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ECO 244: Applied Mathematics II Dept.

of Economics, North South University

[Instructor: SAIMA KHAN (SAI)]

L3: Understanding Concave Functions


Q: What is a Concave Function?
A: If you pick any two points on a curve, say A and B, and connect them if the line segment AB lies entirely below the curve/graph then the function is said to be strictly concave in the given neighbourhood. if the line segment AB lies below or on the curve/graph then the function is said to be concave in the given neighbourhood. Lets now write this same definition in the language of mathematics:

) +(1+(1) ) )

+(1-

Lets take a point and try to prove that the function is concave at According to the definition above, to be concave at , the value of the line segment, AB, must be less than the value of the function at ; i.e., C must be less than D. But how do we find the values for C and D from the information given on the graph. Well first we find is essentially the convex combination of and :

+(1To find the y-value of D all we have to do is plug in the value of we have: +(1)

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Look we found D !!! woohoo

into

and voila

ECO 244: Applied Mathematics II Dept. of Economics, North South University

[Instructor: SAIMA KHAN (SAI)]

Now to find the y-value of C this is a bit more tricky because we do not have a functional form of the line AB sure we know it is a linear function but what does the function look like? as in is the line AB defined as y=3x+2 or is y= 5x +7? So we look at what we do know we know the y values at and , i.e., and So we take the convex combination of and which turns out to be: Look we found C! Double woohoo !! Now lets look at the definition again: A function is concave if f:

+(1-

i.e. a function is concave at a point say,

,iff:

+(1-

+(1-

Now see if you can derive a mathematical definition for concavity, strict convexity and convexity using the concept of convex combination.

Q: What is a convex combination? A: Convex combination is essentially like a weighted average which is written as:

+(1-

So if I want to find the convex combination of 5 and 15, it will be:

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Q: What is the significance of ? A: It is the weight. For example, lets experiment with different values of If +(1If +(1If +(1So, as varies, the convex combination also varies. This is the same as if the percentage I allot to each exam varies, your total mark would also vary. If say

+(1-

ECO 244: Applied Mathematics II Dept. of Economics, North South University

[Instructor: SAIMA KHAN (SAI)]

you have two exams: you get 20 in one and 100 in another. If I allot a lot of weight to the first exam then you would get closer to 20 if I allot a lot of weight to the second exam you would get closer to 100. Now look at the example we did above. When we gave a greater weight to 15, the convex combination came out to be close to 15 i.e. 14 but when we gave a greater weight to 5, then the convex combination came out to be closer to 5 i.e. 7. Will always be <1 and >0? No can be equal to 1 and 0 in general when the convex combination is 15 when , the convex combination would be 5. So if I gave no weight to your first exam , your total would be 100. If I gave all the weight to your first exam, , then your total marks would be 100. But when we are dealing with defining concavity or convexity, we assume
so that we can exclude the end points, and . Because if we include the end points then the line segment and the curve merges in one which does not help us to define concavity or convexity at all !

The End

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