Week 13

Dr. Albertus Bramantyo, ST, MT, PhD

albertus.bramantyo@lecturer.prasetiyamulya.ac.id

Take Attendance in LMS/Moodle (Choose “Present” not “Absent”)

from 13.30 – 13.40.
If you can’t fill attendance, please give a screenshot of your problem
that includes the problem and time of the problem
Password for attendance : 25112020
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Learning Objectives
Students should be able to:
 Find first-order and second-order of partial derivatives
of two or more variables
 Determine differentials and small changes
Lecture Outline
Function of Two Variables

Partial Derivatives

Differential and Incremental Changes

Cobb-Douglas Production Function

Optimum Points
Introduction
 In previous lecture (Chapter 6), differentiation was
confined to functions of one independent variable
only. However, more realistic economic models are
usually functions of more than one variable.
 For example: in Chapter 6 the short-run production
function Q = f(L) was described as a function of only
one input (labour)
 In the long run, a more realistic model assumes that
output, Q = f(L,K), is a function of two inputs: labour
and capital.
Functions of Two Variables
General form:
z = f(x, y)
where x and y are independent variables and z is the dependent
variable

For example:
 z = x + 2y +4
 z = x2 (1 + 2y)
 z = ln(x) + 3ln(y)
Functions of Two Variables (2)
Production function: Output = f(Labor, Kapital)
 Q = 5LK
 Q = 80L0.5K0.2

Total revenue for 2 goods

 PX = 36 - 3x and PY = 56 - 4y
 The total revenue will be: TR = (36-3x)x + (56-4y)y

Profit for 2 goods

Graph of a Function with Two Variables
Example: Q = 5LK
Calculate Point of Isoquant
Isoquant: means equal quantity. It shows the various
combination of inputs L and K for which quantity
(production) is constant
L K (Q= 5) K (Q=10) K (Q=15) K (Q=18)
0.02 50.00 100.00 150.00 180.00
0.04 25.00 50.00 75.00 90.00
0.06 16.67 33.33 50.00 60.00
0.08 12.50 25.00 37.50 45.00
0.10 10.00 20.00 30.00 36.00
0.12 8.33 16.67 25.00 30.00
0.14 7.14 14.29 21.43 25.71
0.16 6.25 12.50 18.75 22.50
Calculate Point of Isoquant
Isoquant: means equal quantity. It shows the various
combination of inputs L and K for which quantity
(production) is constant
A two-dimensional view of isoquants
200.00

180.00

160.00

140.00

120.00
K (Q= 5)
K 100.00
K (Q=10)
80.00
K (Q=15)
60.00 K (Q=18)
40.00

20.00

0.00
0.00 0.05 0.10 0.15 0.20
L
Lecture Outline
Function of Two Variables

Partial Derivatives

Differential and Incremental Changes

Cobb-Douglas Production Function

Optimum Points
 Partial Differentiation
(First-Order Partial Derivatives)
 Partial Differentiation: One of three variables is
fixed, then differentiation proceeds as normal with the
two remaining variables.

z the first partial derivative of z w.r.t. x

or zx
x (treat other variables as constant)

z the first partial derivative of z w.r.t. y

or z y
y (treat other variables as constant)

Note : w.r.t = with respect to

Exercise 1
Find the first-order partial derivatives for each of the
following functions.
(a) z = 2x2 + 3xy + 5
(b) Q = 10 L0.7 K0.3
(c) U = x2 y5
Answer
(a) z = 2x2 + 3xy + 5

Calculating zx Calculating zy
(b) Q = 10 L0.7 K0.3

Calculating QL Calculating QK
(c) U = x2y5

Calculating Ux Calculating Uy
Partial differentiation:
second-order partial derivatives

  z   z2
   2 or z xx The straight
x  x  x second-order
partial derivatives
 z
   z
2
   2 or z yy
y  y  y
The mixed
second-order
 z
   z
2
partial derivatives
   or z xy
x  y  xy
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Exercises 2
Find the second order partial derivatives for each of the
following functions.
(a) z  2 x 2  3x y  5

(b) Q  10L0.7 K 0.3

(c) U  x 2 y 5

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 Answer
2 0.7 0.3 U  x2 y5
z  2 x  3x y  5 Q  10L K
(a) zx = 4x + 3y (b) QL = 7L-0.3 K0.3 (c) Ux = 2xy5
zxx = 4 QLL = -2.1L-1.3 K0.3 Uxx = 2y5
zxy = 3 QLK = 2.1 L-0.3 K-0.7 Uxy = 10x y4

QK = 3L0.7 K-0.7 Uy = 5x2 y4

zy = 3x
QKK = -2.1 L0.7 K-1.7 Uyy = 20x2 y3
zyy = 0
QKL = 2.1L-0.3 K-0.7 Uyx = 10x y4
zyx = 3
Lecture Outline
Function of Two Variables

Partial Derivatives

Differential and Incremental Changes

Cobb-Douglas Production Function

Optimum Points
 Differential and Small Changes
(Incremental Changes)
Incremental Changes: Small changes in the dependent
variables (y), which result from changes in the independent
variable(s).
For y = f(x)
 dy  dy
dy   dx Δy   Δx
 dx  dx
Example: P = Q2. If Q is increased by 3%, use
differentials to find approximate change in P

See Worked Example 7.5 (page 375)

Worked Example 7.5
Answer for 7.5(c):
𝑑𝑃
𝑑𝑃 = 𝑑𝑄
𝑑𝑄
𝑃=𝑄 ;
= 2𝑄 ;
𝑑𝑄 = 3% × 𝑄 = 0.03𝑄
𝑑𝑃 = 2𝑄 × 0.03𝑄 = 0.06𝑄
𝑑𝑃 = 6% 𝑄 = 6% 𝑃

3% increase in Q will result in 6%

increase in P, approximately

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 Differential and Small Changes
(Incremental Changes)

For z = f(x,y)
 z   z   z   z 
dz   dx   dy Δz   Δx   Δy
 x   y   x   y 
Example: TR = 5W2A3. If W is increased by 5% and A is
decreased by 2%, use differentials to find approximate
percentage in TR.

See Worked Example 7.6a (page 376)

Worked Example 7.6a

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Worked Example7.6a (Solution)
Answer for 7.6a(b)(i) :
𝜕𝑇𝑅 𝜕𝑇𝑅
∆ 𝑇𝑅 = ∆𝑊 + ∆𝐴
𝜕𝑊 𝜕𝐴
∆ 𝑇𝑅 = 10𝑊𝐴 ∆𝑊 + 15𝑊 𝐴 ∆𝐴
Wages increased by 5 %  ΔW = 0.05W
Advertising doesn’t change  ΔA = 0
∆ 𝑇𝑅 = 10𝑊𝐴 0.05𝑊 + 15𝑊 𝐴 0
∆ 𝑇𝑅 = 0.5𝑊 𝐴
TR = 5W A so :
2 3

∆ 𝑇𝑅 = 5𝑊 𝐴 0.1
∆ 𝑇𝑅 = 𝑇𝑅 × 10%
TR approximately increases by 10%
Answer for 7.6a(b)(ii) :
𝜕𝑇𝑅 𝜕𝑇𝑅
∆ 𝑇𝑅 = ∆𝑊 + ∆𝐴
𝜕𝑊 𝜕𝐴
∆ 𝑇𝑅 = 10𝑊𝐴 ∆𝑊 + 15𝑊 𝐴 ∆𝐴
Wages increased by 5 %  ΔW = 0.05W
Advertising decreased by 2%  ΔA = – 0.02A
∆ 𝑇𝑅 = 10𝑊𝐴 0.05𝑊 + 15𝑊 𝐴 −0.02𝐴
∆ 𝑇𝑅 = 0.5𝑊 𝐴 − 0.3𝑊 𝐴 = 0.2𝑊 𝐴
TR = 5W2A3 so :
∆ 𝑇𝑅 = 5𝑊 𝐴 0.04
∆ 𝑇𝑅 = 𝑇𝑅 × 4%
TR approximately increases by 4%
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Lecture Outline
Function of Two Variables

Partial Derivatives

Differential and Incremental Changes

Cobb-Douglas Production Function

Optimum Points
 Cobb-Douglas Production Function
Production Function: Q = f(L,K) = A Lα Kβ
 Q = output/quantity produced
 A, α, β constants
 L = units of labour
 K = units of capital
 0<α<1, 0<β<1, L>0, K>0

Marginal Product of Labor

Marginal product
Marginal Product of Capital
 Cobb-Douglas Production Function
Marginal Product of Labor:
MPL > 0  with capital held constant,
Q
MPL  QL 
Q increases as L increases. L
QLL< 0  with capital held constant, Law of
MPL decreases as L increases  diminishing
returns to labour

Marginal Product of Capital:

Q
MPK > 0  with labour held constant, MPK  QK 
Q increases as K increases. K
QKK < 0  with labour held constant,
MPK decreases as K increases  Law of diminishing
returns to capital
 Cobb-Douglas Production Function
Production Function: Q = f(L,K) = A Lα Kβ

 Average product of labor: APL = Q/L

Average product of capital: APK= Q/K
 MPL = α (APL)  MPL < APL
 MPK = β (APK)  MPK < APK
• Normally, a producer would desire productivity to increase as the
amount of each input increases, indicated by positive marginal
functions.
• However, the rate of increase usually slows down as the amounts of
inputs become progressively larger, indicated by negative second
derivatives.
• In practice, a firm produces output over a certain range of the
production function as outlined by the following production
conditions.

 Marginal Rate of Technical Substitution (MRTS)

. .
Given Q constant, MRTS = dK/dL
. .
Exercise 3: Q = 80L0.5K0.2
 Q   Q 
dQ   dL   dK  0=(MPL)dL+(MPK)dK MRTS = slope on

 L   K   MRTS = dK/dL = -MPL//MPK

isoquant condition
(Q = constant) so
dQ = 0
Worked Example 7.8

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Worked Example 7.8 (Solution)

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Worked Example 7.8 (Solution 2)

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Lecture Outline
Function of Two Variables

Partial Derivatives

Differential and Incremental Changes

Cobb-Douglas Production Function

Optimum Points
 Find the optimum points of y=f(x)
(revisited)
Step 1: Determine the first and second derivatives

Step 2a: Solve the equation dy = 0 to locate turning points

dx
This is the x co-ordinate of the turning point

Step 2b: Find the coresponding y-coordinate

Step 3:
If the second derivative at turning point a positive constant, the
turning point is a minimum.
If the second derivative at turning point a negative constant, the
turning point is a maximum.
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 Find the optimum points of z=f(x,y)
Step 1: Determine the first and second derivatives:
z z  z  z  z
2 2 2
, , 2, 2,
x y x y xy
Step 2a:
z z
Solve the equation: 0 and 0
x y
to locate x-cordinate and y-coordinate turning points

Step 2b: Find the coresponding z-coordinates

2
  z   z    z 
2 2 2
Step 3: Calculate    2  2  -  
 x  y   xy 
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 Find the optimum points of z=f(x,y)
....(Cont)
Step 4: make a conclusions

 2z  z2
conclusion

x 2 y 2
Pos Pos Pos Minimum point

Neg Neg Pos Maximum point

Same Sign Neg Inflection point

Different Signs Neg Sadle point

If Δ = 0 then there is no conclusion. 35

A saddle point is a point
which is a maximum
when viewed along one
axis but a minimum
when viewed along the
other. In fact, it looks like
a saddle; hence its name.
Figure 7.9 shows (a) a
maximum, (b) a
minimum and (c) a
saddle point in three
dimensions.

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Exercise 4

Given that z = x2 + y2 + 20
(a) Find the optimum point.
(b) Determine the nature of the optimum point.
Solution:
Step 1: zx = 2x, zy = 2y, zxx = 2, zyy = 2, zxy = 0
Step 2a: zx = 0  0=2x  x=0
zy = 0  0=2y  y=0
Step 2b: At x=0 and y=0  z= 0+0+20=20
So the optimum point at x=0, y=0 and z=20

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Exercise 4 .... (cont)

Step 3: ▲ = ( zxx )( zyy ) – ( zxy )2 = (2)(2) – (0)2 = 4 > 0

Step 4: as zxx , zyy and ▲ positive, a minimum point exists
at x = 0, y = 0 and z=20.

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 Exercise 5
A monopolist produces two goods, X and Y. The demand function
for each good is given as PX=36-3x and PY=56-4y
(a) Find the quantities of each good which must be sold in order to
maximize the total revenue.
(b) What is the maximum total revenue?
Solution:
(a) TR=PX.x+PY.y=(36 – 3x)x+(56 – 4y)y=36x – 3x2+56 – 4y2
TRx = 36 – 6x, TRy = 56 – 8y, TRxx = – 6, TRyy = – 8, TRxy = 0
TRx = 0  0=36-6x  x=6
TRy = 0  0=56-8y  y=7
▲ = ( TRxx )( TRyy ) – ( TRxy )2 = (– 6)(– 8) – (0)2 = 48 > 0
TR xx <0, TRyy<0 and ▲>0 then it is the maximum point
(b) Max TR= 36(6) – 3(6)2+56(7) – 4(7)2=304
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Exercise 6
A monopolist produces a single good X but sells in two separate markets.
The demand function for each market is given as P1=50-4x1 and P2=80-3x2.
Total Cost=120+8x, where x= x1+x2
(a) Find the price and quantity in each market which maximize profit.
(b) What is the maximum profit
Solution:
(a) TR=P1. x1+P2. x2=(50 – 4x1) x1+(80 – 3x2) x2=50x1 – 4x1 2+80x2 – 3x22
TC=120+8x=120+8x1+8x2
π=TR – TC=42x1 – 4x1 2+72x2 – 3x22 – 120
πx1 = 42 – 8 x1, πx2 = 72 – 6x2, πx1x1 = – 8, πx2x2 = – 6, πx1x2 = 0
πx1 = 0  0=42-8 x1  x1 =42/8=5.25  P1 = 50 – 4(5.25)=29
πx2 = 0  0=72-6x2  x2 =72/6=12  P2 = 80 – 3(12)=44
▲ = (πx1x1)(πx2x2) – (πx1x2)2 = (– 8)(– 6) – (0)2 = 48 > 0
πx1x1 <0, πx2x2 <0 and ▲>0 then it is the maximum point
(b) Max Profit = 42(5.25) – 4(5.25)2+72(12) – 3(12)2 – 120=422.25
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Review Question 1
 What is the second derivatives and of
function ?
 Answer with d2z/dx2 = Zxx = … ; d2z/dy2 = Zyy = … ;
dz/dxdy = Zxy = Zyx = …
 Use ^ for power symbol

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Review Question 2
 A company’s total cost (TC) is given by
where S is wages for sales division and A is
advertisement expenditures. What is the changes in
TC if S decreases by 4% and A increases by 5% ?

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Review Question 3
 A corporation with Cobb-Douglas function Q =
75L0.5K0.5 wants to maintain output at Q = 60.
Calculate the Marginal Rate of Technical Substitution
(MRTS) for L = 1.

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Review Question 4
 A restaurant operates in two locations, x and y. The
demand function for the two locations are given by Px
= 39 – 3x and Py = 50 – 2.5y. What is the maximum
total revenue of the restaurant?

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