Lesson 21 (Sections 15.

67) Partial Derivatives in Economics Linear Models with Quadratic Objectives

Math 20

November 7, 2007

Announcements
Problem Set 8 assigned today. Due November 14. No class November 12. Yes class November 21. OH: Mondays 12, Tuesdays 34, Wednesdays 13 (SC 323) Prob. Sess.: Sundays 67 (SC B-10), Tuesdays 12 (SC 116)

Part I Partial Derivatives in Economics

Outline

Marginal Quantities

Marginal products in a Cobb-Douglas function

Marginal Utilities

Case Study

Marginal Quantities
If a variable u depends on some quantity x, the amount that u changes by a unit increment in x is called the marginal u of x. For instance, the demand q for a quantity is usually assumed to depend on several things, including price p, and also perhaps income I . If we use a nonlinear function such as q(p, I ) = p 2 + I to model demand, then the marginal demand of price is q = 2p 3 p Similarly, the marginal demand of income is q =1 I

A point to ponder

The act of xing all variables and varying only one is the mathematical formulation of the ceteris paribus (all other things being equal) motto.

Outline

Marginal Quantities

Marginal products in a Cobb-Douglas function

Marginal Utilities

Case Study

Marginal products in a Cobb-Douglas function

Example (15.20)
Consider an agricultural production function Y = F (K , L, T ) = AK a Lb T c where Y is the number of units produced K is capital investment L is labor input T is the area of agricultural land produced A, a, b, and c are positive constants Find and interpret the rst and second partial derivatives of F .

Outline

Marginal Quantities

Marginal products in a Cobb-Douglas function

Marginal Utilities

Case Study

Let u(x, z) be a measure of the total well-being of a society, where x is the total amount of goods produced and consumed z is a measure of the level of pollution What can you estimate about the signs of ux ? uz ? uxz ? What formula might the function have? What might the shape of the graph of u be?

Outline

Marginal Quantities

Marginal products in a Cobb-Douglas function

Marginal Utilities

Case Study

Anti-utility

Found on The McIntyre Conspiracy: I had a suck show last night. Many comics have suck shows sometimes. But suck is such a vague term. I think we need to develop a statistic to help us quantify just how much gigs suck relative to each other. This way, when comparing bag gigs, I can say,My show had a suck factor of 7.8 and youll know just how [bad] it was.

Anti-utility

Found on The McIntyre Conspiracy: I had a suck show last night. Many comics have suck shows sometimes. But suck is such a vague term. I think we need to develop a statistic to help us quantify just how much gigs suck relative to each other. This way, when comparing bag gigs, I can say,My show had a suck factor of 7.8 and youll know just how [bad] it was. This is a opposite to utility, but the same analysis can be applied mutatis mutandis

Inputs
These are the things which make a comic unhappy about his set: low pay gig far away from home Bad Lights Bad Sound Bad Stage Bad Chair Arrangement/Audience Seating Bad Environment (TVs on, loud waitsta, etc.) No Heckler Control Restrictive Limits on Material Bachelorette Party In Room No Cover Charge Random Bizarreness

Variables

Tim settled on the following variables: t: drive time to the venue w : amount paid for the show S: venue quality (count of bad qualities) from above Let (t, w , S) be the suckiness function. What can you estimate about the partial derivatives of ? Can you devise a formula for S?

Result
Tim tried the function (t, w , S) = t(S + 1) w

Result
Tim tried the function (t, w , S) = t(S + 1) w

Example (Good Gig)

500 dollars in a town 50 miles from your house. When you get there, the place is packed, theres a 10 dollar cover, and the lights and sound are good. However, they leave the Red Sox game on, and they tell you you have to follow a speech about the club founder, who just died of cancer. Your Steen Coecient is therefore 2 (TVs on, random bizarreness for speech)

Result
Tim tried the function (t, w , S) = t(S + 1) w

Example (Good Gig)

500 dollars in a town 50 miles from your house. When you get there, the place is packed, theres a 10 dollar cover, and the lights and sound are good. However, they leave the Red Sox game on, and they tell you you have to follow a speech about the club founder, who just died of cancer. Your Steen Coecient is therefore 2 (TVs on, random bizarreness for speech) = 100 (1 + 2) = 3/5 = 0.6 500

Example (Bad Gig)

300 dollars in a town 200 miles from your house. Bad lights, bad sound, drunken hecklers, and no cover charge. Thats a Steen Coecient of 4. 400 (1 + 4) = 6.666 = 300

Part II Linear Models with Quadratic Objectives

Outline

Algebra primer: Completing the square

A discriminating monopolist

Linear Regression

Algebra primer: Completing the square

Outline

Algebra primer: Completing the square

A discriminating monopolist

Linear Regression

Example
A rm sells a product in two separate areas with distinct linear demand curves, and has monopoly power to decide how much to sell in each area. How does its maximal prot depend on the demand in each area?

Outline

Algebra primer: Completing the square

A discriminating monopolist

Linear Regression

Example
Suppose were given a data set (xt , yt ), where t = 1, 2, . . . , T are discrete observations. What line best ts these data?