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Everything we did in Lecture 3 can be extended to many variables and many constraints.
Let f (x, t ) be a function of n r variables x1 ,..., xn , t1 ,..., tr . Suppose there are two
constraints: we take t as given and choose x to maximise f (x, t ) subject to the constraints
g (x, t ) 0 and h(x, t ) 0 . The maximal value of the objective function subject to the
constraints depends on the vector t: call it v(t ) . The envelope theorem states that
v L
for k 1,..., r ,
t k t k
where L is the Lagrangian, defined as follows:
L(x, , , t ) f (x, t ) g (x, t ) h(x, t ) .
A similar result with three multipliers holds when there are three constraints; and so on
provided the number of constraints does not exceed the number of components of x.
The firm’s cost function gives the minimum level of cost subject to the output constraint;
it is denoted by C ( w1, ..., wn , q ) . The marginal interpretation of the multiplier gives
C
xi for i 1,..., n
wi
where xi is the optimal amount of input i employed. This result is known as Shephard’s
lemma.
p1 x1 ... pn xn m .
The consumer’s indirect utility function gives the maximum level of utility subject to the
budget constraint; it is denoted by V ( p1, ..., pn , m) . The marginal interpretation of the
multiplier gives V / m . This result may also be obtained from the envelope
theorem:
V L
.
m m
The envelope theorem also gives
V
xi for i 1,..., n .
pi
Putting this together with the marginal interpretation of the multiplier, we get
V V
xi for i 1,..., n .
pi m