Lecture 5 (For Student)

PARTIAL DIFFERENTIATION
Lecture 5
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Learning objectives
• To determine the functions of several variables
• To discuss partial elasticity and marginal functions
• To explain unconstrained optimization
• To explain constrained optimization
• To explain Lagrange multipliers for economic interpretation
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Functions of Several Variables
Learning Objective 1 3
A function, f, of two variables is a rule that assigns to each incoming

pair of numbers, (x,y), a uniquely defined outgoing number, z
f(x,y) = xy + 2y
or as
z = xy + 2y
For example, substituting x = 3 and y = 4 gives
f (3,4) = (3×4) + (2×4) = 20
and substituting x = 4 and y = 3 gives
f (4,3) = (4×3) + (2×3) = 18
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X = independent variable
Y = dependent variable
If X more than one,
y = f(x1, x2, . . . , xn) = x1 x2 … xn + 2xn
Quick Check:
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First-order partial derivatives, fx and fy
z = f(x,y)
The partial derivative of f with respect to x is written as
The partial derivative of f with respect to y is written as
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Second-order partial derivatives, fx and fy
1. for the function obtained by differentiating twice with respect to x
2. for the function obtained by differentiating twice with respect to y
3. for the function obtained by differentiating first with respect to x and

then with respect to y
4. for the function obtained by differentiating first with respect to y and

then with respect to x
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Example:
For the function
f(x1,x2,x3) = x13 + x1 x32 + 5x24
we could differentiate first with respect to x1 to get
and if we further differentiate this with respect to x3 we get
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Small Increments Formula
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Small Increments Formula
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Implicit Differentiation
This formula can be used to fi nd d y /d x given any implicit
function
f (x,y) = constant
that is,
Example:
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Partial Elasticity
and Marginal Functions
Partial Elasticity and Marginal Functions
Elasticity of Demand
The price elasticity of demand is defined to be:
with PA and Y held constant in the function of demand Q = f(P,PA,Y), so
The cross-price elasticity of demand is defined to be:
with PA and Y held constant in the function of demand Q = f(P,PA,Y), so
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• EPA > 0 -> Q increases as PA rises, because consumers buy more
of the Q as it becomes relatively less expensive P
• EPA < 0 -> the alternative good is complementary then Q decreases
as PA rises, because the bundle of goods as a whole becomes more
expensive
The income elasticity of demand is defined to be:
• EY is negative if Q is inferior then demand falls as income rises

• EY is positive if Q is normal then demand rises as income rises
• If EY is of a normal good might even exceed 1. These goods are
called superior (these goods the percentage rise in consumption is
greater than the percentage increase in income)
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Utility
To analyze the behavior of consumers quantitatively we associate with
each set of options a number, U, called utility , which indicates the
level of satisfaction.
Example:
Given the utility function
U = x11/4 x32/4
determine the value of the marginal utilities
when x1 = 100 and x2 = 200. Hence estimate the change in utility when
x1 decreases from 100 to 99 and x2 increases from 200 to 201.
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Utility
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Unconstrained Optimization
This is typified by the problem of profit maximization, which usually
has a finite solution without the need to impose constraints. In a sense
the constraints are built into the profit function, which is defined by
π = TR − TC
because there is a conflict between trying to make total revenue, TR,
as large as possible while trying to make total cost, TC, as small as
possible.
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One Variables Two Variables
Function y = f(x) z = f(x,y)
Step 1 f ′(x) = 0 fx(x,y) = 0
fy(x,y) = 0
to find the stationary points (a,b)
Step 2 • f ″(a) > 0 then the function • fxx > 0, fyy > 0 and fxx fyy − fx2y > 0
has a minimum at x = a at (a,b) then the function has a
• f ″(a) < 0 then the function minimum at (a,b)
has a maximum at x = a • fxx < 0, fyy < 0 and fxx fyy − fx2y > 0
• f ″(a) = 0 then the point at (a,b) then the function has a
cannot be classified using maximum at (a,b)
the available information. • fxx fyy − fx2y < 0 at (a,b) then the
function has a saddle point at
(a,b)
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Example:
A firm is a perfectly competitive producer and sells two goods G1 and
G2 at $1000 and $800, respectively. The total cost of producing these
goods is given by
where Q1 and Q2 denote the output levels of G1 and G2, respectively.

Find the maximum profit and the values of Q 1 and Q 2 at which this is
achieved.
Solution:
TR1 = 1000Q1
TR2 = 800Q2
TR = TR1 + TR2 = 1000Q1 + 800Q2
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Constrained Optimization
method of substitution
Example:
To illustrate the method we will show how to fi nd the minimum value
of the objective function
z = −2x2 + y2
subject to the constraint y = 2x – 1
Solution:
z = −2x2 + (2x − 1)2
= −2x2 + 4x2 − 4x + 1
= 2x2 − 4x + 1
Note the wonderful effect that this has on z . Instead of z being a
function of two variables, x and y , it is now just a function of the one
variable, x . Consequently, the minimum value of z can be found using
the theory of stationary points
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At a stationary point = 0, that is 4x − 4 = 0 which has solution x = 1.
Differentiating a second time we see that
confirming that the stationary point is a minimum. The value of z can
be found by substituting x = 1 into z = 2x2 − 4x + 1 to get
z = 2(1)2 − 4(1) + 1
= −1
It is also possible to find the value of y at the minimum. To do this we

substitute x = 1 into the constraint y = 2x − 1 to get
y = 2(1) − 1 = 1
The constrained function therefore has a minimum value of –1 at the

point (1,1)
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Example:
A firm’s unit capital and labor costs are $1 and $2 respectively. If the
production function is given by
Q = 4 LK + L 2
find the maximum output and the levels of K and L at which it is
achieved when the total input costs are fixed at $105.
Solution:
Total input costs are K + 2L = 105
Step 1: Rearranging the constraint to express K in terms of L gives
K = 105 − 2 L
Step 2: Substituting formula above to production function gives
Q = 4L (105 − 2 L) + L2
= 420L − 7L2
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Step 3:
At a stationary point
420 − 14 L = 0 which has solution L = 30.
Differentiating a second time gives

confirming that the stationary point is a maximum
Q = 420L − 7L2
Q = 420(30) − 7(30)2
Q = 6300
K = 105 − 2L
K = 105 − 2(30)
K = 45
The firm should therefore use 30 units of labor and 45 units of capital to
produce a maximum output of 6300.
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Lagrange Multipliers
Example:
To illustrate the new method consider trying to optimize the value of
x2 − 3xy + 12 x
subject to the constraint 2x + 3y = 6
Solution:
Step 1
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Step 2
x2 − 3xy + 12 x
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We can eliminate x from equation (2) by multiplying equation (1) by 3,
multiplying equation (2) by 2 and adding. Similarly, x can be eliminated from
equation (3) by subtracting equation (3) from (1). These operations give
−9y − 12λ = −36 (4)
−6y − 2λ = −18 (5)
The variable y can be eliminated by multiplying equation (4) by 6 and

equation (5) by 9, and subtracting to get
−54 λ = −54 (6)
so λ = 1.
Substituting this into equations (5) and (2) gives y = 8/3 and x = –1
respectively. The optimal solution is therefore (–1, 8/3) and the corresponding
value of the objective function
x2 − 3xy + 12 = x
is
(−1)2 − 3(–1)(8/3) + 12(−1) = −3
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End of Lecture 5
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PARTIAL DIFFERENTIATION

A function, f, of two variables is a rule that assigns to each incoming

The partial derivative of f with respect to y is written as

2. for the function obtained by differentiating twice with respect to y

3. for the function obtained by differentiating first with respect to x and

4. for the function obtained by differentiating first with respect to y and

and if we further differentiate this with respect to x3 we get

with PA and Y held constant in the function of demand Q = f(P,PA,Y), so

The cross-price elasticity of demand is defined to be:

with PA and Y held constant in the function of demand Q = f(P,PA,Y), so

The income elasticity of demand is defined to be:

• EY is negative if Q is inferior then demand falls as income rises

where Q1 and Q2 denote the output levels of G1 and G2, respectively.

It is also possible to find the value of y at the minimum. To do this we

The constrained function therefore has a minimum value of –1 at the

Differentiating a second time gives

The variable y can be eliminated by multiplying equation (4) by 6 and

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