Intermediate Microeconomics Calculus Module

Lecture 2 – Functions of two (or more) variables.

In this lecture we will discuss calculus and algebra when the function involves more than one
variable. You may use the following reference to supplement these notes:

Larson, Sections 7.4 and 7.5.

You may also use Frank-Parker Math Module 12, although this module will be too advanced for
the beginning of your course, but should be useful later on:

http://www.mcgrawhill.ca/college/olcsupport/frank4/math/pdf/mod12.pdf

Examples of multivariate functions:

Ex.1

What does this function look like? It is difficult to graph since it has three dimensions.

Note that wolframalpha.com is a wonderful free tool which can assist with many math problems.
Simply type in your equation at the prompt.

One useful way of visualizing a three dimensional object is through a level set. We get a level set
when we pick a point on the vertical axis, and horizontally slice through the three dimension
object, allowing us to depict the resulting “slice” in two dimensions. Economic examples are
indifference curves, and isoquants.
Variables vs. Parameters

Let’s see some more examples of functions.

Ex.2
Ex.3
Ex.4

What is similar, and what is different, between Ex.2, Ex.3, and Ex.4? They all contain constants,
while in Ex.3 and Ex.4 the constants a and c are unknown, so we call them parameters. It is
important to be able to distinguish parameters or constants from variables. The variables in the
above examples are x and z; we assume these variables can change. Parameters and constants we
take as given.

Economic examples of multivariate functions

Cobb-Douglas Utility function: ;

Cobb-Douglas Production function: ;

Let’s focus on production, as utility is more of an abstract concept.

Ex.5

In Ex.5, output is produced by combining capital (K) and labour (L). What does this function
look like?
If we fix output at a certain level, and graph all the different amounts of K and L that we can
combine to exactly attain the desired level of output, we have a level set. The level set obtained
by taking a horizontal slice of the production function is called an isoquant.

Suppose that K = 16 and L = 4. According to the production function in Ex.5, output is:

The above isoquant shows all the possible ways to achieve an output of 8 by combining various
amounts of capital and labour.

At some point we may be interested in marginal products. For example, suppose the producer
would like to know how much output will increase when either capital or labour increases. To
address this, we will need partial derivatives.

Partial Derivatives

A partial derivative of a function with multiple variables is the derivative of the function with
respect to one of those variables, with the other variables treated as constants.

Consider the following function: .

The partial derivatives of this function are:

These derivatives tell us how much z will change given a small change in x or y, holding the
other variable constant.

Just like a regular derivative, a partial derivative need not always exist. If the function is not
continuous we cannot take a derivative, e.g. or .

Production Function Example

Consider the production function from above:

What is the marginal product of capital and labour?

When K = 16 and L = 4, these marginal products are:

Practice

Find all the partial derivatives for the following functions.

1.)

Note that a is a parameter. We do not take the partial derivative !

2.)

3.)

4.)

Again, notice that a, b, c, and T are all parameters which we do not take partial derivatives of.

5.)

Notice that T has now been specified as a variable. Now we can take a partial derivative.

6.)

The chain rule is used multiple times in the above.

References

Brief Calculus – An Applied Approach, Ron Larson, 8th Edition.