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8 Optimization

(Maximization or Minimization)

of Single Variable Functions

one independent variable

constraint is closed interval [a0,b0]

inner solution of maximization problem or

minimization problem

optimization

f (a)>0

a, then f (x) goes up.

f (a)<0 If x decreases infinitesimally

from a, then f (x) goes down.

f (a)=0 slope of tangency line to f (x) at

x=a is zero

f (x*)=0 (first order condition)

2

y=f(x)

a1

a2

a3

a4

differentiable and concave function y=f(x)

the slope of tangency line of f (x) at x=a is f (a)

equation y f (a) f (a)( x a)

f ( x) f (a) f (a)( x a) x

f (a) 0 f ( x) f (a) x

f (x) is maximized at x=a

the maximum is f (a)

concave function

f(a)+(x2-a)f (a)

f(x2)

f(a)

f(x)

f(a)+(x1-a)f (a)

f(x1)

x1

x2

concave function

f(a)

f(x)

differentiabel and convex function y=f(x)

the slope of tangency line f (x) at x=a is f (a)

equation

y f (a) f (a)( x a)

f ( x) f (a) f (a)( x a) x

f (a) 0 f ( x) f (a) x

f (x) is minimized at x=a

the minimum is f (a)

convex function

f(x1)

f(a)+(x1-a)f (a)

f(a)

f(x2)

f(a)+(x2-a)f (a)

f(x)

x1

x2

function

f(x)

f(a)

y=f (x) is second order differentiable

(f (a))= f (a) second order derivative

f (a)

d y

2

dx

xa

d f ( x)

2

dx

x a

n order derived function

10

functions and convex functions

f '(x)0 slope of tangency line is negative

y=f(x) is monotone decreasing

second order derivative f (x)0 (for any x)

function y=f '(x) is monotone decreasing

slope of tangency line is decreasing

concave function

f (x) is minimized at a such that f '(a) =0

11

and convex functions

2nd derivative f ''(x)0 (for all x)

concave function

f (x) is maximal at a such that f '(a)=0

2nd derivative f ''(x)0 (for all x)

convex function

f (x) is minimal at a such that f ' (a)=0

12

and convex functions

2nd derivative f '' (x)<0 (for all x)

strictly concave function

a such that f ' (a)=0 is unique if it exists

( f (x) has maximum)

2nd derivative f '' (x)>0 (for all x)

strictly convex function

a such that f ' (a)=0 is unique if it exists

( f (x) has minimum)

13

Exercises

following functions.

f ( x) ax bx c

f ( x) 2a

f ( x) 2ax b

If a 0, then concave; if a 0, then convex.

(1)

f ( x) e

ax

2 ax

f ( x) ae

f ( x) a e

2

ax

a 0 and e 0 convex

(2)

ax

14

Exercises

following functions.

a

f ( x)

x

a

2

a

(3)

f ( x) 2

f ( x) 3

x

x

a x 0 convex, a x 0 concave

(4)

f ( x) a log x

a

a

f ( x)

f ( x) 2

x

x

2

Since x 0, a 0 concave, a 0 convex

15

maximal in the neighborhoodlocal maximum

minimum in the neighborhoodlocal minimum

function y=f (x) is maximum in x=x0

f (x0) is maximum in open-interval (a,b)

f (x0) is local maximum

function y=f (x) is minimum in x=x0

f (x0) is minimum in open-interval (a,b)

f (x0) is local minimum

16

(Minimum and local minimum)

maximum among the local maximums

maximum

minimum among the local minimums

minimum

17

Indep. v. x

derivative f (x)

fluctuation

local

max

Local

min

function f(x)

f(a)

f(b)

f (a) 0

f (b) 0

18

y=f(x)

b

19

maximum and minimum

f '(a)>0 f (x) increases when x increases

from a infinitesimally

f '(a)<0 f (x) decreases when x increases

from a infinitesimally

f '(a)=0 zero slope of tangent of f (x) in x=a

maximum (minimum) in x=x * f '(x*)=0

1st order conditions for maximum (minimum)

20

minimum

2nd order derivative f (a)0

f (x) is maximum in a such that f (a) =0

2nd order derivative f (b)0

f (x) is minimum in b such that f (b) =0

21

The marginal productivity

labor imput

production q

production function q f ()

Increment of the production by adding one

unit of labor

q f () f ( ) f () f ()

q

f () marginal product

22

f () 0

f ( x)

(strictly

concave function

total differentiation

df () f ()d

total differential

23

Exercises

whether or not the marginal productivity

diminishes. Moreover, compute a total

differential.

f ( )

1

f ()

2

1

df ()

d

2

(1)

f ()

1

3

4

decreasing

24

Exercises

whether or not the marginal productivity

diminishes. Moreover, compute a total

differential.

f () a log( 1) (a 0)

a

a

f ()

0

f ()

2

( 1)

1

decreasing

a

df ()

d

1

(2)

25

Exercises

whether or not the marginal productivity

diminishes. Moreover, compute a total

differential.

(3)

f ( ) 1 e

f () ae

df () ae

f () a e

2 a

al

decreasing

26

marginal cost

cost function C C (q)

increment of the cost by producing one

additional unit of the product

C

marginal cost MC C (q)

q

27

The law of diminishing marginal productivity

f(l) is decreasing f(l)<0 (strictly concave)

C(q) is increasing C(q)>0 (strictly convex)

28

maximization problem

total revenue R(q) total cost C(q)

profit function (q)=R(q)C(q)

(q) R(q) C(q) MR MC

(q) R(q) C(q) MR MC

(q) 0 MR MC

profit max (q) 0 MR MC

increasing marginal cost

29

Profit maximization problem of a firm

which inputs labor and produces some

good

Firm behaves as the price taker

labor input

product q (variable)

production function q f ()

profit pq w

maximization

30

steps of solution

step 1: find necessary minimum of labor

step 2: find necessary minimum total cost

step 3: Find production maximizing profit

q=f(l) is twice differentiable and f(0)=0

f(l)>0 strictly monotone increasing

f(l)<0 strictly concave

31

1

f (q) h(q)

function h(q) is a strictly convex h''(q)>0

Example : q h(q) q 2 (q 0)

1

1

q

0, q

0

2 0

3

2

2

32

C (q) w h(q)

h(q) is strictly convex C''(q)=wh''(q)>0

Example : q

C (q) wq 2 (q 0)

33

Find profit function and use 1st order

conditions

pq C(q) pq w h(q)

Profit function is strictly concave

''= C''(q).<0

2

Example : q pq wq (q 0)

p

p 2wq 0 q

2w 0

2w

34

function

necessary minimum

labor inputs

function

total cost

function

h( q) f ( q)

TVC( q) wh( q)

wh( q) TFC

35

Average total cost ATC, AC

TC( q)

ATC ( q)

Average variable cost AVC

q

Average fixed cost AFC

TVC ( q)

AVC ( q)

q

TFC ( q)

AFC ( q)

q

36

cost and marginal cost

AVC( q) 0 MC ( q) AVC ( q)

AVC( q) 0 MC ( q) AVC ( q)

AVC( q) 0 MC ( q) AVC ( q)

37

cost and marginal cost

ATC( q) 0 MC ( q) ATC ( q)

ATC( q) 0 MC ( q) ATC ( q)

ATC( q) 0 MC ( q) ATC( q)

38

C(q)

E

D

A

c0

q0

q1

q2

q

39

MC

ATC

AVC

AFC

0

q0

q1 q2

q

40

max (q)=pq-C(q)

By the increase of the additional one unit of

production, the revenue increases in price p.

On the other hand, the cost increases only

by the marginal cost MC to enhance

production of the unit. The profit maximum

attains where both make a balance.

p=MC (price=marginal cost)

marginal cost is increasing MC'>0

41

C(q)

C,R

R=pq

c0

0

q**

q*

-c0

(q)

42

optimal provision supply curve

MC increasing upward-sloping part of MC

curve

Supply is q3 for price p3. Minimal profit in q3'.

Supply is q4 for price p4. Deficit is fewer than FC.

Candidacy for p5 is q5. It isn't supplied because

deficit is larger than FC.

The supply curve is a part of MC curve above

the shutdown point

43

p

MC

ATC

AVC

p3

p2

p4

p1

A : break-even point

B : shutdown point

p5

q3'

q0 q5 q1 q2 q3

q4

q

44

cost function

TFC

ATC ( q) AVC ( q) 2

q

TFC

ATC ( q) AVC ( q) 2 3

q

45

and the geometrical average

x y

xy

2

( x y ) 2 xy ( x ) ( y ) 2 x y

2

( x y) 0

2

46

total cost

ATC(q) AVC (q) AFC (q)

equality holds only when

AVC(q)=AFC(q)

ATC(q) is minimal when AVC(q)=AFC(q)

47

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