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Section 2.

7: Applications of Derivatives to Business and


Economics

Key Formulas:

1) Profit == Revenue - Cost

2) Revenue == Price. Demand

1
ExamJ2k: (#12, page 202) The average ticket price for a
concert at the opera house was $50. The average attendance
was 4000. When the ticket price was raised to $52,
attendance declined to an average of 3800 persons per
performance. What should the ticket price be in order to
maximize the revenue for the opera house? (Assume a
linear demand curve.)

Solution: Weare looking to maximize revenue in terms of


pnce.
Revenue == Price. Demand

R(p) == p . M (p) where p ==Price, M (p) ==Demand


R(p) ==Revenue
. M (50) == 4000
GIven:
M (52) == 3800

Assuming the demand curve is linear, we have

slope ==m ==4000 - 3800 ==200 ==-100


50-52 -2

The point (50,4000) lies on this line. Using the point-


slope form of the equation of a line, we find that:

M (p) - 4000 == -100(p - 50)


so that
M (p) == -lOOp + 9000

2
Hence R(p) == p. M (p) == -100 p2 + 9000 p.

This is a parabola opening downwards. Let's sketch it.

Critical points:

d
- R(p) == -200p + 9000
dp

So, ~dp R(p) == 0 if and only if

- 200 p + 9000 == 0

200 p == 9000

p == 45

d2
Concavity: ~ R(p) == -200 < 0
dp

Hence: AtpJ

(:\
1.Js- f
We see that a ticket price of $45 maximizes revenue.

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Examw: (#16, page 202) A certain toll road averages
36,000 cars per day when charging $1 per car. A survey
concludes that increasing the toll will result in 300 fewer
cars for each cent of increase. What toll should be charged
in order to maximize the revenue?

Solution: Again we want to maximize revenue in terms of


pnce:

Revenue = Price. Demand

R(p) = p .M (p)
where
p = price in cents, M (p) = demand, R(p) = revenue

We are given that the demand curve is linear with


slope

-300
slope = m = = -300
1

The point (100, 36,000) lies on this line ($1=100


cents). Using the point-slope form of the equation of a
line, we find that:

M (p) - 36,000 = -300(p -100)


so that
M (p) = -300p + 66,000

4
Hence R(p) = p .M(p) = -300p2 +66,000p.

This is a parabola opening downwards. Let's sketch it.

Critical points:

d
- R(p) = -600 p + 66,000
dp

So, ~dp R(p) =0 if and only if

- 600p + 66,000 = 0

600p = 66,000

p = 110

d2
Concavity: ~R(p) = -600 < 0
dp

Hence:
.4 l? (fO

110 P
We see that a ticket price of $1.10 maximizes revenue.

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ExamQk: (# 19, page 203) A savings and loan association
estimates that the amount of money on deposit will be
1,000,000 times the percentage rate of interest. For instance,
a 4% interest rate will generate $4,000,000 in deposits.
Suppose the savings and loan association can loan all the
money it takes in at 10% interest. What interest rate on
deposits generates the greatest profit?

Solution: We want to maximize

Profit == Revenue - Cost

Let

r == percentage interest rate,

per) ==profit, R(r) ==revenue, C(r) ==cost

Then

R(r)== 106.r
'---v--'
x 0.10
"---v--I
amount money interest earned
borrowed

6 r
C(r)==10 .rX -
~ 100
deposIts ~
interest for
the customers

6
Therefore,

6 6 r
P(r) = R(r) - C(r) = (10 . r)(0.10) -10 . r(-)
100

==105 .r-10 4
.r 2 .

Let's sketch the curve.

Critical points:

d 5 4
-P(r)=10 -2.10
dr

So, !!..-P(r) ==0 if and only if


dr

105 - 2 . 104 r = 0

2 . 104r. 105

10 = 2r

r=5

7
--~

d2
Concavity: ~dr Per) = -2.104 <0

Hence:
fi.(r)
~7\
~ r

We see that an interest rate of 5% maximizes profit.