Lagrange Multiplier - Applications - Economics

Economics

Constrained optimization plays a central role in economics. For example, the choice problem for a consumer is represented as one of maximizing a utility function subject to a budget constraint. The Lagrange multiplier has an economic interpretation as the shadow price associated with the constraint, in this example the marginal utility of income. Other examples include profit maximization for a firm, along with various macroeconomic applications.

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