THEOREM A2.

22

604

The Envelope Theorem

j = 1, . . . , m.

i = 1, . . . , n

f (x, a)
g(x, a)
L
=

.
a j
aj
a j

T he partial derivative of L with respect to the parameter a j would be

f (x(a), a)
g(x(a), a)
(a)
= 0,
xi
xi
g(x(a), a) = 0.
(P.1)

B y hypothesis, x(a) and (a) satisfy the rst-order K uhn-Tucker conditions given in
T heorem A 2.20. T herefore for every a U , and because the constraint is binding, we
have,

L f (x, a) [g(x, a)].

Proof: First, form the L agrangian for the maximisation problem:

T he theorem says that the total effect on the optimised value of the objective function
when a parameter changes (and so, presumably, the whole problem must be reoptimised)
can be deduced simply by taking the partial of the problems L agrangian with respect to
the parameter and then evaluating that derivative at the solution to the original problems
rst-order K uhn-Tucker conditions. A lthough we have conned ourselves in the statement
of the theorem to the case of a single constraint, the theorem applies regardless of the
number of constraints, with the usual proviso that there be fewer constraints than choice
variables. B ecause of the importance of this theorem, and because it is not so obviously
true, we will work through a rather extended proof of the version given here.

where the right-hand side denotes the partial derivative of the L agrangian function with
respect to the parameter a j evaluated at the point (x(a), (a)).


V (a)
L 
=
a j
a j x(a),(a)

C onsider the problem (A 2.35) when there is just one constraint and suppose the objective
function, f , and the constraint function, g, are continuously differentiable in (x, a) on an
open subset W U of Rn A . For each a U , suppose that x(a) W uniquely solves
(A 2.35), is continuously differentiable in a on U , and that the constraint g(x(a), a) 0 is
binding for every a U . L et L(x, a, ) be the problems associated L agrangian function
and let (x(a), (a)) solve the K uhn-Tucker conditions in T heorem A 2.20. F inally, let V (a)
be the problems associated value function. T hen, the E nvelope theorem states that for
every a U ,

CHAPTER A2

(P.2)

605

i = 1, . . . , n.

(P.3)

R earranging yields



i=1

chain rule again

a j

g(x(a), a)
0.
a j


n 

g(x(a), a) xi (a)
g(x(a), a)

.
a j
xi
a j

i=1

xi


n 

g(x(a), a) xi (a)

T he nal trick is to go back again to the rst-order conditions (P.1) and look at
the second identity in the system. B ecause g(x(a), a) 0, we can differentiate both sides
of this identity with respect to a j and they must be equal. B ecause the derivative of the
constant zero is zero, we obtain

i=1


n 

g(x(a), a) xi (a)
f (x(a), a)
V (a)
= (a)
.
+
a j
xi
a j
a j

Substituting into the bracketed term of the summation, we can rewrite the partial derivative
of V (a) as

g(x(a), a)
f (x(a), a)
(a)
,
xi
xi

N ow, go back to the rst-order conditions (P.1). R earranging the rst one gives

chain rule


n 
V (a)  f (x(a), a) xi (a) f (x(a), a)
=
+
.
a j
xi
a j
a j
i=1 



If we can show that the partial derivative of the maximum-value function with respect to
a j is equal to the right-hand side of (P.2), we will have proved the theorem.
We begin by directly differentiating V (a) with respect to a j . B ecause a j affects
f directly and indirectly through its inuence on each variable xi (a), we will have to
remember to use the chain rule. We get


L 
f (x(a), a)
g(x(a), a)
=
(a)
.
a j x(a),(a)
a j
a j

If we evaluate this derivative at the point (x(a), (a)), we obtain

CALCULUS AND OPTIMISATION

606

(P.4)

x1 ,x2

max x1 x2
s.t. 2x1 + 4x2 a = 0,

L = a 2x1 4x2 = 0.

L2 = x1 4 = 0

L1 = x2 2 = 0

(E .1)

T hese can be solved to nd x1 (a) = a/4, x2 (a) = a/8, and (a) = a/16. We form the
maximum-value function by substituting the solutions for x1 and x2 into the objective

with rst-order conditions:

L = x1 x2 [2x1 + 4x2 a],

and would like to know how the maximum value of the objective function varies with
the (single, scalar) parameter a. We will do this two ways: rst, we will derive the function V (a) explicitly and differentiate it to get our answer. T hen we will use the E nvelope
theorem to see if we get the same thing.
To form V (a), we must rst solve for the optimal values of the choice variables in
terms of the parameter. We would then substitute these into the objective function as in
(A 2.36) to get an expression for V (a). N otice that this problem differs slightly from the
one in (A 2.35) because we do not require non-negativity on the choice variables. T hus, we
can dispense with the K uhn-Tucker conditions and just use the simple L agrangian method.
Forming the L agrangian, we get

EXAMPLE A2.11

L et us see if we can verify the E nvelope theorem. Suppose we have

f (x1 , x2 ) x1 x2 and a simple constraint g(x1 , x2 ) 2x1 + 4x2 a. We are given the
problem

as we wanted to show.


L 
V (a)
=
a j
a j x(a),(a)

T he right-hand side of (P.4) is the same as the right-hand side of (P.2). T hus,

g(x(a), a) f (x(a), a)
V (a)
= (a)
+
.
a j
a j
a j

M oving the minus sign into the brackets, we can substitute the left-hand side of this identity
for the entire summation term in (P.3) to get

CHAPTER A2

V (a) = x1 (a)x2 (a) =

  
a
a
a2
=
.
4
8
32

607

p 1 x1 + p 2 x2 = I ,

We end this mathematical appendix with a look at what are called separation theorems.
T he idea is geometrically simple enough. Fig. A 2.14 shows two disjoint convex sets, A
and B , in R2 . It is obvious that we can draw a line between them. Such a line is said to
separate the two sets. If we think of the line as being described by the equation,

A2.5 SEPARATION THEOREMS

A lthough we have conned attention here to maximisation problems and their associated value functions, it should be clear that we could also construct value functions for
minimisation problems analogously, and that the E nvelope theorem would apply for them
as well.

which checks.
B esides verifying that the E nvelope theorem works, this example has also given
us some insight into what interpretation we can give to those incidental variables, the
L agrangian multipliers. T his is pursued further in the exercises.

a
dV (a)
= (a) =
,
da
16

We then evaluate this at the solution to (E .1), where (a) = a/16. T his gives us

L
dV (a)
=
= .
da
a

N ow let us verify this using the E nvelope theorem. T he theorem tells us that to see
how the maximised value of the function varies with a parameter, simply differentiate the
L agrangian for the maximisation problem with respect to the parameter and evaluate that
derivative at the solution to the rst-order conditions (E .1). A pplying the theorem, we rst
obtain

dV (a)
a
=
.
da
16

D ifferentiating V (a) with respect to a will tell us how the maximised value of the objective
function varies with a. D oing that we get

function. T hus,

CALCULUS AND OPTIMISATION

THEOREM A2.23

608

Figure A 2.14. Separating convex sets.

x1

p c , for every c C .

Suppose that C is a closed and convex subset of Rn that does not contain the origin, 0.
T hen, there exists a vector p Rn of length one and > 0 such that,

A First Separation Theorem

Imagine now two disjoint convex sets in R3 , say a sphere and a box with the sphere
entirely outside the box. A gain, it is obvious that we can separate the two sets, this time
with a plane, and an identical analytic expression, but now with all vectors in R3 , describes
the situation.
T he separation theorems below generalise this to any number of dimensions. We will
provide two theorems. T he second theorem strictly generalises the rst and allows the sets
A and B to be, for example, open and tangent to one another.

p a > p b, for every a A and every b B .

C onsequently, if p = (p 1 , p 2 ), then we see that the geometric notion of separation is

expressed analytically as,

p1 b1 + p2 b2 < I .

and every point (b 1 , b 2 ) B is such that

p1 a 1 + p2 a 2 > I ,

where p 1 , p 2 , and I are positive constants, then every point (a 1 , a 2 ) A is such that

x2

CHAPTER A2