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Optimal Constraints

 
 
koitaki
 
Reply Mon 13 Sep, 2010 10:59 am
Hi,

I lack enough knowledge at maths to decipher the leap that an author has made.
Could someone please be kind enough to offer an explanation.

The objective equation is:
Max EP = l.L + b.B - d.D - b.E
(Its a finance equation, so Max Economic Profit is a function of Loans, Bonds, Deposits and Equity)

The constraint is:
R + L + B = D + E

Apparently you can substitute the constraint into the objective function and get:
Max EP = (l-b).L + [b.(l-r)-d].D

All little letters are associated with the capital letters. Eg. r is the rate associated with R, or the Reserves.

I hope that's enough information.
Many thanks in advance,
Chris
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koitaki
 
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Reply Mon 13 Sep, 2010 11:06 am
@koitaki,
sheesh, I just worked out the answer.
I overlooked the fact that r was the ratio of R to D.
Once I realised that, I worked the rest out ok.
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