THEOREM 8 . 7 .

1 (TEST FOR INFLECTION POINTS)

Let f be a function with a continuous second derivative in an interval I , and let
c be an interior point of I .
(a) If c is an inflection point for f , then f (c) = 0.
(b) If f (c) = 0 and f changes sign at c, then c is an inflection point for f .

FUNCTIONS OF TWO VARIABLES

A function f of two real variables x and y with domain D is a rule that assigns a specified number f (x, y) to each point (x,
y) in D.

PARTIAL DERIVATIVES
If z = f (x, y), then
(i) ∂z/∂x denotes the derivative of f (x, y) w.r.t. x when y is held constant;
(ii) ∂z/∂y denotes the derivative of f (x, y) w.r.t. y when x is held constant.

Higher-Order Partial Derivatives

Partial Elasticities

FUNCTIONS OF N VARIABLES
Given any set D of n-vectors, a function f of n variables x 1, . . . , xn with domain D is a rule that assigns a specified number
f (x) = f (x1, . . . , xn) to each n-vector x = (x1, . . . , xn) in D

MULTIVARIABLE OPTIMIZATION

THEOREM 13.1.1 (NECESSARY CONDITIONS FOR INTERIOR EXTREMA)

A differentiable function z = f (x, y) can have a maximum or minimum at an interior point (x 0, y0) of S only if it is a
stationary point—that is, if the point (x, y) = (x 0, y0) satisfies the two equations

f’1(x, y) = 0, f’2(x, y) = 0 (first-order conditions, or FOCs)

THEOREM 13.2.1 (SUFFICIENT CONDITIONS FOR A MAXIMUM OR MINIMUM)

Suppose that (x0, y0) is an interior stationary point for a C2 function f (x, y) defined in a convex set S in R 2.

(a) If for all (x, y) in S,

f ‘’ 11(x, y) ≤ 0, f’’ 22(x, y) ≤ 0, and f’’11(x, y)f ‘’ 22(x, y) – (f ‘’12(x, y))2 > 0

then (x0, y0) is a maximum point for f (x, y) in S.

(b) If for all (x, y) in S,

f ‘’11(x, y) ≥ 0, f’’22(x, y) ≥ 0, and f’’11(x, y)f’’22(x, y) –(f’’12(x, y))2 ≥ 0

then (x0, y0) is a minimum point for f (x, y) in S.

THEOREM 13.3.1 (SECOND-DERIVATIVE TEST FOR LOCAL EXTREMA)

Suppose f (x, y) is a C2 function in a domain S, and let (x 0, y0) be an interior stationary point of S. Write

A = f’’11(x0, y0), B = f’’12(x0, y0), and C = f’’22(x0, y0)

(a) IfA < 0 and AC −B2 > 0, then (x0, y0) is a (strict) local maximum point.
(b) IfA > 0 and AC − B2 > 0, then (x0, y0) is a (strict) local minimum point.
(c) If AC − B2 < 0, then (x0, y0) is a saddle point.
(d) If AC −B2 = 0, then (x0, y0) could be a local maximum, a local minimum, or a saddle point.
FINDING MAXIMA AND MINIMA
Find the maximum and minimum values of a differentiable function f (x, y)
defined on a closed, bounded set S in the plane.

Solution:

(I) Find all stationary points of f in the interior of S.

(II) Find the largest value and the smallest value of f on the boundary of S, along with the associated points. (If it
is convenient to subdivide the boundary into several pieces, find the largest and smallest value on each piece of
the boundary.

(III) Compute the values of the function at all the points found in (I) and (II). The largest function value is the
maximum value of f in S. The smallest function value is the minimum value of f in S.

CONSTRAINED OPTIMIZATION

THE LAGRANGE MULTIPLIER METHOD

To find the only possible solutions of the problem maximize (minimize) f (x, y) subject to g(x, y) = c
proceed as follows:

(I) Write down the Lagrangian L(x, y) = f (x, y) − λ(g(x, y) − c) where λ is a constant.

(II) Differentiate L w.r.t. x and y, and equate the partial derivatives to 0.

(III) The two equations in (II), together with the constraint, yield the following
three equations:

L’’1(x, y) = f’1(x, y) – λg’1(x, y) = 0

L’2(x, y) = f’2(x, y) – λg’2 (x, y) = 0

g(x, y) = c

(IV) Solve these three equations simultaneously for the three unknowns x, y, and λ. These triples (x, y, λ) are the
solution candidates, at least one of which solves the problem (if it has a solution).

In economic applications, c often denotes the available stock of some resource, and f (x, y) denotes utility or
profit. Then λ(c) dc measures the approximate change in utility or profit that can be obtained from dc units more
(or −dc less, when dc < 0). Economists call λ a shadow price of the resource. If f ∗(c) is the maximum profit when
the resource input is c, then (3) says that λ indicates the approximate increase in profit per unit increase in the
resource.

Note:

Have a copy of this lecture for tomorrow because I will not write this anymore on the board to save time.

We will answer the Problems for Section 14.1 to apply the topics from Chapters 8, 11, 13 and 14 tomorrow.
Please understand the examples given in the book on your own as I will not discuss them anymore. We will
answer the problems instead so you will have more examples to review.