contour set is open, for any point x
1
in the lower contour set, there
is an open ball 1 (x
1
, c
1
) that is a subset of the lower contour set. As the
upper contour set is open, for any point x
2
in the upper contour set, there is an
open ball 1 (x
2
, c
2
) that is a subset of the upper contour set.
The proof of Proposition 31 is suggested by Figures 7.7 and 7.9.
Proof. The function ) : o is continuous if for any r
0
o and any
- 0 there is a number c 0 with the property that if x 1 (x
0
, c) then
[) (x) ) (x
0
) [ < -. In particular if ) (x
1
) < j so j ) (x
1
) 0 there is an
open ball 1 (x
1
, c
1
) on which [) (x) ) (x
1
) [ < j ) (x
1
). As ) (x) ) (x
1
) _
[) (x) ) (x
1
) [ which implies that ) (x) ) (x
1
) < j ) (x
1
) so ) (x) < j.
Thus the lower contour set is open. Similarly if ) (x
2
) j so ) (x
2
) j 0
there is an open ball 1 (x
2
, c
2
) on which [) (x
2
) ) (x) [ < ) (x
2
) j. As
) (x
2
) ) (x) _ [) (x
2
) ) (x)[ this implies that ) (x
2
) ) (x) < ) (x
2
) j so
j < ) (x). Thus the upper contour set is open. Hence the upper and lower
contour sets are open if the function is continuous.
To prove the converse result note that if the upper contour set
x : x o, ) (x
0
) - < ) (x)
and the lower contour set
x : x o, ) (x) < ) (x
0
) + -
are open then, from Proposition 17, their intersection is also open. This inter-
section is the set on which ) (x
0
)- < ) (x) < ) (x
0
)+-, or equivalently the set
on which - < ) (x)) (x
0
) < -, that is the set x : x o, [) (x) ) (x
0
)[ < - .
The point x
0
is an element of this set, hence as the set is open there is an open
7.9. CONTINUITY FOR CONSUMER THEORY 81
ball 1 (x
0
, c) with the property that all elements of the open ball lie in the set
x : x o, [) (x) ) (x
0
)[ < - . This is what is needed to establish continu-
ity.
This proposition makes possible yet another equivalent denition of conti-
nuity.
an open subset of
q
the function ) : o is continuous if for all elements
j of the upper contour set x : x o, ) (x) j and the lower contour set
x : x o, ) (x) < j are both open.
Now suppose that ) (x) : o is continuous and consider the comple-
ment in o of the open upper contour set x : x o, ) (x) j, that is the set
x : x o, ) (x) _ j . This is by denition a closed set
2
. Similarly the com-
plement in o of the open lower contour set x : x o, ) (x) < j , that is the
closed set x : x o, ) (x) _ j . Given Denition 32 I can give yet another
denition of continuity.
an open subset of
q
the function ) : o is continuous if for all elements j
of the sets x : x o, ) (x) _ j and x : x o, ) (x) _ j are both closed.
I have been assuming throughout this argument that o is an open set. With
a little more mathematical sophistication
3
I can drop the requirement that o is
an open set. This is useful thing to do, because for may purposes it is necessary
to think of functions dened on
q+
which is dened as the set of vectors with
r
l
_ 0 for i = 1, 2...:. The set
q+
is closed.
Denition 34 (Continuity for a Function of Several Variables) If o is
a subset of
q
the function ) : o is continuous if for all elements j of
the sets x : x o, ) (x) _ j and x : x o, ) (x) _ j are both closed.
This is the denition used in consumer theory.
2
I am being somewhat sloppy with denitions of open and closed sets here. If you have
not noticed my sloppiness ignore this footnote. The di!culty is that I am assuming that V
is open and i is continuous, in which case the set {x : x M V> i (x) $ |} that I am calling the
complement of the upper contour set in V is not a closed subset of R
q
unless V = R
q
. I
can get away with this by dening an open set in V as the intersection of V and a set that is
open in R
q
, and a closed set in V as the complement in V of an open set in V= If V is open
the open sets in V are open in R
q
, but the closed sets in V are not closed in R
q
. If V is
closed some of the open sets in V are not open in R
q
, but the closed sets in V are closed in
R
q
. If you know about general topology you will recognize that either way I am setting up
a topology on V, and know that this makes mathematical sense.
3
In order to do this I have to dene an open set in V as the intersection of an open set in
R
q
, and then dene a closed subset of V as the complement in V of an open subset in V. See
footnote 2.
7.10 Appendix: Proofs
7.10.1 Proof That An Open Interval is an 0pen Subset of
If a < /, a < r < / and - = min(r a, / r) then as a < r < /

- 0. (7.4)
As - = min(r a, / r) _ r a and - 0
a _ r - < r
1
2
- < r
so
a < r
1
2
- < r < /. (7.5)
As - = min(r a, / r) _ / r
/ _ r + - r +
1
2
- r a
so
a < r < r +
1
2
-. (7.6)
Taken together inequalities 7.4, 7.5 and 7.6 imply that
a < r
1
2
- < r < r +
1
2
- < /. (7.7)
The set of points satisfying r
1
2
- < r < r +
1
2
- is the open ball 1
r,
%
2
.
Inequality 7.7 then implies that 1
r,
%
2
is a subset of the intervals (a, /) (a, )

and (, /) . Thus these intervals are open.
7.10.2 Proof That An Open Ball is an Open Subset of
q
The open ball 1 (x
0
, c) is the set of points satisfying |x x
0
| < c. Note that
if x is an element of 1 (x
0
, c) then c |x x
0
| 0. Let z be an element of
the open ball 1 (x, c |x x
0
|) . Then
|z x| < c |x x
0
| .
From the triangle inequality (proved in the previous chapter on vectors)
|z x
0
| = |z x +x x
0
| _ |z x| +|x x
0
| .
The last two inequalities imply that
|z x
0
| _ |z x| +|x x
0
| < c |x x
0
| +|x x
0
| = c.
Thus if z is an element of the open ball 1 (x, c |x x
0
|) then |z x
0
| < c, so
z is an element of the open ball 1 (x
0
, c). Thus the open ball 1(x, c |x x
0
|)
is a subset of 1 (x
0
, c), so the open ball 1(x
0
, c) is an open set.
7.10. APPENDIX: PROOFS 83
7.10.3 Innite Sequences and Closed Sets
The result here is
Proposition 35 A set o is closed if and only if for any innite sequence
x
1
, x
2
, x
3
....... whose points are all o that tends to a limit, that limit is in
o.
Proof. Suppose that o is closed and that x
1
, x
2
, x
3
....... is an innite sequence
of points in o that tend to a limit in o
F
. As o is closed o
F
is open so there is
an open ball 1 (x
O
, -) that is a subset of o
F
. As x
1
, x
2
, x
3
....... tends to x
O
the point x
l
is an element of 1 (x
O
, -) and thus of o
F
for all su!ciently large
i. But by assumption all points in the sequence lie in o so cannot be in o
F
.
This contradiction implies that the limit of innite sequence of points a closed
set o must lie in o.
Now suppose that the limit of any innite sequence of points in o lies in o,
but o is not closed. As o is not closed, o
F
is not open. This implies that
there is a point x in o
F
for which every open ball 1 (x, -) contains a point that
is not in o
F
and therefore is in o, regardless of how small - is. Thus there
is an innite sequence of points x
1
, x
2
, x
3
....... that are not in o
F
for which
x
l
1
x,
1
l
. This innite sequence tends to x. As none of the points in

the innite sequence are in o
F
they are all in o. However the limit is in o
F
.
This contradicts the supposition on limits of innite sequences and o not being
closed that I started with. Thus o is closed.
Chapter 8
Introduction to
Multivariate Calculus
8.1 Why Economists are Interested
We use multivariate calculus in economics because the things we are interested
in are usually functions of more than one variable. This gets suppressed in
introductory economics. You may have worked with a model where the cost
to a rm of producing j is c (j) =
1
2
j
2
and written
gf
g|
= j as marginal cost.
This seems a bit special, so perhaps you generalized this to work with a cost
function c (j) = j
2
. At this stage you are treating as a parameter of the cost
function. However when you think about it the cost must depend on input
prices and the technology used, so is itself a function, and changes in input
prices change . You will learn to think of cost as a function of input prices
n
1
, n
2
and output c (n
1
, n
2
, j) . For example the minimum cost of producing
output j from inputs r
1
and r
2
with prices n
1
and n
2
using the technology
given by the Cobb-Douglas production function j = r
d
1
r
e
2
is
c (n
1
, n
1
, j) =
1
d+e
a
/
e
d+e
+
a
/
d
d+e
n
d
d+e
1
n
e
d+e
2
j
1
d+e
.
(You can nd this result on page 54 of H.R.Varian, Microeconomic Analysis.)
This reduces to the cost function j
2
if a = / =
1
4
and = 2
2
n
1
2
1
n
1
2
2
.
However, having acknowledged that costs depend on n
1
, n
2
and j, you now
have to use the partial derivative
0c (n
1
, n
1
, j)
0j
=
1
a + /
1
d+e
a
/
e
d+e
+
a
/
d
d+e
n
d
d+e
1
n
e
d+e
2
j
1
d+e
1
for marginal cost. When you have a function of many variables ) (r
1
, r
2
, .r
l
..r
q
)
the partial derivative is dened analogously to the derivative of a function of a
85
86 CHAPTER 8. INTRODUCTION TO MULTIVARIATE CALCULUS
x 0
y
x
0
y = f(x)
y = f(x
0
) + f(x
0
) (x x
0
)
Figure 8.1: A function and its tangent
single variable as
0) (r
1
, r
2
, .r
l
..r
q
)
0r
l
= lim
k$0
) (r
1
, r
2
, .r
l
+ /..r
q
) ) (r
1
, r
2
, .r
l
..r
q
)
/
.
You calculate the partial derivative
0) (r
1
, r
2
, .r
l
..r
q
)
0r
l
in exactly the same way
as you calculate the derivative of a function of a single variable, treating all the
variables except r
l
as parameters of the function.
In fact the distinction between a parameter and a variable depends entirely
on what you are interested in. Varian writes c (n
1
, n
1
, j) treating , a and
/ as parameters. But for some purposes, for example modelling technical
change you might want to think of , a and / as variables, and write costs as
q (, a, /, n
1
, n
2
, j) .
8.2 Derivatives and Approximations
8.2.1 When Can You Approximate
Think about a function of one variable j = ) (r) illustrated by the curved
line in Figure 8.1 and its tangent at r
0
which is a straight line with equation
j = ) (r
0
)+)
0
(r
0
) (r r
0
). The denition of the derivative )
0
(r) implies that
close to r the tangent line is a good approximation to the original function, that
is
) (r) - ) (r
0
) + )
0
(r
0
) (r r
0
) when r is close to r
0
.
8.2. DERIVATIVES AND APPROXIMATIONS 87
5
2.5
0
-2.5
-5
5
2.5
0
-2.5
-5
120
100
80
60
x y
z
x y
z
Figure 8.2: Appoximating the function at (1, 2) ) (r) = 100 r
2
1
r
2
2
at (1, 2)
by the plane j (r) = 95 2 (r
1
1) 4 (r
2
2) .
Now think about the function of two variables j = ) (r
1
, r
2
) illustrated in Figure
8.2. The graph of the function is now a curved surface. Just as the curved line
in two dimensional space corresponds to a curved surface in three dimensional
space, the tangent line in two dimensional space corresponds to a tangent plane
in three dimensional space. In the chapter on vectors I showed that any plane
through the point (r
01
, r
02
, j
0
) can be written in vector notation as
(j
1
, j
2
, j
3
)
3
C
3
C
r
1
r
2
j
4
D
3
C
r
01
r
02
j
0
4
D
4
D
= 0
or equivalently
j
1
(r
1
r
01
) + j
2
(r
2
r
02
) + j
3
(j j
0
) = 0
or if j
3
,= 0 as
j = j
0
+ a
1
(r
1
r
01
) + a
2
(r
2
r
02
)
where a
1
=
s1
s
3
and a
2
=
s2
s
3
. By analogy with the equation of the tangent
line as j = ) (r
0
) +)
0
(r
0
) (r r
0
) the equation of the tangent plane should be
j = ) (r
01
, r
02
) +
0) (r
01
, r
02
)
0r
1
(r
1
r
01
) +
0) (r
01
, r
02
)
0r
2
(r
2
r
02
)
and the approximation should be
) (r
1
, r
2
) - ) (r
01
, r
02
) +
0) (r
01
, r
02
)
0r
1
(r
1
r
01
) +
0) (r
01
, r
02
)
0r
2
(r
2
r
02
) .
This suggests that the extension to : variables should be the approximation
) (x) - ) (x
0
) +
q
X
l=1
0) (x
0
)
0r
l
(r
l
r
l0
) when x is close to x
0
.
The argument I have just given is in no way rigorous, but it can be made so.
This is done by assuming that the function ) (x) can be approximated by a
function of the form
) (x) - ) (x
0
) +
q
X
l=1
a
l
(r
l
r
l0
)
and then showing that a
l
must be the partial derivative
Ci(x0)
C{l
.
You have to be slightly careful with this, because unlike the situation with
functions of a single variable it is possible that the derivatives exist but the
approximation does not work. As an example consider the function ) :
2

given by
) (r
1
, r
2
) = 0 when r
1
r
2
= 0
) (r
1
, r
2
) = 1 when r
1
r
2
,= 0.
This function is 0 when one or both of r
1
and r
2
are zero, and 1 otherwise.
Thus ) (r
1
, 0) = 0 for all values of r
1
and ) (0, r
2
) = 0 for all values of r
2
,
implying that the partial derivatives
0) (0, 0)
0r
1
=
0) (0, 0)
0r
2
= 0.
This suggests that when (r
1
, r
2
) is close to (0, 0)
) (0, 0) +
0) (0, 0)
0r
1
r
1
+
0) (0, 0)
0r
2
r
2
(8.1)
should be a good approximation to ) (r
1
, r
2
) . However
) (0, 0) =
0) (0, 0)
0r
1
=
0) (0, 0)
0r
2
= 0
so this implies that 0 is a good approximation to ) (r
1
, r
2
) when (r
1
, r
2
) is
close to 0. But this is very far from being a good approximation because
) (r
1
, r
2
) = 1 whenever r
1
r
2
,= 0.
An assumption that ensures that the approximation works for a function
) : o is that o is open, that ) has partial derivatives on o, and that the
partial derivatives are continuous. In order to avoid writing out the conditions
many times I will use the following denition.
Denition 36 If o is an open subset of
q
the function ) (x) : o is a well
behaved if it has partial derivatives, and the partial derivatives are continuous
on o.
8.3. LEVEL SETS AND VECTORS OF PARTIAL DERIVATIVES 89
x
0
x
1
x
2
Df(x
0
)
Df(x
0
)( x - x
0
) = 0
f(x) = f(x
0
)
Figure 8.3: The Level Sets, Tangent and Partial Derivative Vector for a Function
If a function is well behaved the approximation
) (x) - ) (x
0
) +
q
X
l=1
0) (x
0
)
0r
l
(r
l
r
l0
) when x is close to x
0
works. Making this argument rigorous requires a precise denition of what is
meant by approximation, and then a proof that existence and continuity of the
partial derivatives implies that the approximation is valid.
8.3 Level Sets and Vectors of Partial Derivatives
8.3.1 The Level Set and Tangent for One Function
In the previous chapter I gave:
q
x : x o, ) (x) = j
of elements of o for which ) (x) = j is called a level set.
A level set of a utility function is an indierence curve; a level set of a
production function is an isoquant. Now think about two points x and x
0
that
lie in the same level set so
) (x) = ) (x
0
)
and assume that the function ) : o is well behaved so close to x
0
) (x) - ) (x
0
) +
q
X
l=1
0) (x
0
)
0r
l
(r
l
r
l0
) .
As ) (x) = ) (x
0
) this implies that
q
X
l=1
0) (x
0
)
0r
l
(r
l
r
l0
) - 0. (8.2)
If I use notation
1) (x
0
) =
3
E
E
E
E
E
C
Ci(x0)
C{
1
Ci(x
0
)
C{
2
.
.
Ci(x
0
)
C{
q
4
F
F
F
F
F
D
so 1) (x
0
) is the : vector of partial derivatives equation 8.2 becomes
1) (x
0
)
0
(x x
0
) - 0.
Thus when x is very close to x
0
and ) (x) = ) (x
0
) x very nearly satises the
equation.
1) (x
0
)
0
(x x
0
) = 0.
This is an equation of the type that I discussed at some length in section 7
of the chapter on vectors. If : = 2 this is a straight line, if : = 3 it is
a plane, and for : 3 it is a hyperplane. In every case the vector of partial
derivatives 1) (x
0
) is orthogonal (at 90
) to the line, plane or hyperplane. This

is illustrated in Figure 8.3, which shows the vector of partial derivatives 1) (x
0
)
which is orthogonal to the line 1) (x
0
)
0
(x x
0
) = 0. The line is a very good
approximation to the level set when x is close to x
0
, and it seems reasonably
intuitive and is in fact true that this line must be tangent to the level set.
8.3.2 Level Sets and Tangents for Two Functions
This section goes beyond revision mathematics in taking a look at a constrained
optimization problem, and working with vectors of partial derivatives to gener-
ate insights about Lagrangians. Figure 8.4 is the same as Figure 8.3 except that
I have introduced another function q (x), its partial derivative vector 1q (x
0
)
at x
0
and its level set q (x) = q (x
0
) . I have chosen to show the case where the
two partial derivative vectors point in dierent directions. In Figure 8.4 there
is a point x
1
for which ) (x
1
) ) (x
0
) and q (x
1
) < q (x
0
) , which immediately
implies that if c = q (x
0
), the point x
0
cannot solve the problem of maximizing
) (x) subject to q (x) _ c.
From Figure 8.4 it looks as if the problem is that the two partial derivative
vectors point in dierent directions. I have a result from the chapter on vectors
that goes some way to clarifying what is happening here. This is:
q
, q is a vector in
q
, and
there is no real number ` _ 0 such that q = `p, then for any : vector x
0
there
is an : vector x
1
such that
p
0
x
1
< p
0
x
0
8.3. LEVEL SETS AND VECTORS OF PARTIAL DERIVATIVES 91
x
0
x
1
x
2
Df(x
0
)
Df(x
0
)( x - x
0
) = 0
f(x) = f(x
0
)
g(x) = g(x
0
)
Dg(x
0
)
Dg(x
0
)( x - x
0
) = 0
x
1
Figure 8.4: Level Sets and Partial Derivative Vectors for Two Functions
and
qx
1
q
0
x
0
.
Using this result with p = 1q (x
0
) and q = 1) (x
0
) I have the fact that if
there is no real number ` _ 0 such that 1) (x
0
) = `1q (x
0
) then there is a
vector x
1
such that
1q (x
0
)
0
x
1
< 1q (x
0
)
0
x
0
which implies that
q (x
0
) + 1q (x
0
)
0
(x
1
x
0
) < q (x
0
) (8.3)
and
1) (x
0
)
0
x
1
1) (x
0
)
0
x
0
which implies that
) (x
0
) + 1) (x
0
)
0
(x
1
x
0
) ) (x
0
) . (8.4)
If x
1
is very close to x
0
the terms on the left hand side of inequality 8.3 is a very
good approximation to q (x
1
) and the terms on the left hand side of inequality
8.4 is a very good approximation to ) (x
1
) . All this suggests the following
proposition
Proposition 39 If ) is a well behaved function and there is no number ` _ 0
such that 1) (x
0
) = `1q (x
0
) then there is a vector x
1
such that
) (x
1
) ) (x
0
)
and
q (x
1
) < q (x
0
) .
This proposition is true, although I certainly havent proved it. Doing that
requires a precise statement of what how the approximation argument works.
The proposition immediately implies that if there is no number ` _ 0 such that
1) (x
0
) = `1q (x
0
) or equivalently
0) (x
0
)
0r
l
= `
0q (x
0
)
0r
l
for i = 1, 2....:
and q (x
0
) = c then x
0
cannot solve the problem of maximizing ) (x) subject
to q (x) _ c. The number ` is of course the Lagrange multiplier. Another
way of saying this is that if ) and q are well behaved functions and q (x
0
) = c
the rst order conditions from the Lagrangian are necessary for x
0
to maximize
) (x) subject to q (x) _ c.

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Chapter 6

= 0. The vectors x and y are said to be orthogonal.

to the vector x..

and, as the graph of cos 0 in Figure 6.6 shows, cos 0 < 0.

cos 0 = cos (360 0) .

. The graph of the

< 0 < 180

which gives a result su!ciently useful to be stated formally.

. It is convenient to choose the smaller angle 90

to each other. In everyday English an angle of 90

. The two vectors are

. The two vectors are parallel and point in opposite

and the two vectors are said to be "orthogonal".

, so the vector is still orthogonal to the plane. (Take your

and the angle

is the straight line r

in Figure 8.3 is the set of points (r

in Figure 8.4 is the same as the boundary of o

in Figure 7.4 is the same as the bound-

for : = 1, 2, 3..... are open, but

If a < /, a < r < / and - = min(r a, / r) then as a < r < /

is a subset of the intervals (a, /) (a, )

. This innite sequence tends to x. As none of the points in

) to the line, plane or hyperplane. This

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