Econ 509 Fall’09

Mathematical Economics
Kaffine

Chapter 8 – Comparative-Static Analysis of General-Function Models - ctd

In the previous section, we looked at total differentials of explicit functions. We now turn to
implicit functions
- An explicit function is a function in the form of , such as:
-
- Where y is explicitly expressed as a function of x
- Rewriting this by bringing f(x) to the left hand side gives the implicit function:
-
- Generally speaking, implicit functions are denoted by , or

- This implicit function may define an explicit function

- While an explicit function can always be written implicitly (like we did above), an
implicit function may not always be written explicitly.
- Ex. does not have an explicit function (because it’s the
equation of a circle).

The Implicit-Function Theorem (IFT) tells us when we can locally define an implicit function
- Given , if A) F has continuous partial derivatives in all
variables and B) if at a point which satisfies F() = 0, the partial
with respect to y, Fy is non-zero, then there exists a neighborhood of
, where y is an implicitly defined function of ,
satisfying . The implicit function f() is continuous and has
continuous partial derivatives.
- So in the circle example, we can locally define an implicit function along each curve
of the circle

Derivatives of Implicit Functions

 - If we can explicitly write out a function in terms of y, then we can use conventional m
methods to find the derivative.
- If we can’t solve explicitly, if the terms of the IFT hold, we can still find the
derivatives. To do so, we use the Implicit-Function Rule (IFR)
- Suppose we have the equation , we can write dF=d0 or:
-
- The implicit function has the total differential:
- which we can substitute and rearrange as:
-

- For this relationship to hold for any possible change in the xi’s, it must be the case
that each parenthesis term equals zero:
- for all i
- Dividing through by Fy and solving for gives the implicit-function rule:

- for i=1,2,…m

Thus, the implicit-function rule says that if , then ******

- Ex. Suppose By the implicit-function rule,

- (can use explicit differentiation to check)

- Suppose we have the equation of a circle . Then is

- Consider
- This has continuous derivatives, and is nonzero at a point such as (1,1,1), then an
implicit function exists in the neighborhood of that point.
- Using the IFR, we can find partial wrt x as:
 - , which at (1,1,1) gives a derivative of .

- Suppose the equation implicitly defines a production function

.
- If is the marginal physical product of labor and is the marginal physical
product of capital, then using the IFR:

- and

- Furthermore, which is the tradeoff between capital and labor required to

keep output Q at a constant level. Thus, we can think of an isoquant for each level of

output Q, and describes the slope as we move along it. The magnitude of is

called the marginal rate of technical substitution between capital and labor.

Consider the case of several simultaneous equations: When will a system of n equations have n
implicit functions?
-
-
- ……………………………..
-
- The implicit functions (if they exist) would be:
-
-
- ……………………………..
-
- In other words, if the y’s are the endogenous variables, the implicit functions for each
of those endogenous variables will be a function of the exogenous x’s.
The general IFT says that if A) all have continuous partial derivatives with respect to
all y and x variables, and if B) at a point satisfying the n equations, the
Jacobian of the endogenous variables is non zero:

- Then there exists a neighborhood of where are implicit

functions of the variables which satisfy:
-
- ……………………………..
-
- The implicit functions are continuous and have continuous partials with
respect to all the x variables.
- If we use the same trick as with the single equation case (dF=d0 and total diff each y
equation) we get the following linear equation system for a change in the exogenous
variable x1:

- (note that the first term is just J ). By

Cramer’s rule we get the following solution for the partial with respect to :

- for j = 1, 2, …, n Which can be generalized to all x variables by

replacing the x and d vectors above with xi.

Note that we don’t actually have to solve for the equilibrium solution!

- Ex. which is satisfied at the point P:

- If the Jacobian is nonzero, we can use the IFR to find

- Totally differentiating each equation gives:

- Which in matrix form is:

- Taking the Jacobian gives:

- which is non zero ( ) at point P. By the IFR:

- We can then use Cramer’s rule to get:

-
- NI Ex:

- So Y,C,T are endog, and the remaining exog.

- If we take the Jacobian of the endogenous variables we get:

- which is always nonzero, and thus implicit

functions exist for the endogenous variables. So we can write the equilibrium income,
consumption and tax as:

- To find the comparative-static derivatives with respect to the exogenous variables, we

can then use . Suppose we want the partial with respect to . We can

write out our system of equations as:

 - and use Cramer’s rule to find that:

- This is exactly what we got before, but this time we didn’t solve for Y* explicitly
- Generally speaking then, we set up the Jacobian of endogenous variables. Multiply it
by the vector of partials with respect to the variable of interest, and set it equal to the
(negative) differential vector of the exogenous variable of interest (in this case, we
did ), and then use Cramer’s rule

Comparative-statics of General Functions:

- Market model and the IFR

- Where D is increasing in Y0 and decreasing in P, S is increasing in P

- The solution will be a function of the exogenous variable , so

- Equilibrium requires that: If we want , IFR

says:

- Furthermore, at equilibrium, , so:

Another approach uses total derivatives:

-
- Taking the total derivative of equilibrium identity with respect to :
- Rearranging and solving gives the same expression

for