368 Chapter 6â•… Applications of the Derivative
6.3 Exercises
1. In the discussion of economic lot size, use the critical point
theorem to show that 212ƒM2/ k is the economic lot size that
minimizes total production costs.
2. Why do you think that the cost g does not appear in the equa-
tion for q [Equation (3)]?
3. Choose the correct answer. Source: American Institute of
�Certified Public Accountants.╇
The economic order quantity formula assumes that
(a) Purchase costs per unit differ due to quantity discounts.
(b) Costs of placing an order vary with quantity ordered.
(c) Periodic demand for the goods is known.
(d) Erratic usage rates are cushioned by safety stocks.
4. Describe elasticity of demand in your own words.
5. A Giffen good is a product for which the demand function
is increasing. Economists debate whether such goods actu-
ally exist. What is true about the elasticity of a Giffen good?
Source: investopedia.com.╇
6. What must be true about the demand function if E = 0?╇
7. Suppose that a demand function is linear—that is, q = m - np
for 0 … p … m / n, where m and n are positive constants. Show
that E = 1 at the midpoint of the demand curve on the interval
0 … p … m / n; that is, at p = m / 12n2.
8. Suppose the demand function is of the form q = Cp-k, where C
and k are positive constants.
(a) Find the elasticity E.╇
(b) If 0 6 k 6 1, what does your answer from part (a) say
about how prices should be set to maximize the revenue?
(c) If k 7 1, what does your answer from part (a) say about
how prices should be set to maximize the revenue?
(d) If k = 1, what does your answer from part (a) tell you
about setting prices to maximize revenue?
(e) Based on your answers above, is a demand function of the
form q = Cp-k realistic? Explain your answer.
Applications
B u sin e s s a n d E c o n o m i c s
9. Lot Sizeâ•… Suppose 100,000 lamps are to be manufactured
annually. It costs $1 to store a lamp for 1 year, and it costs $500
to set up the factory to produce a batch of lamps. Find the num-
ber of lamps to produce in each batch.╇
1 0. Lot Sizeâ•… A cookie manufacturer has a steady annual demand
for 384,000 boxes of their well-known chocolate cookies. It
costs 756¢ to store 1 box for 1 year and $250 in setup cost to
produce each batch of cookies. Find the number of boxes per
batch that should be produced.╇
1 1. Lot Sizeâ•… Find the number of batches of lamps that should be
manufactured annually in Exercise 9.╇
1 2. Lot Sizeâ•… Find the number of batches of cookies that should be
manufactured annually in Exercise 10.╇
M07_LIAL8971_11_SE_C06.indd 368
13. Order Quantityâ•… A bookstore has an annual demand for
100,000 copies of a best-selling book. It costs $0.50 to store
1 copy for 1 year, and it costs $60 to place an order. Find the
optimum number of copies per order.╇
14. Order Quantityâ•… A local juice producer has an annual demand
for 3000 dozens of empty clean bottles. It costs $5 to store 1
dozen empty bottles for 1 year, and it costs $200 to place an order.
Find the optimum number of dozens of bottles per order.╇
1 5. Lot Sizeâ•… Suppose that in the inventory problem, the storage
cost depends on the maximum inventory size, rather than the
average. This would be more realistic if, for example, the com-
pany had to build a warehouse large enough to hold the maxi-
mum inventory, and the cost of storage was the same no matter
how full or empty the warehouse was. Show that in this case
the number of units that should be ordered or manufactured to
minimize the total cost is
ƒM
q = .
A k
16. Lot Sizeâ•… A book publisher wants to know how many times a
year a print run should be scheduled. Suppose it costs $1000
to set up the printing process, and the subsequent cost per
book is so low it can be ignored. Suppose further that the
annual warehouse cost is $6 times the maximum number of
books stored. Assuming 5000 copies of the book are needed
per year, how many books should be printed in each print run?
(See Exercise 15.)╇
1 7. Lot Sizeâ•… Suppose that in the inventory problem, the storage
cost is a combination of the cost described in the text and the
cost described in Exercise 15. In other words, suppose there
is an annual cost, k 1, for storing a single unit, plus an annual
cost per unit, k 2, that must be paid for each unit up to the maxi-
mum number of units stored. Show that the number of units that
should be ordered or manufactured to minimize the total cost in
this case is
2ƒM
q = .
A k 1 + 2k 2
18. Lot Sizeâ•… Every year, Erin D’Aquanni sells 30,000 cases of
her Famous Spaghetti Sauce. It costs her $1 per year in elec-
tricity to store a case, plus she must pay annual warehouse
fees of $2 per case for the maximum number of cases she will
store. If it costs her $750 to set up a production run, plus $8
per case to manufacture a single case, how many production
runs should she have each year to minimize her total costs?
(See Exercise 17.)╇
Elasticityâ•… For each of the following demand functions, find (a)
E, and (b) values of q (if any) at which total revenue is maximized.
p
19. q = 50 - ╇ 20. q = 14,400 - 40p
4
â•…
2 1. q = 37,500 - 5p2╇ 22. q = 14,400 - 75p2╇
23. p = 400e -0.2q╇ 2 4. q = 8 - 2 ln p╇
╇ ╇
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 6.3â•… Further Business Applications: Economic Lot Size; Economic Order Quantity; Elasticity of Demand 369
Elasticityâ•… Find the elasticity of demand (E) for the given demand
function at the indicated values of p. Is the demand elastic,
inelastic, or neither at the indicated values? Interpret your results.
25. q = 4500 - p2
(a) p = +30╇ (b)╇ p = +50╇
2 6. q = 540 - 3p╇
(a) p = +80 (b)╇ p = +100
27. Elasticity of Crude Oilâ•… The demand for crude oil in the
United States was recently approximated by
q = ƒ1p2 = 2,431,129p - 0.06,
where p represents the price of crude oil in dollars per barrel and
q represents the per capita consumption of crude oil. Calculate
and interpret the elasticity of demand when the price is $100 per
barrel. Source: OPEC Review.╇
2 8. Elasticity of Riceâ•… The demand for rice in Japan for a particu-
lar year was estimated by the general function
q = ƒ1p2 = Ap - 0.13,
where p represents the price of a unit of rice, A represents a con-
stant that can be calculated uniquely for a particular year, and q
represents the annual per capita rice demand. Calculate and inter-
pret the elasticity of demand. Source: Agricultural Economics.
29. Elasticity of Softwareâ•… The Valve Corporation, a software
entertainment company, recently ran a holiday sale on its popu-
lar Steam software program. Using data collected from the sale,
it is possible to estimate the demand corresponding to various
discounts in the price of the software. Assuming that the origi-
nal price was $40, the demand for the software can be estimated
by the function╇
q = 3,751,000p - 2.826,
where p is the price and q is the demand. Calculate and interpret
the elasticity of demand. Source: codinghorror.com.╇
30. Elasticityâ•… The price of beef in the United States has been
found to depend on the demand (measured by per capita con-
sumption) according to the equation
342.5
q = . (c) Show that the elasticity equals 1 at the point found in
p0.5314
Find the elasticity. Is the demand for beef elastic or inelastic?
Source: SAS Institute Inc.╇
3 1. Elasticityâ•… A study of the demand for air travel in Australia
found that the demand for discount air travel from Sydney to
Melbourne (in revenue passenger kilometer per capita, the
product of the number of passengers traveling on a route and
the distance of the route, divided by the populations of the host
cities) depends on the airfare according to the equation
q = 55.2 - 0.022p.
Source: International Journal of Transport Economics.
(a) Find the elasticity when the price is $166.10, the average
discount airfare deflated by the consumer price index to
1989–1990 prices, according to the authors of the study.
M06_LIAL8971_11_SE_C06.indd 369
(b) Is the demand for airfare elastic or inelastic at this price?╇
(c) Find the price that maximizes revenue.╇
32. Elasticityâ•… The price along the West Coast of the United States
for Japanese spruce logs (in dollars per cubic meter) based on
the demand (in thousands of cubic meters per day) has been
approximated by
p = 0.604q2 - 20.16q + 263.067.
Source: Kamiak Econometrics.
(a) Find the elasticity when the demand is 11 thousand cubic
meters a day. (Hint: To find dq / dp when p is expressed in
terms of q, you may use the fact that
dq 1
= .
dp dp / dq
Review the explanation of the derivative of the natural
logarithm to see why this is true.)╇
(b) Is the demand for spruce logs elastic or inelastic?╇
(c) What happens to the elasticity as q approaches 16.6887?
Discuss the limitations of this model for the price as a
function of the demand.╇
33. Elasticityâ•… A geometric interpretation of elasticity is as
follows. Consider the tangent line to the demand curve
q = ƒ1p2 at the point P0 = 1p0, q02. Let the point where the
tangent line intersects the p-axis be called A, and the point
where it intersects the q-axis be called B. Let P0 A and P0 B be
the distances from P0 to A and to B, respectively. Calculate
the ratio P0 B / P0 A in terms of p0, q0, and ƒ′1 p02, and show
that this ratio equals the elasticity. Source: The AMATYC
Review.
34. Elasticityâ•… Here’s another way to identify the point of unit
elasticity when the demand function is a straight line.
(a) Suppose the demand function has the form q = mp + b,
where m 6 0 and b 7 0. Find the points where the line
intersects the p and q axes.╇
(b) Find the midpoint of the two intercepts found in part (a).╇
part (b). In other words, the point of unit elasticity is
midway between the two intercepts of a straight line
demand function.
Your Turn Answers
1. 6 batches per year with 3000 cans per batch
2. Order 98 units about every 3.675 months.
3. E = 0.909; the demand is inelastic.
4. E = 40; the demand is elastic.
5. Demand is inelastic when p 6 20 and demand is elastic
when p 7 20. The maximum revenue is $48,000 when
p = $20.
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