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A. Methods of Differentiation
The slope of a function y = f(x) is the change in y divided by the corresponding change in x. In
order to find the value of slope, there is a need to use derivatives.
For a function y=f(x), the derivative, written as dy/dx is the slope of the function at a particular
point on the function.
Rules of differentiation:
Example:
y = 10
dy/dx = 0
Example:
y = 10x2
dy/dx = (2)10x(2-1) = 20x
Example:
y = 10 x(1-1)
dy/dx = (1)10X(0) = 10
Example:
y = 20x + 10
dy/dx = (1)20x(1-1) + 0 = 20
Example:
y = (x2 – 3)(x3 + 4x + 2)
If y = f(x)/g(x), then
Example:
y = x2 -4x
x2
(x2)2
(x4)
(x4)
= 4x2
x4
dy/dx = 4/x2
Exercise 1A:
b) Y = 6X2 + 8X + 50
d) Y = X2 + 3X + 4
X2 –4
e) Q = 120 – 0.2P2
i) The maximum or minimum point of a function, y = f(x) can be found by setting the first derivative of the
function to zero and solving the equation for the value(s) of x.
Example 1B:
ii) When the first derivative of a function is zero, the function is at a maximum if the second derivative
is negative, or at a minimum if the second derivative is positive.
Example 2B:
If total revenue, TR = 200Q – 2Q2 , what is the output level that can maximize TR?
Maximize TR = dTR = MR = 0
dQ
= 200 – 4Q =0
4Q = 200
Q = 50
To determine whether Q = 50 is indeed the maximum value, you have to find the second
derivative of the TR function.
dTR/dQ = 200 – 4Q
d TR/dQ
2 2 = -4 (less than zero)
iii. Sometimes, setting the first derivatives to zero will give two extremum values. In order to identify
which one is the optimum value, one has to substitute the two values into the second derivative.
Example 3B:
TR = 7Q – 0.1Q2
TC = 10 + 8Q – 0.3Q2 + 0.01Q3
Profit = TR – TC
= -10 – Q + 0.2Q2 – 0.01Q3
Thus, 3Q – 10 = 0 OR Q – 10 = 0
Q = 10/3 Q = 10
There should be only one optimum value. Therefore, substitute these values into
the second derivative.
iv. To be an optimal value, the value must fulfill both first order condition (setting first derivative
equals zero) and second order condition (finding the second derivative.)
Exercise1B:
1. Optimize the following functions and find the value of x at the optimum point. Then determine
whether x is a minimum or maximum point.
a) y = 3x2 – 4x + 25
b) y = (3x – 2 )2
2. Given the following total revenue and total cost functions of a firm:
TR = 22Q – 0.5Q2
TC = 1/3Q3 – 8.5Q2 + 50Q + 90
determine,
a) the level of output at which the firm maximizes its total profit
b) the maximum profit that the firm could earn.
C. Partial Derivative
In the previous section, the exercises given involve differentiation of simple function i.e. one
dependent and one independent variables. However, functions are normally in the form of
multivariate functions i.e. one dependent but many independent variables. In order to find the
derivative of the multivariate function, we have to find the partial derivative of the function.
Example:
-130 + x + 4(16x) = 0
-130 + x + 64x = 0
-130 + 65x =0
65x = 130
x = 130/65
x = 2
Substitute x = 2 in z = 16x
z = 16x
= 16 (2)
z = 32
Exercise 1C:
a) y = 4 – x2 – 2z + xz + 2z2
determine;
i) the level of output of each commodity at which the firm maximizes its total profit,
ii) the value of the maximum amount of the total profit of the firm
find the value of X and Z that will maximize the function. What is
the maximum value of Y?
In many decision problems, there are constraints imposed that limit the options of choices available
to the decision makers.
Example:
TC = 3x2 + 6y2 – xy
Methods:
1. normal/substitution method
2. lagrangian method
Method 2 : lagrangian
Lagrangian is a process to combine the objective function and the constraint function with a
multiplier (lambda).
Steps:
(i) Objective function : TC = 3x2 + 6y2 – xy
(ii) Constraint function : x + y = 20
(iii) Rewrite the constraint function as follows:
x + y – 20 = 0
OR
20 – x – y = 0
Solution:
[–13y – 7y + 140] = 0 ×7
– 20y – 140 = 0
Y =7 ------ (6)
x = 13 ------ (7)
λ = 71 means if output (constraint) were to increase by one unit from 20 to 21, then the TC (obj.
function) will increase by 71.
Exercise 1D:
It faces the constraint that the output of commodity x plus output of commodity y
must be 12.