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Chap.

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

First order conditions of


optimization
f (a)>0

If x increases infinitesimally from


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

x=x* is an inner solution of the problem


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

a1

a2

a3

a4

concave function and maximum


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)

graph and tangency line of 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

maximum and graph of a


concave function
f(a)
f(x)

convex function and minimum


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)

graph and tangency line of 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

minimum and graph of a convex


function
f(x)

f(a)

second order derivative

If the function y=f (x) is differentiable at x=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

second order derived function(f (x))= f (x)


n order derived function
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Conditions for concave


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

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Conditions for concave functions


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

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Conditions for concave functions


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)

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Exercises

Judge concavity or convexity with the


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

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Exercises

Judge concavity or convexity with the


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
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Local maximum and minimum


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

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Maximum and local maximum


(Minimum and local minimum)
maximum among the local maximums
maximum
minimum among the local minimums
minimum

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Graph and fluctuation of function


Indep. v. x

derivative f (x)

fluctuation

local
max

Local
min

function f(x)

f(a)

f(b)

f (a) 0

f (b) 0
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Fluctuation of the function


y=f(x)

b
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1st order conditions for local


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)

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Conditions to be maximum and


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

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Marginal concepts in economics


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

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marginal concepts in economics

Diminishing marginal productivity

marginal productivity f () is decreasing


f () 0
f ( x)
(strictly
concave function
total differentiation

df () f ()d
total differential
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Exercises

Show the marginal productivity of f(x). Judge


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
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Exercises

Show the marginal productivity of f(x). Judge


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)

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Exercises

Show the marginal productivity of f(x). Judge


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
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Marginal concepts in economics


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
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Marginal concepts in economics


The law of diminishing marginal productivity
f(l) is decreasing f(l)<0 (strictly concave)

The law of increasing marginal cost


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

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The solution of the profit


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

always holds if decreasing marginal revenue,


increasing marginal cost
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Example of profit maximization


Profit maximization problem of a firm
which inputs labor and produces some
good
Firm behaves as the price taker

labor input

product q (variable)

wage rate w product price p (fixed)

production function q f ()
profit pq w

maximization

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Profit maximization problem


steps of solution
step 1: find necessary minimum of labor
step 2: find necessary minimum total cost
step 3: Find production maximizing profit

Assumptions of the production function


q=f(l) is twice differentiable and f(0)=0
f(l)>0 strictly monotone increasing
f(l)<0 strictly concave
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Step 1 : efficient production

Find a minimum labor input function


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
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Step 2 : Cost minimization

Find the total cost function

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

Example : q

C (q) wq 2 (q 0)

MC (q) C (q) 2wq C (q) 2w 0


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Step 3 : Profit maximization


Find profit function and use 1st order
conditions
pq C(q) pq w h(q)
Profit function is strictly concave
''= C''(q).<0

p w h(q) 0 profit max


2
Example : q pq wq (q 0)
p
p 2wq 0 q
2w 0
2w
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The derivation of the cost


function

necessary minimum
labor inputs

total variable cost


function

total cost
function

h( q) f ( q)
TVC( q) wh( q)

C TC( q) TVC ( q) TFC


wh( q) TFC
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A variety of average costs


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

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


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Relation between average variable


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)

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Relation between average variable


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)

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C(q)

E
D
A

c0

q0

q1

q2

q
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MC

ATC
AVC

AFC
0

q0

q1 q2

q
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Maximization of short-run profit


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

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C(q)

C,R

R=pq

c0
0

q**

q*

-c0
(q)
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Short-run supply curve

price=marginal cost, increasing marginal cost


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
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p
MC

ATC
AVC

p3

p2
p4

p1

A : break-even point
B : shutdown point

p5

q3'

q0 q5 q1 q2 q3
q4

q
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The shape with average total


cost function
TFC
ATC ( q) AVC ( q) 2
q
TFC
ATC ( q) AVC ( q) 2 3
q

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Relation of the arithmetic mean


and the geometrical average

for any positive numbers x, y

x y
xy
2

equality holds only for x=y

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

( x y) 0
2

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The minimum of the average


total cost
ATC(q) AVC (q) AFC (q)

2 AVC (q) AFC (q)


equality holds only when
AVC(q)=AFC(q)
ATC(q) is minimal when AVC(q)=AFC(q)
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