16

roo!s for Comparative

,tattCS

Mere pow er and mere kno wkd ge ua b

hum an nat ure bw de not bus s 1L
nringJ
-Fr anc is Bacon (The Advancement of Lea

pro per ties of functions defined imp liat ly

The ultimate aim of this cha pte r is to stud y
by a system of simuJta neo us equ atio ns.
In par ticular, we are intel'e:Sted tn how
respond to changes in para met crs lile
economic variables like demand and s upply is:
price. This is the s ubj ect of com par ativ
e stat ics. in which the general quesooo
n the parameters of the problem cbaoe-oe?
What happens to an opti mal solu tion whe
proporti on of eco nom ic ana lysi s reli es on comparative statics. so dus top, c
A l~e
IS eitttcmcly imp orta nL

161
' The Chain Ru le
functions of ooe
Many CCOnom.ic mo dels inv olv e com pos ite functions. These are
themselves func tions of O<ber basic
~several Variables in whi ch the variables are of
ction of cap iw and l.abor . both1v
ables. For exa mpl e out put could be a fun "th . '> ":1"""' -ne ra1
wtuch are funct ion s of 'tim e. How docs out put vary "'.1 ~e · " . --~ -
0 • .;

n as us bas ic v~a ble s cha nge .

Tbihat _happens to the val ue of a com posite fun ctio the next sec aon . The ~ s ulcs
111
this. and
~ is the general pro blem we discuss in ves . Thi s
..._, lled also gen eral ize the cha
in rule of Sec tion 5.2 10 par tial den vao
--uo n co .d crs the sim ples t cas e.
DSJ
SupPos c l is a function of x and y , with
[I}
i == F(x . y)
555
 Chapter 16 0015 for Comparative Statics
-r.
556 11

w here x an d .
,. both arc fu nctions of a variable r. with

X = j(t ). Y = g (r )
Substituting for x and J in f 1] gives
[i .
z = F(f(t). g(t))
[3,
so that : is a function of t alone. A change in r wiJI in general lead to t"-- .
in both f (t ) and g(t ). and as a res.ult, z ch_anges. How does z change~~
changes? For example, will a small increase m r lead to an increase or a ~
in :.? The answer to such questions will be easier if we can find an express· ,
100 ,ar
d z/d t. the rate of change of z w1' th respect to r. This 1.s given
.
lby the foDOWtng
rule:

The Chain Rule

When.:= F (x. y ) with x = f(r) and y = g(t), then

dz , dx , dy
-d
I
= F (x. y)-dt + F?(x,
1
- .
y) -d
t
•l1-o.1.1

lt is important to understand precisely the content of [16.l]. It gives the deri,'311vt

of z = F (x , y ) with respect to r when x and y are both differentiable funcuoos
of r. This derivative is usually called the total derivative of z with respcci ~ 1
According to [16.1], one contribution to the total derivative occurs becaUSC the ~
variable in F(x , y), namely x, depends on t . This contribution is F;(.t . _v)d.t J;
A second contribution arises because the second variable in F (x . _v). na.rod~ '·
also depends on t . This comribution is F~ (x, y) d y / d t . The total derivative d~ a!
i:s die sum of the rwo contributions. •
Here is a simple example.
Example 16.1 . . _ : :snJ
1
Use (16.1] to compute dz/dt when z = F(x , y) = x~ + y> wi .T -
th
y =
2, . '
Solution We get

dy
F{ (x, y) = 2x. dx
- =2t. -- :::: 2
dt
dt
Then formula [16.1J gives

dz ~
dt = 2x . 2r + 3 y2. 2 = 4tx + 6y2 = 4r3 + 24r
 Sec. 16 1 1 r,
. . he Chain Rule 557
i,ere the last equ~ltty comes from substituti
7or x and y respecllv~ly. In this case, we can
=
:!t~: ?p~opriate functions oft
12 and y 2t m the fonnula for F ( ham rule by substitutin
f. :::: I · ..t , Y) and th d. g
respect to r. The resu t 1s en 1ffercntiating with

3
L
?
_== x- + y = (r-)-,l + (2r) 3 = 14 + 8r3 ~ dz- :: 4( 3 + 24/ 2
dr
as before.

EIJJIIPle 16.2 ..
S uppose two commod1nes are sold on a market w"'-e pn· .
•n:;r ces per ODJt are
respectively p and q. Suppose that the demands for the two comm...,ca•
. (All vu, es
depend on thesc pnces. other factors that might influence demand are
assumed to be constant.) In particular, Jet D, = Di(p . q) den()(t demand
for the first commodity.
Suppo,se that prices p and q vary with timer, so that p = p(t ) and
q = q(t ). Then demand can be detennined as a function D1 = D, (p(t ). q (l) J
of r alone, and it is interesting to ask how D 1 changes with t. This problem
is precisely the same as that posed earlier-only the symbols are different.
Changing the symbols as appropriate, and then using the chain rwe [16. I l
implies that

dD1
-=
dt
. .
where we have denoted time denvanves bY "dots ·.. The first term OD
. the
.
right-hand side gives the effect on demand that an·ses because. me pnce p is

changing, and the second term gives cbe effect of lhe change in q.

Elalbple 16.3 .
5tth e production tuncooo r ==
Example 15.10 of Section 15.2 ~on d~~d d L is labor. Suppose dw
ou~ut, K 1s capt'4U,
F(K L an
, ) , w.here y Is
·
[ 16 I) tells us that
K and L are functions of ame. Then ·
aY . aYL Ill
y = aK K + aL .
t und by multiplying the marginal
Thus, total output increases at a rate o f that input. and lhen sunurung
of change 0
product of each input by the rate _ AKoLo
· F(K L) - ·
over the inputs. bb-Douglas funcuon ·
In the special case of die Co
one has [2)
58 Chapter 16 I Tools for Comparative Statics

Dividing each term in (2) by Y = AK O

Lb yields

Y K i
- =a -
K +b-
y L
The relative rate of change of output is. therefore. a linear c
the relative rates of change of capital and labor. OTnbinatioii "
Here is a rather typical example of one way economists
USe fl6 J)
Example 16.4
Let u(x . .:) denote the "total well-being" of a society, where x i.s an
of the total· amount of goods produced and consumed, and z is a 1
of the level of pollutio~. Assume that u~ (x . z) > 0 and u; (x . z) < o. ,~
me:
Example 15.21 of Section 15.6.) Suppose the level of pollution , is ~
increasing function z = h (x) of x, with h' (x) > 0. Then total weD-bemt
becomes a function ·
U(x) = u(x . h(x))
of x alone. Find a necessary condition for U (x) to have ;i maxunmn >t
x = x· > 0, and give this condition an economic interpretation.
Solution A necessary condition for U (x) to have a maximum ar .r• > O
is tlw U ' (x•) = 0. In order to compute U ' (x), we use the chain rule (16. lt

U' (x ) = u:(x , h(x)) + u~(x, h(x))h' (x )

So U' (x • ) =0 requires that

r;
u: (x" , h(x " )) = -u; (x " , h(x" ))h' (x• )

S ~ we th.We of increasing x• by one unit. How ~uch do

directly? Approximately u:(x" . h(x•)) (see (15.9] of Seen~ •~J). ~ ~'
"~r:
other band, if we increase ·x • by one unit, the level of polluuon ~~ ~\l5 •\I
about h'(x• J units. For each unit increase in pollution. we lose 11 / 1 ~ io-
1
in well-being, so in all we lose about 1l (x".h (x"))h' (x" ) from• froltl'
crease in x• . Equation I•] just itares that what we ,ain ~dyed pel-
unit increase in x• equals what we lose indirectly thtOUJh ancreas
lution.

.
1n fact, the chain rule [16.1) has many implications. 1n paru·culll• all ~
•ust 5peC1,J
general rules for differentiaring functions of one variable rum out to be J
cases of this result (see Problem 4).
 Sec. 76· 7 / The Chain Rule 559

. nal oerivatives
;,ect10 . . .
0 ,c y). the partial ~en ~at1ves /{(x. y) and J;(x.
If::: ~~ J(:c. y) in the d1recuon s of the x-axis
ani of ~~ measure the rates of1
?e of the funcf }-ax,s. r.es~u vel y.
aiaoge ant to measure the. rate of cham . - ion in other d1tectJons
, a]so w .
\\C CbOOst a part.icular• pomt (xo. Yo) m
the domain· An Y nonzero vecto r (h k)
. ·
d irtction m which we can move away from (xo. YoJ in a straight hne co
< dtel1 a
1
•• 0f the
form
p01nts
(x. y) = (x(t ) , y(t) ) = (xo + th .Yo+ tkJ

Given the point (xo, Yo) and tbe direction (h. k) ¥=

(0. 0), define the direcrwnal
fancrion g by
g(t) = f (xo + th , Yo+ rk) [ IJ

ens to f as one moves

This is a function of one variable, recording what happ
rse direction (-h . -kJ.
away from (xo, Yo) in the direction (h, k), or in the reve
(See Fig. 16.1.) By using the chain rule, the derivative
of this direaional function
can be calculated as

, , dx , dy
g (t) = /1 (x, y)d t + f2(x , y) de
= f{(x0 + th , Yo+ tk)h + J;(xo + th, Yo+ tk)k [~]

Letting t = 0 gives
{3]
g' (O) = /{(xo, yo)h + J;(xo. )'o)k
ative of/ in the direction
For the case when the vector (h . /c) has length I, the deriv
(h. k) is called the directional derivative off
in the direcnc>n (h · k ) aJ (x o• ."o)- It

Ft<iURE 16.1
'

:-= /(x.y )

·o) (XIJ•---
+th. yo+-tk)
----
;r
560 Chapter 16 I Tools for ComparatTVe Statics

is denoted by D1-. .tf(xo. y 0) . so we have the following :

Directionru Derivative
The directio nal deri vative of f(x . y) at (xo. Yo) in the direc tio n of the unit
vecto r (h. k ) (chat is. h 2 + J.: 2=I ) is

D1-..tf (xo. Yo) = / 1(xo. Yo) h + h(xo, Yo) k [16.21

Note that only ~hen (h_, k ) has le~gth 1 does the derivative of the direction:,J
function have the followmg converuent propeny: A move of one unit away from
(xo. .vo) in direction (h. k) changes the value off by approximately D h.t / (:i:o. YoJ
The vector (f1 (J:-O. Yo). h.(x o, Yo)) is called the gradient of / (x. y ) at (xo. Yo).
Thus. [16.2] says that the directional derivative in direction (h. k ) is !he scalar
product of the gradient with the vector (h. k).
Let us also compute the second derivative of the directional function g. To
find g "(r ) . we have to differentiate [2] with respect tor. thus obtaining

where x = X-0 + rh, and y = y0 + rk . Again, we must use the chain rule [16.n
We get

-d f I' (x .y·) -- f"II (x , y·) -+

dx / J?
11 (x , y·) dy
- -- f II" (x.y·)h -r. f 12" (x . ,,·)k
dr dr - dr

-dd f .,(x
' . Y) = f -.,1,, (x. y )dx II dy 11 )h f " ( ·)k
- + f.,.,(x . y) - = f,,(x. Y + r: x. -'
r - dt - dr -

Assuming that f (2 = 1;;, insertion into [4] gives

[5]
g " (t ) = t:; cx , y )h 2 + 2J(;(x . y)hk + f{i(x. y)J?
. · that (ii . .ti
where x = x o + , h . and y = y0 +, k . Letting r = O and assuming again
bas length I , we o btain the following second directional deri,•ative:
, k, [16..ll
D;,,kf (xo, Yo) = / ;'1(xo , Yo)h 2 + 21:;<xo, Yo)hk + J~; <.xo. Yo>··
Example J6.5 . . es of
.
Let / (x , y ) = x y. Compute the first and second direetaon . al denvanv
) (h.kl ""
/ at (xo, Yo) in the directions: (a) (h , k) = (J / ,Ji.. 1;,Ji.) and (b
<If .Ji. - If.Ji) .
 Sec. 16. 1 I Thi} Chain Rule
5olutfon We have 561

J;(x.y)=y. !'( .. )
2 "' • Y
::: X . / '' (
! "( 11
12 X, Y)= f 21(X.y)::: I f "(
11Xy),.0
.
• 22 X, y):::O

Thus. if (h. k) = 0 /h. 1/./2). then

and

2
2
Dh.kf(xo, Yo)= 0 ~1)
v2
( + 2-..!...
1
../2 .Ji
O(..!...)
-L.
.Ji
2
_
- I

If (h, k) = O/h. -1/h), then

D
h.11.
I< xo, Yo)= Yo~+
I -) I
xo~ = - (y - x)
v2 v2 ../5, 0 0
and

Dftf(xo, Yo)= 2 (~)(~)=-I

A Rough Argument for the Chain Rule
In order to show that the chain rule is valid, none of the earlier rules for derivatives
can be applied. Instead, we must go all the way back to the definition of derivative.
Lea:ing 4>(t ) denote F(f (t), g(t)), we must examine ~ limit as Ar _. 0 of tbe
Newton quotient

4,(t + Lu) - ~(t) F(f (t +. At). g(r + Ar)) - f (/(r). g (r ))

[1 )
l:lt
= Ar

Because x = f (t) and y = g(t) , we define l:lx = f (r + Ar) - / (r) and _A.v_=
g(r + Ar) - g(r), so that f( t + l:lt) = x + Ax, g(t +ti.I)~ _\' + Ay. SubsotuOQg
~ l_ast two expressions into (I], then subtraeting and adding f (:c. Y + ~.vl. we
""lain

~ - F(x + Ax , y + ti.y) - F(x. y + A y) + F(x , J + Ay)- F (x. y)

Ar - ~t [2)
>apter 76 / Tools for Comparatwe Statics

Now assume that /j.x _and ~ Y are different from O for all tit close to
simple aJoebraic man1pulanon suggests that. for all ti t close to 0· Then so
~ O. we have Ille
</>(t + t:11) - <f>(t ) = F (x + 6.x. y + tiy) - F (x. y + Ay) tu
tit tix --
Ar
F (x. y + tiy) - F (x.y) A )·
+ [3]
tiy -At

\\'hen 6.r-+ 0. then 6.x / £11---+ dx /dt =

f ' (t) , and 6.y/tit-+ dy/dr == ,
panicular. l1x - 0 and 6" ---+ 0. From the definition of partial deriva,/ (t ). In
_ . •
[15. l:>] of SecnC1n 15.5). we see that
(F(x + tix. y + tiy) - F(x . y + Ay))fAx
11ves (set
tends to F {(x. y + ~y) as tix---+ O. and that ( F (x. y + tiy) - F(x. y))/Ay lends
to F~(x. y) as .6.i· -. 0. As 61 -+ 0. both 6x and tiy tend to 0. and because F'
is a continuous function. F{(x. y + ti y) -+ F{(x. y). 1 Finally. taJcing all the l~
as~-+ 0 gives
, . <f>(t + 6r) - <f>(r) , dx , dy
¢ (r) = t:.1-0
lim - - - - - = F (x, y) - + F.,(x. y) -
l1t dt - 1
dt .
(4]

as required.

Problems

1. In the following cases. find dz /dt by using the chain rule [16.1):
a. F (x. y ) = x + y 2 . x = 12 . y = r 3 •
b. F (x . y) = x In y ,- y In x. x = t + I. y In r. =
c. Check the answers by. first substitutino.::, the expressions for x and .,· and
then differentiatin2.
2. If z = F (r. y) and y =- g (t ), find a formula for dz /dt . Consider in para·cu1ar
the case where z = 12 + y e.\ and y = 11 .
✓-K - " r.
st
3. With reference to Example 16.3, let Y = JOK L - L. and supPO
K = 0.21 + 5 and L = 5e0· 1'. Find dY / dt fort= 0. . .
F ( r. v) 1s ~
4. Wruu do you get if you apply the chain rule [ 16.1) when · ··
follows?
(e) G(.l'l
(a) x +y (b) x . - y (c) x . y (d ) x /y
Here x = f (t) , y = g (r ). and G (x) are differentiable functions.
h (Xl :#
5. Consider Example I 6.4 and let u (x. !) = A In [ I + (x / z) 0 J. ~el ~
t..h=== oprifflj)
;, •
var+ b. with the constants A . ex, a, and b all posmve.· · find e
level of production x" in this case.
the11 i,ocl'
I • • t::J,f _. Q.
There 1s a small technical point in connection with the last limn. _Wh; :t + t::.X . y ,s -i-_t ·)'

t:.x and Ay approaeb O togecher. We OUJht really to show mat the expression iF< d (hen ~--
F (x. Y+ t:.y}) /tu tends to F ;<x . y} as Ar - o. and DO( just as first t::.x - O an
Ay-0.
 Sec. 16.2 I ~,eGe
•~-

6, A function is given by f>fral Chain Rules

563
F(x, Y) :::: j lnx + I J
. thd J ny
a. De~enruneh e Fomain of F (x, Y). Draw the I
indicate w ere (x, y) > o (U th eve) curve F (
. se e fact tha x. Y) == 0 and
b. find dz/dt when z = F (x,y), x:::: e3' t F(x , y) :: !Jn(x2y}.)
lim,-oc> dz/d t . ' and Y == I + e-f, "--·
· """'u:;mune
7. Compute the directional derivatives of th ~ .
point and m . the given
. direction. e iollowing fu n.;uons
. at the given
a. f (x , y) = 2x + Y - I at (2, 1), in the dirccti
b (x y) - xe>"x - xy at (I 1) . on of (J , I).
•g . - , • m the direction of (3, 4).
Harder Problems

s, If z = F (x . y). x = / (r), and y = g(t), prove that

2 2
2 2
- +2 oz (dx ) (d")
2
dz - -az --
2
oz dy2 8 z (dx)
i lx +--+- 2 J
32~
-
(d1:J )2
dr - ax dt oy dr ox 2
dt ox&y dt dt + &y2 dt
under appropriate assumptions on F. f, and g.

16.2 More General Chain Rules

Ir is easy to generalize the chain rule to the situation where

z = F (x , y), X = f (t, S) , y =g(r.s)

In this case, z is a function of both r ands, with

z = F(f(t . s),g(r, s))

artial derivatives &r./ot and or.Jos. If we
Thus, it makes sense to look for both P therefore use the chain ruk
'- -- fix . . ft alone and we can .
~ Ps ed, then z 1s a funcuon o • e can differentiate : with respect to
[l6.J] . In the same way, by keeping r fix~. ~
s by using (16.1]. Toe result is the following.

lit Chain kwe

~ z=== F(x. y) with x = f( r, s) and Y =g(t , s )• th~
f 16A ]
ay
(a) az = F;(x, y) ~~ + F1(x, y)ai
&t ay
(b) az. = F;(x , y) ~ + F2(X, y)as
as
 Chapter 16 I Tools for Comparative Statics
564

Example 16.6
Find 01. /o r and oz/os when 1. = F (x, y) = x 2 + 2 2 .
Y • With
y ts . = -t
""t , ,i
ar.,
Solution We obtain
ax ax ay
F{(x. y ) = 2x. F2(X. y) = 4y , -ar -- 1. a;= -2s. ai ::: S,
Fonnulas [ 16.4) (a) and (b) therefore give:

~
a~ = 2x . 1 + 4y • s = 2(1 - s2 ) + 41ss = 21 - 2s2 + 4rs2
ar
a~ 2
~
OS
= 2x. ( - 2s) + 4y · t = 2(1 - s )(-2s) + 41s1 = -41s + 4s3 +•·2
"" I

Clleck the answers by first expressing z as a function of r and s, and

differentiating. lbQ

The General Case

Economists sometimes use a more general version of the chain rule. Suppose !hi

Substimtiog the x1 's as functions of the t/ s into the fonnula for z gh-es : 1!
a composite function of t 1• t 2 , ••• , tm . Ao obvious generalization of (16.1) mi
(16.4) is as follows:

The General Chain Rule

When (16.5) is true, then
oz --+--+···+
-= oz OX1 oz &xi -az -OXn (j= l ,2.... , m)
a,j OX J O!j 8x2 a1i axn ar1 '

· an 1mponant
Thi s 15 · &
,ormula that every ccononust· sbould underS
.
rand·
r; x· oepo--, ~.~
change in a basic variable ti gives rise to a chain reaction. ~irst. eve , ~
1111
i;
on lj in general and hence changes when lj is cbanJed- In its ~~tinj f:rot11
The contribution to the total derivative of z with respect to 1i• r ; , is lbe s~
81
change in x1, is (az/ox1)(ox;/ar1). Formula (16.6) shows thal a-I .:,,a5

of all these contributions. . ut the fUJI~

Note: For [16.6) to hold, we niust make some assump~ons abO _nuoUS ~
8
in~olved . . The following requirements are sufficie~t: F .15 ~ c:~ /,, /J, -···
wuh connnuous partial derivatives in an open doawn A 1D R '
 Sec. 16,2 1 M
. . . ore Genera/ Chain Rules
conunuous partial denvatives w· h 565
aJI oave tt respc
o"' We also suppose that (t1 , t 2. . . t ) e Bet to,,. ' 2.. .. . , in ad
ill " · · • "' ~ (x "' omain B
I , X2, .•. . X~ ) '= A.

Let·b,niz's
,, Formula
10.3 showed how to differentiat .
.
sectl00 ' . . . . e integrals With
peanng 1n the hnuts of integration. Actuall rc~pec, to a parameter
~nted there is much used in econornics:2 y, a generalization ()f the formula5

1,1ibflil's Fonnula
sappose dlat f(t, x), a(t), and b_(r) are differentiable functions. and that
b(r)
F(r) = l a(r)
f(t, x)dx
[ J6_TJ

ibell me derivative of F is given by

F'(r) = f (t. b(t) )b'(r) - f (t, a(r) )a'(t) + lb<r> 0 f (t · x ) dx [ 16.81

a(r) ot

Note that when t changes in [16.7], the limits of integration a (r) and /,(ti bodl
change, and moreover the integrand f (t , x) changes for each .x . Formu.la [ 16.81
captures the total effect on the integral of all these changes.
We discuss briefly the rationale behind the Leibniz's formula. Let H be the
function of three variables:

H(t, u, v) = 1vf(t.x )d:c

Then with u =
a (t ) and v =
b(r), we have f (r) = H (r. a(r) . b (r ) ) . So. by lbe
chain rule for differentiating composite functions.
C•l
F'(t) = H; + H~a'(t ) + H;o' (t)
Whe . and v arc constant. It is ~~~
re H; 1s the derivative of H w.r.t r w~en" b diffcrenna~g under me
~ guess that we can differentiate H parually w.r.t. r \ ccotdln! to [10.20) and
integral sign, lrivin., H '
(10? c,• o , "
=
f. v f,'(r , x ) dx . Moreover, ) ,_~...., .. o these results
d H' - flt i • u.....,~ .....~
=
i ·- 1) in Section 10.3. H~ -f(r. u ) ~ . •· ~den1,of r. theno fl1. ,ti ci r = 0.
~to l•J yields (16.8) . Note that if /(r , x) 15 indepe
ll6.8] reduces to ( 10.22].3
BOOU Ne"' yo,t.. 1986).
' .
/Jr f1vNftlJII! (8&1111111 . . 11 - tqlllll) useJuJ
,L "In Richard Feynman· ~ Surely You 're Jolu 118· · of dlis
,esu)l 10 phyS1c,su. IS
"'"'
f0r lue NObeI laureate vividly '.... •u"'
descn.,..s ... UilfulnoSS .
tconomists. BatUI ( 1976). SecOOt1 31
3 • • ronnuJa.
For a more detailed disc:l&SSion of Lelbrut 1
*
I \.,I ldJ.l l t l J ti / I f,JUl .:t nJI VV ' t iJ,,IW , .... ,,-.., --·•-·-
Example 16.7 ,
Use [16 .8] to compute F (r) wh _ ,: ,
1
en F (r) :-- J, 'i~ -- ' dx .
by calculating the integral
first and then di fferentiatmg.
Solution We ob tai n

F ' (r)
1 , 2
= -(
2
r) r . 2r - I 2
-t r·
2
1
+ f':-
,
1
2
x
2d
x

= r6 - l I,.'
1
-2 r3 + 6x = t
3 6
2'l 3 + 6l ((t 2) 3 - 3] 7 2
I,
- r = _,6 - - rl
6 3
1n this case, the integral F (t)
is easy to ca lculate explicitly:

F (c) = -1c
2
1,· ~

x dx = -1t • -x
2 1 3
,2

= -1(r 7 - r4 )
I 2 ,3 6
Differentiating yields the same
expression for F' (t) as before.
Eumple 16.8
Suppose that a small business ea
rns a net profit y(r) at each time
At time s E [0. T] , the dis i e (0. rJ.
counted value {D V) of future
profits is

V( s . r) = 1 1
y(t)e-r<r-s) dt

wh ere r is the constant rat

e of discount. (See (10.34) of Sectioo 10..l.
Compute v;(s, r ) by using Leibniz' s rule.
Solution We get

v;( s. r ) = -y (s ) + i r y(r)re-r<r-s) dt = - y(s) + rV (s

. r} !•I
where the last equality was ob
tained by moving the constant
integral . r ou(Sl(ie di(
Solving equation [•j for r yields

r a
y(s ) + v;cs. r)
~- --- :.. .,: ___;_ l••I
V(s , r)
Th15
' tw · portan ·
an im t 1n1erpretation . At time s. the
the DV ~f future profits is inc bulintss ow ne r-· - ·~(J).~
reaaina at the in1tantaneous r1to
e"'1 ---c
on the nJbt-hand aide of l••) is
known u the proportional ;nsuuu
l'btt'Olf ef v:cs.,).
11 an10f'S 111 fai.1.
~; ''" of the mveatma,L Equation
1 l ••1require, lbi1 11tio to be oqual to
' were the P1oponional in1tantaneou ' ~ 1~e
5 ru e of rewm on a (relar:ively)
aovemmem bonds, and if the left-h s,Je . tlt·bll""
and aide or l•• l were hi,ner thi
n the 111
 ct,apter 16 I /001!> /VI v.,,..,.y, - ·
574
F ally after ma.king
**
use of ( Jat the end of Section 15.8, we can u,.,;
1D • hat more memorizable form : ~ ..tc the
in the somew result

0 F'I F.'2
" d 2y - 1 F' F" F"12
F (x. y) = c .r = dx 2 - (FD 3 F~ F"II
21 F''22
[16.I3]
"alid for F; d= 0.

Example 16.14
Use [16.12] to find y" when xy 112 = 2. (See Example 16.9 and Example 5 rn
of Section 5.3.)
Solution When F(x.y ) = xy 1()., F;(x ,y) = y 112 and F (.x.yJ :::
2
{xy- 1/2. Furthermore, F['1 = O. F;2 = ½Y- 112• and F::, = -¾xy- 312. Thus.
according to [16.12],

y
II
=
=
This simplifies to y'' 6y /x 2 , the same result we obtained more ea.siJy in
Example 5.10 of Section 5.3.

Theoretical Considerations
So far, this section has presented the technique of implicit differentiation.. In
pan:icular, provided th.al F(x , y) = c defines y as a differentiable functio
n or :c.
we were able to derive the fonnula y' = -F{( x , y)/F (x. y). Yet it is eas~ ro
construct examples in which this formula makes no sense 2
at all. For answict-
cons1der cbe equation

Ill
Wi th F ( x , Y) = x 2 +e'> and c = 0, (I) reduces to the equation F (x. y} = c. 'fbtP
formula [16.9) suggests that

y' = _ F;(x , y) = _ 2x + ye > r:1

F2(x , y) xe"~
whenever F~(x y) r > ~ 0. -.
,_ ..,A_~ . - . ' However, a closer look at [l] rev eats
x tbJI its
!bt
111.n•uauu llde lS always po ' · . .
graph of the nave, so no pm (x. y) sansfies the equaUoD· TltUS•
. .
15 empty
Even 1_feqtheua1non
evel curv F(
, and the "result" in (2] is complete nonsenst·f(.t)·
it can almost al be e x, Y) • c is not the graph of one funcno · v :::
ways CODJidered u n✓• AD
example is shown in F' . b f . eral
a ~ompos1te grap o sev . . 6.4 funCOO 05 .
1
& l6.4 . Most Vertical lines cut the curve 111 fig. 1 tbret
r

Sec. 1s 4 1 p
· an,a, Elastici11es 577
can show that with cen .. : .
. •wun mild rest · -
amply l I).) nct1ons on u r21 .11 .
• w1 in general

.4 partial Elasticities
16
Section 5.6 introduced the concept of elasu· .
•
we study the corresponding . for funcf1ons of one variable. Here
concept for fu Caty
• · · h between. for instance thenct1ons
us to d1snngu1s . of several
. · van'ab!cs. This enable~
as well as between own and cross pri~e elaspnu·c~ '.'11d income elasticiues of dem.snd.
cmcs.
If:= /(xi• x2. · · · , x,,). we define the partial 1 .
respect to x; as the elasticity of z with respect e asdcny of z <or of / J with
are held constant. Thus, to x; when all the other vanables

El; Z = X; af (x ,. X2, · · .. x,,) x, az

f(X1,X2, ••• , X11 ) ax; =- - [16.14]
z ax,
.
The n~ber El~z is appro~tely equal to the percentage change in :: caused by
a 1% increase m x;, keeping al] the other xi (j -:f; i) constant (see Section 5.6).
Among other forms of notation commonly used instead of El; z. we mention

El.r, z, z; ("z hat i ..). and e, or E,

Eumple 16.15
Find the elasticity of z = xye.t+Y w.r.t x (with x and y both positive).
Solution If you have not srudied the rules for elasticities in Problem 7
of Section 5.6, you can argue as follows: Take the natural logarithm of bom
sides t0 gee In z = In x + In y + ln ~+y = ln x + ln y + :r + y. Differentiating
this equation partially w.r.t x yields z~/z = 1/x + l. Hence.
1

Elx z = :
z
z: = X ::!.z =X
1 (
-1
X
+ 1) = l + X

Example 16.16 tu · f ·
Let o 1 = D 1(p. q ) denote demand for a product as a ncuon o pnces p
and q. Then, as in Example 16.2.

dD1 = 0D1(p , q) p(r) + oD i( p . q ) q(t )

dt <Jp oq

h follows that
 -r.-,.k for c;o"•~· -- _ _
Chll(]le' 16 I IVV'-' .

578 wth of demand 1s the elasncuy weiohtcd

So the rate of gro . . crease. o sum of
. aJ rates of pnce 1Jl tht r...
" ll.
p0ruon

7 A a,xa: ... x 0 • is a demand function (wher e

Example 16.1 A ::i. 0
S pose D == x, 2 II .
. o,. o.
up a are constants and .x, > 0. xi > 0 . .. .. X11 > 0). Conm... •
. . . . . ~ f D with respect to
elasnc1t)' o
and .x, . x, ··""ic ~

Take the natural logarithm of both sides ro get

Solution
In D = 1n A + a I Jo x 1 + · · · + a,, In .x,,

Differentiation w.r.t x, yields

D~ a,
--
D
--
x, .
so

Similarly, El; D = a;, for i = I. 2, . ... n.

1 pJ. wbcree rs
As a speci al case of Exam ple 16.17, Jet D; - Amap ;-
incom e, p; is own price, and Pi is the price of a substitute
good. Then a is a
incom e dastici.ty of demand, -/3 is the own price elasticity. and
y is the aim JD?
elasticity. However, becau se own price elasticities of demand are
usually negxi.e.
f~
ooe often describes /3 rather than -/3 as being the own price e~r y o
Usually, there is no conf usion -exc ept among economics srudenrs ~
:r
uodttstand elasticity!

Elasticities of Composite Functions

Sections 16.1 the derivatives of composite funcriOOS- No-~
and 16.2 presented
sec bow to find ~ elasticities. Let us consider the general case ~00
:
fonru!late _tbe following result. which is valid with appropriate requiremeaG
fiuoa.ioos mvoJved:

l. c F (x l ), X;: /,·(I )
·• ·· • X 11 I I ' ••• , l"' • i=l . ... , n

let us call F the main functi . aD(i l1, . -_- ·

e
l_s. die uP
,., the buic Variables. The on, x,. · ••. x,, lhe intennedia te van~
~ t Variable z in n (l 6. I5) tells us bow to find the elastic1oes
0
~ !
terms of the eluticities of the main function WJtb
 Sec. 164 I p
the intennediat~ vari~bles, and the elas . . . . an;a, E!ast1cities 579
1° t 10 the basic vanables. Fonnui llcit1es of the .
pee ate th 1ntcnncd·
res The proof of [16. 15] follows dire tl c result in Your iate Variables with
·vative, that is the chain rule (16.6 t
y fr~rn the corre:wn ~ords.
deJ'l . . ' Xn are all not zero. Then, if w!
n S~ction 16.2. lnd!°nding result for the
.tt.. -/ ~. we get multiply each side of : · ass~ e that z and
bY11 - e equation in [ J6.6]

oz - 2. L F',(. X I , . ··- Xri ) -::::

n
lj OX· L
~
II
-- -. - '; x,
I I
.. ac) .. ,·-,
_
Ot·J .
-F (x I
,,
z i I, .. . .xii) - -dx;
1
'"' 1 X; at,I
Note that we have used a little trick to derive the last .
[16.15) must be true. equality. We sec at once that
Example 16.18
Aukrust and Bjerke have estimated that the growth . th .
. · m e nanonal product
of Norway can be descnbed by the production function

[1]

As usual Y(r), K(t), and L(r) denote respectively net national~ real
capital stock, and labor used in year t . The factor e0·018 1t is due to "technical
progress." Find an expression for the elasticity of Y with respect to r.
Solution In order to 'find El, Y(t) , we express the production function as

y =2_262K o.203 L o.763 T with K = K(t), L = L(t), T = eo.01s1,

. . rul & maru'pu}atino0 elasticities (see Protr

Usmg [16.15] together with the es ,or
lem 7 of Section 5.6), we have

El, Y(t) =0.203El, K(t) + 0.763El, L(t) + 0.018lr

The Elasticity of Substitution . bl 1n sec-
. . F of two vana es.
Consider a level curve F(x y) == c for a funcnon be y' - -F{(x. y)/ f j(x. y).
. ' urve to - .
tlon 16.3, we found the slope of the }eve1 ~ this fraction a special name.
Economists often denote -y' by Ry:x • and give

'tbc ina~- • d x is
--. &lllal tate of substitution between Y an ·
[16.16)
Fr(x , y )
R yx == Fz.(X, y)
 Sec. 16.5 1 Hornog
eneous Functions of Two Variables
583
.., 0 geneous Functions of Two 'l .
5
~o••· . . ~raables
ID• tass of especially 1mponant functions in ec .
. f of two variabl onom,cs c:onsi sts of th c homoge-
011e c &.,nctions . T be fu nct1on
oeoUS iw• cs x and Y defined .
. 'd to be homogeneous of degree k if, for alJ . D.
(x , Y) m in a domain D
1s sai

f (tx . ty) = tkf(x , y) for aJI r > O [16. 18)

.,u1op· lication of both variables by a positive factor 1 will thus ma1bp• 1y ..__
u..:; value
JYI • t . .
of the funcnon by the factor t . (In this section, it is always to be understood th3l.
if (x . y) is in D. then (tx, t y) must be in D for all 1 > 0.)
The degree of ho~ogen ei~ of a function can be an ¢itraJJ number-
posirive, zero. _or negan~e. , Earlier we de~ed the homogeneity of several
particular funcnons . For instance, we found m Example 15.4 of Section 15. I dw

f..(S. £) = 2.26-59·44 £ 0·43 is homogeneous of degree 0.44 T 0.48 = 0.92

and more generally that the Cobb-Douglas function

F (x , y) = Ax y0 0 is homogeneous of degree a ~ b

vs;~w
i;-...... L ~6.21 .
that the following function, whicb IS defined for
geneous of degree 3:
. an
X
and ... is OOfD(r
• •

f(x , y ) = 3x-y -
? )';;

. .- ~--ula for •; (.t . .\. 1·

d by I )' lll ~ I\.IIW

Solution If we replace x by rx an J
~o~n • 3
• ?? 3 3 ==t J(3
,,· >-1 ·.,· - .v · )
" . , - 3,·x·ty - .
/(rx , ry) = 3(rx)-(ty ) - {t)) ....,

= r3f(x, y) " lfwele tt=-

... men
. neous of degree _J. aJ>d ,. the value of
This confirms that / 1s homoge · After doublin$ .t • •
f (2x . 2y) = 23 f (x , y) == 81 (x · y). 8
. b fac1or of ·
this function increases Y a . m palynomiaJ in Ex-
h tenn ,n e f de- k
nents in e,.c . h0 rnogeoeous o .---
Noce that the sum of the expo polynomial 15 . · ()tber cypes of paly-
~plc 16.21 is equal to 3. In general, a io e3ch ,ertn ,s k. of lllY deP· (Sec
if and only if the sum of the exponents not hornogeneOUS
nonua1. such as f (x. Y) == ..r 3 + ..rY. are geneous (unetions of rwo
Problem 5.) ,__,fies of holllO .:.- is Euler's dteoreal,
. portant pror-- .0 ns lbe 1.....
Let us mention some 1111 .c applicao ·
variables that are of intefdl in ecooorni
 CflaPl8( 16 I Tools t,'Of i.;omP"'o• ••., -·- ··· •
584
which says lhat

aJ aJ
e·-~- k ~ x o.,.
J(x. y) is homogeneou S Of de "I,. + Y-;r,-Y = lcf(x , }')

.
It is cas), to demonstrate that when f is homogeneous of degree le ,..___
'd f [ 16 19) is .1.:& r
h .
tro e. For wuerentl•atm e of [16 18)' ~ IL
•
band s1 e o · g eac sid
• l to different iate the lef d . . · w. " II: 11~l'l'L
the ehain ru e t-han side, gives 11
· • ,. 01i...
~

xf:(rx, ty) + yJ;(rx, ty) = k,1c-i f(x , y )

Putting t = 1 gives xf{(x . y) + Yf2(X, y) = kf (x , y) _immediately. ~
in the next section also proves the I~·
conv~rse, and co nS id ~ the case of
Euler's theorem shows that a funcnon 11 ~
z = f (x, y) IS homogeneous of ~
1.: iff the expression xz: +y
•asked
z:. is equal to kz. For example, Pro cm
· z
you to prove that if
follows tha t z is homogeneous of
=
(ax + bY).,- , then xzx' + YZy' = 2.z;
O :
IJ~
from (16.191~
degree 2 as a function of x and y.
[ I6.18) confirms this. De1imrxt
We note three other interesting prope
mogeneous of degree k: rties of a function f(x . y) that is~

f {(x , y ) and J2(x, y) are both homo

geneous of degree k - I [16.r
_ /f(x , y) =x1- /(1 , y/x ) = yk f(x /y , 1) (for x > 0, y > 0) [16.:::
x1 ! {~ (x, y) + 2xyJ:;cx. y) + y2 fu (X , y) = k(k - 1) /(x . y) [16.:;
. To prove (16.20], keep r and y con
:UY stant and differentiate EquatioO (l6.1S'.
w.r.t. ~- The~ r/,(tx , ry) == rt / (x,
sbow~!.ilha~~x~yf abs homoa~neous of1
12 \X , Y, as omogeneous
We can pr
and by / .
1 .> , respec
the
nvely.
.
of de
d
a-
o•. .
y), so j (t x, t)') = rt- lJ; (x.~·).

ek- 1
ove. two equalities in ( 16.21] by .
1
ep k- 1, A correspondin8
-

replacing r in [16.l 8) b'· I .1

lli-
first dw":~.:e
Euler's theor1 .
s~ w [ 16.22] (assuming that I (x. Y)
/, (x' Y> and /2 (x, Y) are both homo
is a cl function~ ',\; ~
em can be applied to /1 and f 5.. It
geneous of degret
implies that
x/11" (
x. y) + Yf [i( x, y) = (k - l)J ;(x , y)
xf" (
21 X, y) + Yf u( x, y) = (k
- l)/ 2( X, y)
,,,
I / Hom .. . 585
S e c. 16.S s F11nc,;,. ,,...
og9rleo11 Of
tM~
Tito 11•,-
- •,y r ,.
.
o f th ese ,.-1-1,Uat,•on.s b Y • . the SCcond b en
y >. ""'th
th e f .ir st
no w m u lt.ip ly , fi ," = I "
1 s ncoon / , so the
resu1, is
u ,use / JS a c - u 2 2/
i , aec ,. . y 2 '" " (
x )
- t { ,
- l xy f ,'; ( x . y ) - Y " " < k f i <:c . n l
J
,dd-1 , ,, (x . y ) + .122 · :c . YJ + y
> :cf,<
X I II
ro Euler,s th
e o r e m , h o w e v er
--.:_
."'(
!1.1._:c
,._
v
~ -<J!! ~
, + v f: r . -n k / 1, ' ':._ S
o

.. .....4ing
·
AC'V' .... - e r u l e d.
111is v
11-0 e 16.22 y ) = J x 2y _ y l_
(x ,
.22) for f
rQreck Solu t i o
(16 . 1
n
9 ) t o {
We find
1 6

,1
j' (x , y ) : : 6xy a n d 2 ( x . Y):::: 3x 2 - 3 ( IJ
J f

HCDce, 'y _ , ' i

2 + 3x 2y - 3 y 3
= 3(3 r
x, Y) = 6x y
x f; (x , y ) + Y I ,(
== 3 / ( x , y ) r.c 3. so . . , _
deg
neoos o f
that f i s bo""'8c
16.21 showed , ticJi -
Ex6a.1m9p}.le
{1 ,nogeneoos o
i e ho
J. bod> ' ainndthis' acase it
fJ
From r [ 16.2 1],
[ 16.2 0]. As fo i - I_i
/ x >3] = y 3 { 3(:c f.\·
2 3 3
)- ( y rivvi,-cs:
== x {3(y / x ccond-ocde
r partial de
i.,-n y - y mpute rhe
s
] , firs t co
.22
, t o show [16 - 6.,·
FUlally
x. h , (:c . y ) =
x , y ) == 6y, J j'~(x , y ) = 6
Jj'; (

Hence '

( 16 .2 2 ] as weU. .
irms s
"'bicb conf ous Fun ction
ecnc propene
r-
gene eom
~
o
ts o f Hom • ceresang g in the x y -pla
•

metric A snac . Jes h 8v

m y
e somCe ...,_, a ra on .
Geo n ab n a,t,io=--ary pou,c
,. ,. ., , o va 0). A = <,
ns i n rw egree k · / ( X o , rol gh
1.r oll>o
11 us fu n c ti o
,;._ feneo x , y ) be homogene
ou s o f d 0 . we i . .
) ~ , ; d>e xy -p lu e rh >e
u rou
~- •4-Ct / ( ug h nt
b
(
o
x
;
~
:
.
:
the poi pos,ave •
. :
Y
_
:-J
D
- co asists o f d

(x:. = ,'c. A
rbro
!igin ( 0. 0 o ty, ) f o t some
) 0
'>y . !lie O m, ( tX
ilien" o f Ilic fo , , ; Yo) n o f tbe
,,.,:<r •x,, 'Yo) =the relevant
(.to, Yo),
p o r t io
SS6 Chapter 16 1 Tools for ComparatiVe Statics

Z :: / (X. y )

----------· -• -------
Yo) (rxo. ryo)

X
F'fGURE 16.8 FIGURE 16.9 f is homo-.......
of degree 1. --·-.uua

curve z = rte, where r measures the distance along the ray from the ..
=
c f (Xo, y0). A function that is homogeneous of degree k is therefore ongin. •
determined if its value is known at one point on each ray through the ~
Fig. 16.8.) In particular, let k 1 so that f (x. y) is homogeneous of - ~
=
The curve z = rt c lying vertically above each relevant ray through the ~ ~
then the straight line z = re. Because of this, it is often said that ~ graph ~:
homogeneous junction ofdegree I is generated by straight lines through w ori,r:z.
Figure 16.9 illustrates this.
We have seen how it is often convenient to consider the level curves i 1
function f (x, y) of two variables instead of its graph. What can we say abo11 ?I
level curves of a function if the function is homogeneous? It rums out dlafen
homogeneous function, even if only one of its level curves is kno...,-n. tlrDt so alt~
its other /,evel curves.
To see this, consider a ~ction / (x, y ) ~ t is ho~neous of ~~
=
and let f (x , y) c be one of its level curves, as 1I1usaated lll fig. _I6J O. h-u,g
explain how to construct the level curve through an arbitratY po~t A ~ ~
on / (x , y) = c: Fust, draw the ray through the origin and the pomt ~- . ci 1
intersects the level curve f (x , y ) =
cat a point (x i, y,). The ~ ~ ~
will then be of the form (rx 1, ry 1) for some value of r. (In the ~ -

FIGURE 16.10
 ;:;,~ , o. o , Gene,., Ho
l'nOQeneous •1'1<1
Homo,i,.tlc F
10 constrUC I a new point on th UflCtions 587
~ . . Th. c same lev I
1n the ongin. ts ray intersects the . . e CUl'\le as A
211
ttifOU~l Now use the value of , found ca . ongana.l level curv · dra/w a new ray
,.. . ) Th' r11er 10 d e (.r y)
\.r:· , ~nateS (r x1. , )': . is new point B is o elermine the new . . = c at
~ n'l) == rt/(x1. y2) r• c :: rlf (x n )the same level curve
,·tr,r;. • fo di"
= 1. Y1 == J (t
: •~•~-~ith
,, ~use
. (tJUdion r u~rcnt rays through the o . . .x1. ' Yi). By tin .
~ we can find as man • ng1n that inteneq repea g this
(\:t v) == c. . Y points as we wish the level curve
. · ·n,t foregoing ~m~nt shows that if f (x 0 ~ the new level curve .
.tto1e fortn of the funcuon 1s detcnnincd by an 0 ~:) •~ homogeneous, then the
~ of ho~ og~eity of the function. The sh! of its level curves md by the
...fll'lOUS fun(:tion 1s often detennined by Specify·~ o_f each level curve of a boo»
~~ in [1 6. 17). mg tts elasticity of Wbstilntion. as

p,obltms

= 4 2 2
1. Show that f (x • Y) x + x Y is homogeneous of degree 4 by using ( 16_1 1-
8
2. Find the degree of homogeneity of x (p , r) = Ap-l.5rl.°' .
=
3. Show that / (x , y) xy 2 + x 3 is homogeneous of degree 3. Verify !bat the
four properties [16.19) to [16.22] all bold.
4. See whether the function /(x, y) = xy/(x 2 +y2) is homoge,io:,a.s. and dJeck
Euler's theorem if it is.
S. Show th.at f (x , y ) = x 3 + x y is not homogeneous of any degree. (H utt: Let
x y= = =
1. Apply [16.18) with z 2 and r = 4 to get a comradiction.)
6. If g(x , y) is homogeneous of degree 1, show that / (x. y) = a ln(g(.1 . y)/ .x:
is homogeneous of degree 0.
7. Use l•J in the proof of [16.22] to show that if f(x. y) is ~ of
degree 1 for X > 0 and y > 0, then !;'1 (x, y)fn(X. y) - [fn (.x . y)~- . o.
8. If F is a function of one variable that is homogeneous of degree k. ~ O. and
if F- 1 exists, prove that F- 1 is homogeneous of ~ 1/k.. Test tbe result
by applying it to F (x) = ,Ji.

~·~-~neral Homogeneous and Homothetic

'"'1CUons
fi d in a domain D. Suppose tb.a1
SupPose that f is a function of 11 variables de ne rx ) also lies in D.
Whenever ( ) D and t > 0, then (u1 , tx1, . . ... ~ of
(A ~I , X2, .. . , x,. , E . .) We say that / lS
set D with this property 1s called a cone
~ le on D if O) [16.23]
(for all t >
k f (X X:? . •. 'Xn)
/ ( zx1, r.r 2, •• . • rx,. ) = t 1, • .
1'be . ·ve zero or negauv~.
constant k can be any number--po5it1 • '
588 Ch lpW 16 I Tools for eom,,,raffve $tatiCS

Example 16.23
Test the homogeneity of

Solution Here / is homogeneous of degree -1

because

f (u ,. rx2 , t.x3 , tx4) = (tx, )2 + (tx2)2 + (tx

3)2 + (tx ,)2
t(x , + 2x2 + 3x3 + 4x
-- -~ ----,...-~- _ ,-1/(
r2(xr +Xi+ x1 +_;
4)
xl) = X1, X2, .t3,X tJ

Ewer's theorem can be generalized to

functions of n variables:

Theorem 16.1 (Euler's Theorem)

Suppose / is a function of n vari-
ables with continuous partial derivativ
es in an open domain D, where r >
and (xi , x2, . . . • Xn) e D imply (tx O
,, tx2, . •• , tX11) E D. Then f is
neous of degree kin D if and only homoge-
if the following equation bolds for
(.x1 , X2, . . • , Xn ) E D: all

n
L
i c)
X; ff(X1, X2, •• • , Xn) =kf (Xt , X2, ••. • X 11 ) [\6..:i

Proof Suppose/ is homogeneous of degree

le so (16.23} holds- DiimC'
r:iating this equation with respect
tot (with (.x 1• X'2, ••.• .x,.) fixed) yiel
ds
n
Lx if/ (tx1 , u2 , ... • U n) = 1crk-l
;., / (x1 . x2 .. .. . x,.)

Setting r = l Jives [16.24} immedi

ately. . all x :::
To prove the converse. assume tha
t [16.24 } is valid for
(x ,. 1 2, • •. , Xn ) in D. Keep
x fixed and define the function g fOf Ob'
all r :> •
Ill

Then differentiation with respect to,

gives

'
g (r) • -1cr- le- l / (tx 1. tx1 ... .
. Un ) .. ,-.t L x; ff (rx,. r.x2- .. · · r.t~
n )
{Zl

i •I
 - • •urnotheric F
aeeause (!XI. r.x2 .. Th l.Xn) lies in D. ( 16.24) Unctions 589
. repl aced by z.x; . creforc.
1s must also be var
id when each X,
n
L (r.x ;)f[ (r.x 1. r.x 2.... . r.x )-
i=I n - kf( tx ,. rx,
• • • • , • I X11 )

Applying this to the last term of (21 impr

,es that. for all t :), 0.
g'(r)= - k r -k- 1 f (rx 1. r.x2 .... . r.x, ,)+ , - k-1
k/ (
t.x 1. tx 2. . tx,.) = 0
It follows that g (r ) must be a constant c• Ob .
implying that g (r) = 0. According to the dcfinitio v1ous1y g(I
·f • . ' • 0 so C = 0.
°
n g in I 1). lh1s· prov es ctw
/(r.x1 . zx2.... . t.xn ) = ,1: f (x, . .x-,
-· ... .x,.,
nus, f is indeed homogeneous of degree k.

Toe res ults in {16 .201 to [16.22) can also

be generalized to functiom of 11
variables. To e proofs are similar to those
in Section 16.5. so they can be safely
left to the reader.
Thus, if f(x 1 , ... , Xn) is homogeneous of
degree k . then (with suitable as-
sumptions on f): '

f (x 1••• • , Xn ) is hom ogeneous of degree k - 1, i = 1. .... n [16 .251

l l6.26]

provided tha t X 1, x2, . . . , Xn > 0.

n n k(k - 1)/ (XI· .X?, ••• • .x.) l 16.! 71

L L XiXj f f; (x, . x2 , • · · ,x,. ) ~
i•I j=I
. 24 · 0 t,woed by di'",._
15
·,..;,.., each
<&
An tnteresting ver sio n of the Euler eq on l l 6- l
uati · t O Recalling
'ded this number ,s no ·
tenn of the equation by / (x, , x2 , · · · '. x." ) • prov1
we have
the definition [16 .14] of partial
elasucit)' • s: k (16 .28]
Cl (X 1, ... , .\a)
El 1 (x 1 , ••• , x11 ) + Eh (X 1, • • • • Xn ) + ... + J;.l/1

. f
11
variables that is homo-
.,..,_ .. f a funcuoo o
'nu s, the sum of the parti•a1 e1astic1ues 0
&cncous of degree k must be equal to k .
.
90 Chap ter 1o I /0015 /UI vv111µ d l dllllC •..11all"->

Economic Applications
Let us consider some typic al eJtam ples of homo geneous fu .
nctions in ceo.,..
Example 16.24
-,'VTll1t1
Let /(v, . ... . vn) deno te the output of a production p
. ft
quantitJes are u1• •• •• Vn . It 1s roecss wi.~
o en assum ed that if all th . 'l'Cfl !tie
.
scaled bv a factor r . then r omes as much outpu t as beforec .inpu1 qua,,ti 111~
• tit ~
IS J)rMh a. . \ ari
- ~ ~. 'Ir)~
/( r v 1. ... . t un) = r/ (u1 . . • - , Un) (for all r > 0)

This impli es that / is homo geneo us of degre e 1. Production f .

this property are said to exhib it cons tant retur ns to scale. A pr~nc
ti_ons ?.'lib
tion that is homo geneo us of degr ee k < 1 has decreasing reru Uction
~
\l.'bereas 1t. h as incre
. . retur ns to scale if k
asing > I. 171.s 1'> I<4!t
The general Cobt:>-Douglas funct ion F (u 1, ••• , vn) Av0 i . . • lf- =
[_15.5) in Secti on. 15.1) is often_u_sed as an exam ple of a production'
~
non. As an exercise, show that 1t 1s homogeneous, and ex.amine when
it ~
constant/d ecrea singf mcre asing retur ns to scale.

Eum plie 16.25

In a market with three comm oditi es whos e price s per unit are respectively
p.
q. and r , suppose that the dema nd for one of the commodities by a coosum
:
with incom e m is given by x(p , q , r, m ). Supp ose that the three
priet:S and
income m are all mult iplied by some t > 0. (Ima gine, for examp)e.
mac the
price s of all comm oditi es rise by 10%, but that the consumer's incom
e llso
rises by 10%.) Then the cons umer' s budg et const raint px +qy +r! 111
~ ~
comes rpx+ cqy +trz !: rm , whic h is exactly the same constraint. It is-
1ore ...,m
&
narural to assume that the cons umer' s dema nd remains
• · · -- """"~
Ul)UJG U;,

x(tp, tq, tr, rm) = x(p , q. r , m ) Ill

Requiring ( 1] to be valid for al.l t > 0 means that the _demand funC tiOO X ti
d is it-"
~omogeneous of degre e O. In this case. it is often said that demaD
tion tb4I
influenced by "money illusi on." A concrete ex.ample of sucb a tune
has been used in dema nd ·anal ysis is

x (p , q , r, m ) = ~--....;mpb
____ (b is a constant)
pb+ I + qb-,. I + r b+I
This function is homo gene ous of degre e O because

x (rp . tq . tr, tm ) = (tm )(tp)b

l+b
- ~ x (p . q . ,. ,n
)

(lp)b +I + (rq)b +I + (tr )b+I - t t>-T- 1

= x(p. q. r , m )
 -·•w nomo
In some cases. we cnco ffletic Functions 591
unter nonh
variables that ~e, however, homo enc ornogencous fun .
sorne of the vanables only, With th g ous When regar..i_ ..cttons of several
. e Other v~..: b ~ as fu ·
,that f (x I ' •• - • Xn , YI •••• ' y,,,) is homo ... ia Jes fixed. Na ncttons of
, "!' •• , Ym (at the point (x1 .... .,. )) _ gfethneous of degrte k ,·ntut~ly, we say
YI . "'II I e " , 'It: VQrial,{
g(y, . .. . . Ym) = f (x I ..... x". Yi. . . . . . ) . Partial'" function g defi es
e usual sense. Y111 is homogeneous of d ned ~Y
egree k tn

omothetic Functions
, ,, f be a function of n variables x == (x 1 .
I."'1 • •• • ' Xn ) defined
is called homothetic provided that m a cone K . Then /

x. y EK. /(x) = /(:J), r >0 ==> /(tx) = /(ry) [16.29]

For instan~ if f is.s?~e. consumer's utility function, [J6.29) requires that when-
ever the consumer 1s indifferent between the two commodity bundles x and y.
then she is also indifferent after they have been magnified or shrunk in the same
proportion.
A homogeneous function f of any degree k is homothetic. To see this, DOie
that if f (x) =
f (y) and t > 0, then homogeneity implies that

~ =1'/(x) =I /(y) = /(ry)

. al Define the function F (x) by
It 1s easy to prove a more gener resu1t
/ {H is strictly increasing [16.30]
-V(l) = H(f (x)), where and f is homogeneous of deg:reC k
• l'Vl~ that f (x) == F (11).
1i0 prove this, supr--
. . · o this
We claim that F (x) is bomothenc. H is grisUY incre&§lDa·
H(J(J}) Because -- k if r > 0.
~ equivalently, that, H(f{x)) = f i~ }loinogeneous of degree ·
unplies that /(x) =
/(y). Because
then
H(/ (ry)) == f (ry)
· H<l /CJ)) s
F(rx) = H(f (tx)) == H(tk f(x)) s:: ~ function of a
. . Hence, any stri~dycommon to take (16.30)
Which proves that F(x) is homothe~;- It is actually ~u•t: • t.s us
th th
homogeneous function is hom~ :n~tion, usuallY ~ func:tions are horoo,ene<> ·
as the definition of a bomotheuc all bol1lothe0 c
.,.,__ that not . · 116.291>
1 1.11: next example shows ,coo,din. co defi11J0011 in the
·c cuncdon < f can i,e ...ni=n
i,ocnothe'J coon of , • dlefl
• ()US
sOne can prove that if / (x) is a cono_~~y incrc&Sinl full
~ - for each XO E K. f (txo) is a stn
ll6.30) Wilh le - 1.
 ecmpsra11rc ..,,_ .. -
Chapter 16 I Tools tor
592

Define x ·
=
ExaJDple t6.l6F( y) == a ln X + b ln y ln(xa yb), for au
x :::. O
b are any positive parameters. The ln functi and
a an d f degree +b S on is s . Y~o
and xa Yb is homogeneous o . a . o F (x' Y) is IJicu~ , . \
. of a homogeneous funct1on, and thus it is ho a stticu~ ' -"'
funcnon lllothc . , 'l'tct~
homogeneous t,ecause ic. B14 F~"i
~~

F (tx.ry) = ln [(tx)a (ty)b ] = ln(t a+bxayb) = (a +b)lnr

+ ln(r,> t
which cannot be written as ,1: ln(xa yb) for lilly (fixed) VaJuc of
Problem 6.) . . k. '~ ,,
Note. that this parucular funcnon F can be written as a .
. g function of a function that is homogeneous of any given destrictly •~
m . ( lcD kb)l/(a+b) gi"ee1; ~
define the new tuncnon f (x, Y) x Y = , which is easily · ....,,.
homogeneous of degree k. Then note that F(x, y) [(a +b)/k]~ ~, =
Ji
Problems

1. Examine which of the following functions are homogeneous. am -. .

possible. the degree of homogeneity:
a. f (.x, y) = 3x + 4y b. g(x, y) = 3.x +4y - 2
' ..
Jx+g+Jz
c. h(x. y, z) = ---------
1·-
d. G(x, y) = FY Jn___;_
x+y + z IJ
•
e. H (x , y) = lnx + In y f. p(x, , x2, ••··.x,,) =L.:;'

2. Examine the homogeneity of the following:

2
1
a. F(.x1 , x2 , x3) = x 4(X1X2X3)
4 4
(
- + -1 + -I )
1+x +x 2 3 x, x2 X3

b. G(x,, xz, .x3) = (axf + bxf + cxf)' ~

3. EYaroine tbe homogeneity of the function in Example 15.5 (b) 0~ $(\.; ~1

4· Consider i,., i<;, and iH ; as defined in Example 15.6 of secoon

5·
these homogeneous of any de,ree? witb C\,~
D. ~ - Katzner bas considered a utility function u(x, • · · · · x,.)
Partial derivatives th.at for some constant a satisfy

~ OU x ::,, 0)
,., x; -ox, = a
L- (for all x, > 0, · · · · "
.,. ...~...
Show that the fun . ) _ a }n(.ti
is homo cuon v(x, , . .. , x,.) i= u(x,, ... ,x,. Ill 16.l,)
geneous of decree 0. (Hint: Use Euler's neore
 Sec. 16.7 I ~
e on lmPficJr •
• p,-ove that lbe function F in E Differefttiati,on 593
6 xantpJe 16.26 is not h
£uler' s theorem .
. Ornogeneous b
p,-ove that 1f F (x . y ) is homo Y using
7· . genous of d
socuuon can be expressed as O _ , , egrce I . then the e . 1
(16.19). together wuh f•J in th;'
~:1F2/FF;; <H,m. Use ~ ' . Yof sutr
of Secuon 16.4.) p of I16.22), and the re•ult Ps theorem
• in roblem Io

8. Suppose that j(x, . . . . . x,i) and g(x

and s. re spec ti vely. Examine wheth er •. .th. .. x,, J are homogeneous of uc;gree r ,4_
e foll .
arc homogeneous. Detemtine the de grcc of h owing functions •
nrx,· · · · ...~,.,
a. h (x 1. x2. ... . x,, ) =
f (x"'I . x"'
-, ... .. x)
,,, omogene,ty 1n each case
b. h(x , . x2 ... .. x,,) = "Jp
[g(x, . x-2, · . . • x,,,
C. h = I + g d. h I . g = e. h = I /g
9. Show that no generalization of the co of
emerges if one replaces ,1: in [16.23] by7 arbi a homo g~ ~
foocoon g (t) . (Hatt:
Differentiate the new [16 •23] w1·th respect to t. trary and let r :-: I Then use
Euler's theorem .) ·

16.7 More on Impli cit Differentiation

Section 16.3 explained how to differentiate functions defiDed implicitly. c~
traring on the case with only two variables. More general cases are now discussed
Consider the equation F (x, y, z) = c, where c is a constant. In general.
this equation determi nes a surface in ~me osional space consisting of all ce
triples (x. y. z) that satisfy the equation. This is called the graph of the equation.
Suppose that z =
f (x . y) defines a function that. for all (.r. y ) io some domain ,-\.
satisfies the equation F (x . y, z) c. Theo =
F (x . y. f(x. y)) = c for all (.r. y) EA
· defined b, g tx ,·) -
Suppose F and f are differentiable. Because the funcoon g · ·• -
· ·) A !he pa.roa.l den\'ail\'CS
F (.r. y . f (x y )) is equal to the constant (c for) all (x · ~ e .· f and
,,, • . is a composite funcooo o t .'
6,, and g: must boch be 0. Howeve r. g x • Y [ !6 6) Ul Secnoo 16.2
• · I.be chain ru 1e •
h
w OSC partial derivati ves can be found by using
Therefore,
- F' I - F. : , = O
g I,, = F' . I + F: · z: == O.
.I -
g·' - ' . •
art'al den vauves oi : = J lX, y ):
1
l nh implies the following expressions for che P

,:. [16.31}

F Cx . y. z) =c -, ==
I
-." F'..
--
 T_,,. tor eomparative Statics
Chaf)ter 16 I ,,._.,

. 16 31) allows formulas for z: and z;. to be found even

if i . .
11tlJ>os,;b
Using [ · . f (:c. v. z) = c explkitly for z as a functio n oftis
x ~ -,_'' ~ ~
solve the equaoon ,
Example 16.27
The equation
x - 2y - 3z + z2 = -2
f;
defines : as a twice differentiable function of x and
Y about '
\: --) = (0. o. 2). Compute z: and i>.,. and then """' -I'die p,~
z"xx• z"xr -11.1
(..... . J. •
(0. 0)...,,. ~
also the numerical values of all these parnaJ denvatives at
3z + z and c = -2. Then
2
Solution Let F(x. y. z) = x - 2y -
r; = I. F_~= -2,

Formula [ 16.31 Jcannot be applied when F; = 0, so we assume that z=; •

-
Then [163 1] gives

_, -2 2
I

Zx = - 2z - 3' .:.y =- iz- 3= 2z- 3

For x
= - I and :-: =:
= 0, y =0, and z =2 in particular, we obtain zfx:parti
We find z;xby differentiating the expression for ally with° resp:i
to x. Keeping in mind that z is a function of x and y, we
get

,, a (--1-) = -a [-(2.z -
Zxx = - 3)- 1
]
= (2z - 3) -? , z
_., •

2z -3
ax ax

Using the expression for z: from [2], we have

-2
=(2z---3)-3
II
z
u

Correspondingly, we have

and

.,,, _ a , - a r,(2 ... s .

., .,.' == ~? , - J )'
....
• •
- _~ ....,.,
v} - -
~}" -
7
.. - 3)- 11.
J
= - ? (2-. -
- '"""
3)--2 -,· (.. ,., ...
(,J

,, - _g.
For x = y = 0 .,
.,,,
- - 2• ~zy = 4, and z,-.- -
and .. = 2, we get ,.,.,,
, __zz -
,
Sec. 16.8 I Li
near AP,,rox·
trTlahons and 0111
.,,erentia/s
fhe General Case 595

-n.,foregoing can be extended to any

1•"' d'" . number of .
. pJicitlY as a 111erent1able function of th . vanables. Su
un e n vanable s x pPose z '~defined
' . .... "~ by the
F(x1 , x 2 , ...• Xn, z) == c . eqUatJon
(c is a constant J

e nr00f of the following result is a dir· ect extcn · f l6.32J

1b r -- • St0n of the argume 11 we gave for
[16·31
J and so as left to the reader··

oz oFJax;
-= (i = I. 2, .... n)
OX; aF1az · [16.33}

assuming that aF /oz # o.

Problems

1. Find oz/ox for the following:

+ y - Z=0
a. 3x " - -- 1
.. -xv2zs
b. X)"'.. +x-.3 .•• =,rv-
c. "...r.·
l Compute z:, z~. and z;y when x3 + y3 + z3 - 3z = o. ·~
3. The ~ation xY + yz + r = k, where k is a positive eoostanL defines : as
a ftmcuon of x and y, for x > 0 and y > 0. Fmd the partial derivatives of
z with respect to x and y.
4• Let D = f (r, P) denote the deman<i for an agricultural commodity wbe.n
the price is P and r is the producers' total advertising cxpe.nduure. Let
supply be given by S = g(w, P), where w is an index fur ho\\" fa,u-able
the weather has been. Assume g' (w, P ) > 0. Equilibrium oov, requires
((r, P) = g(w , P). Assume tha~ this equation define.s P impbcitly as a
00
differentiable function of r and w. Compute P~. and comment !be SlP-
S. ~ith appropriate requirements on the function /. prove that ! = .rjt.r y l
lDlplies xz: + yz~ = z.
6· Let / be a differentiable function of one variable. and let ~ b be
O
fl'-O
. az - /(v - b•) dcnnes : as a
. nstants. Suppose that the equauon .r -
CO - . • _: • = 1
differentiable function of x and y . Prove tbal z sa11s6es a:.i + b, , .

16,a L·
lllear Approximations and Differentials
Sccti . fu uons of one variable. Geornetri-
cau . ocb its tangent In a similar way.
on 5.4 discussed linear appro,oroauons to
line~ we app~ximated the ~pb of the funcu_~~le; come (rom using the tangent
lpProximatioos to funcoons of two van
 aph of the function . According to (15 I l] .
· tead of the trU e gr · lJl S
plane ms . & the tangent plane to z
the equaoon 1or
=/
(x. Y) at the point (a b Cetion ls
' , /(a, b)) .~.
graph is of 'ti
:: == f( a . b ) + f[(a, b)(x - a)+ / 2(a . b)(y _ b)

Hence:
-
. pro..,.mation to /(x . y) about (a , b ) is
The linear ap '" ·
f(x. ~·) ~ f(a. b) + f{(a. b)(x - a)+ J; (a , b)(y - b)

Example l 6.28 .
Find the linear approximanon to / (x, Y) = e +Y.(x y - 1) about (0. O).

Solution Here

so that / (0. 0) = -1, /{(0, 0) = -1, and / 2(0, 0) = -1. Hence. [16.34]
gives
~+>"(xy-1) ~ -1-x - y

For x and y close to 0, the complicated function z = e+>' (xy - I) is ~-

proxiroarexi by the simple linear function z = -1 - x - y.

The Differential of a Function of Two Variables

Let z = f (x . y) be a differentiable function of two variables. If dx mi d~_
are arbitrary real numbers (not necessarily small), we define the differential ~
z = f (x , y) at (x, y) , denoted by dz or df, so that

z= f (x , y ) => dz = J:(x , y)dx + J;(x , y)dy ]

Wb · . ~c~
. en x 15 changed to x + dx and y is changed to y+ dy, then the actu
m the value of che function is the increment

61. = f(x + dx , y + dy) - f(x , y)

If dx and d y . · . ed bY dZ:
are small in absolute value, then Az can be approxunat ·

/lz ~ d z= f{(x, y) d x + t;(x, y) dy

r S ec. 16.8 I U ne
a, A pp,o.
'Xlrnation, •nt:1 Diff!
'~ntfals 597
m
n-vaJuc theo re . one can Prove that the d.1ff
. BYusing the m. ea
I d z can be Writte erence between
vo rt· d the differenna n as
.
t>= an
6 -- - d -, -- f1 d X + f 2d y
d d tb
and E2 are func tion s o f d x an maJ:ttbboth· tend to O as d x -. "0
and
-t,ere f i ry :
y are both ve d
e difference t. 7- _ Z LS ve ry,
~" - o. lb us. if d x and d ·•

"· -~ 11 ••
• • •
m [16.36) can be o· en vea a oeometri .
,-el)' SDJAW •
n,e appro, anon
um
resu lts fro;, :
interpretation. ib e
ises fr om re p lacing 6 z by d z . ri ll oWJo g the tangent plane
t!fOf that ar rated in Fig. 16 11 . ere IS an anal yn cal _ ,-
o-
rf ac e," as il lu st -
!11ber than the su
' ..
inen t ~
y)
x) + J;(x. y) (Y -
/( x . y ) = fj' (x , y
) (X -
z -
e •
. Y . Z ) in the tangent plane 31 th
ts (X
r th e ~ o f poin
p0 D ll
obrain
=
be the equation fo X x + d x an= d Y y + d y, we
g
f= (x . y . f (:.c. y )) . Lettm
x,y x + J; (x , y ) dy =
f (x , y ) + d z
Z / (:.c, y ) + J;(
) d
= d :.
th e figu re is , therefore, f (x . y ) -
en t Q S in
The length o f the line se g m
pital IDd
Eumpl-e 16.29 fu nc tio n w it h K and L as ca
) be a production the marginal prod
ucts o f
Let Y = F (K . L F~ and F ;_ ar e
ec ti v el y. Then ion 15.6.) If d K
an d d L
labor inputs, re sp e 15 .20 o f Se ct
of Y =
(S ee Exampl y. the differtlllial
capital and la b o r. d L, re sp ec tiv el
in cr em en ts in K
an
are arbitrary
F (K . L ) is

dY = F ~ d K + F;_dl
ntialdz .
A Z and th e d if fe re r
terpretation of
The geomee,ic in
:: a: f (x . y )

• Sr·- ... --··r .

I 'D .. .• .. .
♦

...L......t~..J. ..
n
d -•

I
Y;

(x . y) l. ..........
.....l Q • (x + dx . y ~ dy )
 Is tor comparative sratta>
8 Chapter 16 I TOO
1
A y _ F (K + d K. L + d L ) -
F ( K . L) in y
The increment .ded d K and d L are smaJJ (in absolute va)can be ani.....
imated by dY prov1 Uc), aii<i;o~.
Ar == F (K + d K . L + d L ) - F ( K . L ) ::::: F~ d k + F{ dL
rall , approximation [16.36] can be used to estimate f(x+d .
Gene d ) · d d v are small and the values of f (x . y), f[(x . Y), ,...~· y,.,.d)J
when x an • "'"' f2<x
are known: · 'J

f( x + dx . y + dy) :::::: f (x. y ) + 1:<x. y) dx + J;(x. y )dy [16.3~

Example 16.30 _
Let f(x. y) = xy~ - 2x 3 . Then /(2. 3) = 38. Use [16.37] to estimate the
value of/ (2.01. 2.98).
~-'1ution Here f{(x , y) = y3 - 6x2 and /2,(x, y) 3xy2_ With x = l =
y = 3. dx = 0.01, and dy = -0.02. we have !{(1, 3) = 3 and / 2(2. 3) == 54.
Thus, [16.37] gives

1c2.01. 2.98)::::: 1c2, 3) + 1:c2. 3) . 0.01 + 1;c2. 3). <-0.02)

= 38 + 3(0.01) + 54(-0.02) = 36.95
The correct value to four decimal places is f (2.01, 2.98) = 36.9506. Tir
change in f is - l.0494 instead of - 1.05, so the error in che change ~
- 0.0006.

If z = f (x . y), we can always compute the differential dz. = df b~ mt

finding the partial derivatives f{(x. y) and J;(x. y), and then using the defuriri®
of dz. Conversely. once we know the differential of a function of two varlab!es.
tben we have the partial derivatives because

d.,~ -- Adx + B dy ~ - =
8z A a n d -
8z.= B
8x oy
to re-
Nou: In the literattlf
guir th d e on mathemaucs·
for economists, it is quite conuncn of di(
diff e ~ · x and d y be "infinitesimals," or infinitely small. in the definition .
~renliaJ dz f 1(x • Y) dx + (x , y) d y. In this case, it is often claimed. ~
= Ii
mes equal to d 7 Imp · · - over u.-
centuries since Leib; fi rec1se ideas of this son have caused confu51on doned
in mathemati 6 2 rSl introduced them, and they have largely beeD abaJl
cs.
6
1n nonJtandlld anal . _,.,ijficd
. °
ven,·o f , ., .
n ._bniz·s ideas
y,1s. a re,,,_,.....I
. ,......_, e pan of modem mathemaacs. . . . ...., a """' ..,_
u 1s shown u... so,,...
inr.eresana applications of about Ulfinitesimals fin be made .......ise There even have t,een
nonstandard anal . ,.. -· ·
>'515 to theoretical economics.
 Sec. 16.8 I Li
near An,.,P,ox/mafio
RuleS for Differentials ns Sf>(J Differenr,ats 599

crion 5.4 developed several rules t

Se . bl Th or Working I .
one vana e. e same rules apply to fun . w th differential s
pase that / (x . y) and g (x. y) are differcn~t,;s of several van able~ of :~n:ons
== f{ dx + /2dy and dg = g', dx + g' d,a"'· e.IfBy I16.35). their d1" ·, sup-
uerentJa s are
di . · ·d th 2 d(
. 1of
whatever 1s ms1 e e parentheses. then th e· ,,ollow,n . ) denotes
I the diff-...,entJa
as [5.8]: g ru cs are exactly the same

~oleS for Differentials

d(af+bg ) =adf+ bdg (a and b are constants)
d(f · g) = gdf + f dg [16.38)

d ( f) = g df-., f dg (when g:,: 0)

g g-

These rules are also quite easy to prove. For example, consider the product rule
applied to the function f · g defined by (f · g)(x. y) = / (x. y) · g(.z. _v). We oa,.c

a a .
d( f · g) = ox [f(x . y) · g(x, y)] dx + ay [f(x. y) · g(x. y )_d:,

= <J; .g 7 f · g;) dx + <f:. ·g + I ·g;) dy

= g(f,' dx + J:. dy) + f (g~ dx + g;.dy) = g. dj
X •
- f. dg

• ·a1 $ SC that - = fl.t. \ ) = g \ j\.t . \

There is also a chain rule for d1fferenn s. up~ ' ·
. . . fu · of one vanable. Theo
where g is a differenuable ncuon
'( ))/' dx + g'(f t.t. \) ) ; , d_\
dz= F;dx + F;.dy = g f(x ,y ¥ ••

' d + J' d,·) = g' (f(.r. y)) d/

= g'(f(X , y) ) (/¥ X ·' •
,d f ' d\' Bricft~ fonnulat~
' ddJ -Jx+ ,
because F'~ -- g' f X'' F'.\ = g'
1
f ., an
.\
-
( loJQ]
• - '(J(.r. y)) d/
z = g(f(x. y)) => d:. - g

f r the following .
Example 16.31 . terms of d.r and dy o
10
Find an expression for dz

(a) z = Ax" + Byb

600 Chap ter 16 I Tools for Comp aratw e Statics

(b) z = ~u with u = u (.x. y)

(c) z = ln(.x 2 + y)

Solution

(a) d z= A d(x 0 ) + 8 d (yb) = Aax 0

-
1
dx + Bbyb- 1d y
(b) d : = exu d(xu ) = ex" (x du+ u dx )
= ex"{ x [u;(x . y) dx + u;(x. y) d y] + ud.x }
= ex" { [x u;(x. y) + u ] dx -!- xu;(x , y) dy}
(c) d "-- =. d ln (x 2 + y ) = d(x 2 + y) + dy
., +· = 2x dx
.,
x- y x- + y
Invariance of the Differential
Supp ose that
z = F(x , y). X = j(t, S) , y = g(t , s) Ill
wher e F , f.
and g arc all differentiable functions. Thus, z is a composite functio
n
of 1 and s. Suppose that t and s are changed by dt and ds , respec
tively. The
differential of z., regar ded as a function of r and s, is then

dz= z;dr +z: ds .,.

(- J

Using the expressions for z; and z;.in the chain rule [16.4), of Section 162 ghes
d z = [F ;(x . y)x;+ F~(x , y)y;j dt + [F;(x , y)x; + F~(x. y)y;) ds
= F;(x , y)(x; dt + x; ds) + F~(x, y)(y; dt + y; ds) [3)

= F{(x. y) dx + F~ (x , y)dy
wher e dx and d y deno te the differentials of x =
f(r . s) and y g(r. s). res_~ - =
rively, as functions of r and s. Note that the expression for dz in
[3] is P~:s~-~
challged ~ \.
the definition of the differential· of z ;:;: F (x . y) when x and y are
and d y , respective ly. Thus , the differential of z has the same form
wherh~r x pc~
are free variables, or whether they depend on other variables t and s.
Tots pro ·
is referred to as the invar iance of the differential.

The Differential of a Function of n Variables . the

The differential of a function z = f (.x • x • •..• . . defined in
1 2 Xn ) of n van ables is
obvio us way as
p6.401
 Sec. 16.8 I Un ear Ap pro ximations and
[);fferentials 601
(be a1>5olute values of d.x 1 • ••• • d:x,, are all ~mall. the
n again Az :::::: dz. where 6.z
:: !he actual increme~t of z ~he~ (.x1 .•.
.• x,, ) 1s c~ange d to (~ 1+d
The rules for differenaals m [ 16.38) are :x 1 ••• •• x,,+dx,, ).
valid for fun cao ns of n variables. and
mere is also a general rule for invariance of the differ
ential : Th e dif ferential of z =
f (x, . .. .. x") has the same form wh
ether Xi, ... , x,, are free variables or dep
orhtr, basic variables. The proofs are eas eru:J on
y extension s of those for two variables
.
Eu mp le 16.32
Compute dz when z = Ax t x;J · · · x!•
, where x, > 0. x2 > 0, ... , x,, > o.
and A, a 1, a2, ... . a,, are all constants wit
h A positive. (Hint: First, lake the
natural logarithm of each side.)
Solution Taking the logarithm of each side yields

In z = 1n A+ a, lnx 1 + a 2 lnx + ••• +

2 a,, ln x,,
Hence,

so tha t

dz = z ( X1-a1 dx1 + -a2 dx2 + •· · + -a,, dx,, )

~ ~

Problems

1. Fin d the linear approximation abo

ut (0. 0) for the following :
a. f (x. y) = J 1+ x+ y
b. /(x .y) =e xln (l+ y)
c. f(x . y) = A( x + 1)0 (y + tl
2. Suppose tha t

g·( µ , E) = [O + µ. )(I + E)°] 1/(1-Jl) - I (a and /3 are constants)

Show tha t if µ. and E are close to 0, the
n
1 a
g• (µ.,E)::::: 1- /Jµ + 1- /J t

3. Le tf( x,y ) =3 x 2 +x y - y-.

.,
a. Compute /(1 .02 , J.99).
Ol) and use [16.37] to find an
b. Let /(1 .02 , 1.99) = f(l + ~·02 2 0
approximate value for / ( l. 0 · 1· 99)~ H~w Jarge is the error caused by
this approximation?
I 16• 9
systems o f Eq
uations
arked p re v io u sl
S e c 16 .9 I S ys
tems o f Equatio
ns 603

y . e c o n o m ic m
As r::'uation s. o d e ls o fte n in
In th is se ct io n vo lv e ,;yste m s
. w e o f si m u lt a n e -
,,en
()0 5 wav
1 .
o f findin g th e p se
a n ia l d e ri v a o v
e h o w d iffe re n ti al
s ca n p ro vide an
system s. e s o f funCtJon s e ff i-
d ef in ed im p li c it
ly b y suc h
Degrees o f Fre
edom
L et x ,. x • . • .•
2 x,. b e n v a ri a b
sa~ . b y d ef in it io le s. lf th e re a re
n . th a t there ar n o re st ri ctio n s
can b e fr ee l y ch e n deg ree s o f f re p la c e d o n th e m
o se n . If th e v a ed o m, b e c a u se all th . we
form /, (. x1 . x ~. ri a b le s a re re q u ir e n v a ri a b le s
reduced b y 1 . =
. . . x,.) 0, th
en th e n u m b e r
e d to sa ti s fy on
o f d e g re e s o f fr
e e q u a ti o n o f th
e
Whenever one e e d o m
n u m b er o f d e g re fu rt h e r " in d e p e n d e n is . in g e n e ra l.
e s o f fr ee do m is t" re st ri c ti o n is
in d ep en d en t re st a g a in re d u c e d b in tr o d u c e d . th e
ri c ti o n s o n x ., y 1. In g e n e ra l.
of in d e p e n d en t x , •• • , X n m e a in tr oducmg m < n
e q u a ti o n s h a v in 2 n s th a t th e v a ri
a b le s sa ti sf y a sy st
g th e fo rm em

f I (X I • X 2,
=Q
• • · , Xn )

f1 (X 1 , X2 , •. ••
Xn ) = Q

[1 6.4 1 }

Then. p ro v id e d th
a t m < n . th e re m
The ru le that e m a in in g number
o f degrees o f fx
e rg e s fr o m th e eed
as it is b a rd to se c on si d er at io o w is n - m .
e x p la in p re c is e n s is a ra th e r ro
Nev er th el ess. th ly w h a t it m e a n u g h one. e s p e
s fo r e q u a ti o n s c ia ll y
e fo ll o w in g is to be "'\ndcpen
m u c h u se d in e denL ..
c o n o m ics a n d S
tatistics:
lit Counting R u le
111 fu
ld the number o f d e g
!I,: rturnbcr o f
re e s o f fr e e d o
v a ri a b le s n a m fo r a sy st e m
n d th e number o i c q u a u o ~. co
ij ,.
, ' .. m, there a re n ' ' o f ''. in d ep en d en unt
- m degrees o f fr e e t' ' equan oos. '" ·
~
I. Iii'; '" I
utton to th e sys
tem.
dom m .
th e sySte m. lf " < " ' \here
·

.
lb1s rule of cou
-~ . nting variables an . n s is u se d ,o
Jusni)-ing \he fo
-. .n o n u c proposi d eq uau _o d Uowmg
b
tion: ''The num r o f mdepen e n t ,.r <> elS that a g
o vernment
can l>Ursue cannot p e ber o f av
-:.
aila
F o ss ib ly exceed lh ble policy U\StrUIDC ..
or example, a go e num \ nts.
vernment seelci·n · u )t an eo u s 0 " •U\ftation . \ow unemplo
,u
~ t. . a n d stabil g sun s a t least wee in y-
ity o f exchange d li
ependent po eY
tnstnunents. ra te s need
 T.oo
4 cnaprer 16 . " /s for Comparatrve Statics

noted that the cou nting rule is not generally

.
It ShOUId be . · fy
valid F
. bl x
if 100 van a es x,. • · · · 100 are res mc ted to saus one equation the· Or C)(amp
• ru cs le
aree
the nwnber of de e s of free dom sho uld be 99. 1
Ho wev er. if the equ . ays that,
to be anon b ~

+ · · · + x 1.,00
~ '
x 1 + x~ =0
th en there is onl~ one solution . x, =
x~ = ·· · = x 100 = 0. and so th
de2 Jtt5 of freedom at all. ere are no
- It is ob, ·iou s that the wo rd "in dep end ent
" can not be dro ppe d from the
men t of the counting rule . For inst anc e,
if we jus t rep eat an equation tha t~
appeared before. the num ber of deg ree s of free
dom will certainly not be reduced.
The concept of deg rees of free dom intr odu
ced ear lier needs to be generalized.
A sysrem of equ a.t ion s in n var iab les is sai
d to hav e k degrees .>f freedom if thert is
a ser of k var iab les thar can be free ly chosen
, whi le the rem ain ing n -k variabLts a~
uni quely det erm ined onc e the k free var iab
les hav e bee n ass ign ed s~c ific vab,,,es.
Thus. the sys tem must def ine n - k of the
var iab les as fun ctio ns of the remaining
k free var iab les. If the n var iab les are rest rict
ed to var y in a set A in Rn, we sa:-
that the sys tem bas k degrees offree dom in
A.
In ord er to qua lify as a sys tem with k deg ree
s of freedom, it suffices that
ther e exisr le of the var iabl es tha t can be free
ly chosen . We do not require that arry
set of k ,·ar iab les can be cho sen freely.
Sup pos e we have a linear sys tem of m equ
atio ns in n unknowns, Ax = b.
Acc ord ing to 'Theorem 14.3 of Section 14.3
, the system has a solution iff the rank.
of the coefficient matrix A is equal to the
ran k of the arg um ent ed matrix. In this
cas e, the cou ntin g rule giv es the cor rec t resu
lt iff the m row vec tors in A are lin-
early ind epe nde nt, bec aus e the n the ran k of
A is equ al tom . (Se e TbeorCID 145:)
So linear ind epe nde nce amo ng the row vec
tors of the coe ffic ient matrix is w~ 15
~ceded for the cou ntin g rule to app ly. The
meaning of "independent'' eq ~
m lhe cas e of nonlinear equ atio ns is a bit
mo re com plic ated, so we do not diseU55
it here.
So far. we hav e disc uss ed the two cas es
m < n and m > n. W ha t~
the cas e
~ n, _in wbi~h the num ber of equ atio ns is equ al
= t~ the oUIDbe: o.
unknowns . E~en ~ the sim ple st cas e of one
equ atio n in one vanabl~. /(x ) !be
suc h~ equ ano n rmght hav e any num ber
of solu tion s. Con side r, for 10stanee·
followmg fou r different sing le equ atio ns in
one variable:
.,
x- + 1 = 0, X - 1 = 0. sinX::::: O
(x - l )(x - 2) . . . (x - p } = 0.
1bese have O, l , P , and an infinite num ber of solu tion s,
respectively .
~ general. a system wit h as man y equ atio ns as unk now ·steot
(tha t is has sol ·
'.. uno ns ), but 1t
• may hav e ns is usuallY c~nnssi are
usually separated" . ... l.... .a.. severaJ solu tion s. The se solun°
. Rn
or 1s0 au.u from eac h oth er, as poi nts 1n
·
, l
Sec. 16.9 I S
. d . Ystems O' equation
Wi are often mtereste m mOdels w·th 1 s 605
:ally
..,.,,onll
meaningful solution , bctau then
. uJ • se
systcn,s of cqu .
th
e rnOdct .
h •
at.Ions aving a u .
e,.v •·. of paru c ar economic Var iables B Purpo n1quc
• ascd ~
a111es · on the earlier di rts ro PTCd 1c1
' ea51 fonnulate the foll owing rough rule
11 system of eq S<:uss,on. we can
• / have a unique solution unl~ss th · Aare ere 1'at1011s do
etntrO . exact/v ,.,. ts ""' 111
'
• ..... c
. . '"" tnarry
nkft0"'''"'' tqua1to11S aJ
" To establish the existence of a un.ique solutio f
. . all icult S n o a sysrern
•..-Qr equanons 1$ usu y very diff "fi r>o101 invo lving
Ju,-, from " glObal analysi s•· can .so ~c.
d
Xed- th flt)n,.
-~.r results metimes be Used eorems· and
(JU'"" 10 establish 1Jniqoe-
l)CSS.

Finding Partial Derivatives from Differentials

We begin with an example.
Eumple 16.33
Consider the system of equations
.,
u·+ v =x y
? [ Il
UV = -x-? + y-
Find !be differ-
(a) What has the counting rule to say about this system?
entials of u and v expressed in terms of dx and dy.
(b) Find the partial derivatives of u and v
with respect to x. and :-
If .xo = l is ux:reasec
(c) (.x, y, u, v) = (1, 0, 1, -1) satisfies system [I).
by 0.01 and y0 = 0 is increased by 0.02. wha
t is (appro:uawel~I tbc
new value of u?

Solution
uations so the~ sbould ~ :
cwo eq ~-·ed values foe .1 ind ,
(a) There arc four variables and se
pose we choo• · UA the t'<'O rema•mn: ,-vi-
•

degrees of freedom . S up
== 0. tbe.n III re--
Theo there are two equations lefor.1fdxe-~ I~d ·" • - 1 and
v. For exam .P ' --om whic h \\e find M - _
ables. u and
d : - 1 • n . diffi ult to nnd
duces to u-
, =-v an uv of x and >·, ic 1s more
alues nab.l e
c
•·ume that
to ~ ,_ • .
v = -1 . For orhe r v ·1 seem s rcaso
d However, t differenodbK run-: -
· ( ) and v == vt-t , ') as bl . ~ s111tsbh
solutions for u an v
system [ 1] defines u ~ u ~1f:e domains of the ' ana
c-> •
• ..,1 ~ 1 4.11d 11 is
tions of x and Y, ac leasl f and "· so t) .
. , e func tions O .c ·a1 of the left-b and side
restncted. r,::nu
Because u and v ar Then the &ffe
.
equal to x y for all x and Y·
the piwc1se Sl~ ·
•on calls
• !ho poXl S-CO
'The implicit fwlction m,eo,etn 111,
 roust be equal to the differential of the right-hand s·d
d(x y) .
In the same way. d (u v) = d( -x l
. + y2) _ IUe: so d(i.l; .
differentials. we obtain sing the lJJ
flllc i I~
2u du + d v = Y d x + x dy
u du + u d v = - 2.x d x +
2y d y
Note that by the rule for the ~var
iance _of the differential, ,
is valid whichever pair of vanablc
s are mdepcndent. Ystern 121
We want to solve system [2]
for du and dv. Ther
equations in the two unknowns du
and d v of the fonn e arc lil,,1
Ad u+ Bd v =C
D du + Ed v = F

where. for instance, A = 2u, C = Y dx + x dy ,

Cramer" s rule or otherwise, we and so on. Usuig
find that

+ 2.x
du = yu .,
2u- - V
dx +
XU -
2
2y
dy
2u - V
-4 xu
dv - - - - -- d
yv 4u y - xv
x + --- dy
- 2 2u - v 2u 2 - u
(b) From (3) , we obtain imme
diately that

au yu +2 x au
ax = 2u2 - V ' -ay = 2u.-, - 2)'u
XU -

Al ~, the partial derivatives of u wi

th respect to x and )' are me coci·
ficients of dx and dy , respectively, \
in [4]. In this way. we have fooi
all the first-<>rder partial derivati I
ves.
(c) We use the approximation \
1

u(x + dx , y + dy ) ~ u( x , y) + du
Letting x = l , Y = 0, dx = 0.01, an
d dy = 0.02, we obtain
u (1 + 0.01. 0 + 0.02) ~ u( l , 0) +
u', (1, 0) . 0.01 + u~(l. 0) . o.Ol ••
== 1 + 0.01 + ½. 0.02 ~ 1 +- 0.0133 - 1.01')
!· -
Note that in this e of
u( l.0 1 , 0.0 2). case, it is not easy to find the exact 'I/alu
 -
Sec. 16.9 I S
YSlems Of E
Quafions
le 16.34 607
f)'tlllCP nsider the foll owin g macroeconomic d
o mo el:

Y :::C+ J + G
C=f( Y - r, (Il

I = h(r) [2]

r = m (M ) 13)
{4]

Here y is national income, C consumption J invest C .

. · ment public expendi-
ture. T tax revenue. r interest rate, and M money supply. Check the number
of degrees of freedom. If we assume that J, h. and m are differennable
functions with O < f ' < 1, h' < 0, and m' < O, then these equations will
detennine Y, C, I, and r as differentiable functions of M, T. and G. Dif-
ferentiate the system and express the differentials of Y. C. I . and , in r.enns
of the differentials of M , T, and G. Find aY;a T and ac ;aT. and commem
on their signs.
Suppose Po = (Mo, To , Go, Yo, Co, Io, ro) is an initial equilibrium pomr
for the system. If the money supply M , tax revenue T. and publi~ ~
G are all slightly changed, find the approximate changes in nanooal mcome
Y and in consumption C.
Solution There are seven variables, Y, C• I , '· M· T · _il!ld G· and f~
e.quations. Thus, there should be 3 degrees of freedom · Diffettnnann,g ~
system yields

dY =dC+dI +dG
dC = f'(Y - T)(dY - dT ) [5]

d/=h'(r) dr
dr = m'( M )d M
. ..u,04'!-.dY. dC . dl .
di " ,enoal Cnau ~--
. . . tcm for the ue oxpres.s111S these Ul
We wish to solve this linear sys .
vana bles y' c. /, G . the eAO:l..,........,.,,
and' · __ __,_ y~
nolic~
and dr in the endogcneous d .~ dT and d lD l l we can riod d I
5
tenns of the differeno Cuau he la.st two' equ.au·ons lO •
'a) i.. .. ngeS lff '
Vari.ables M. T. and G · From '
and dr irnmediaiely.8 In fact [6)
' (r )lfl '("~)dftl
/U
di• h
dr:: m' (M)dM , wns.
wtikh haS four unknO
aolvc: sysuslll (~l-
'1 . le c,.,ner·' rule ,o
t is nor a 1ood idea w u
 comP''stive Statics
1 1 rools rot
608 c,i,pter 6
. for d I from [6 I into th
. o the e;( pression e first two
1nsert1n,. cq\lati0n .
g,,·c~ df - dC == Jr'( r)m '( M )d M ' •n l~J
+de
f'( l' - T)dY - dC == /'( Y - T )d T
. ns to detennine the tw o un
r: I
rwo equauo knowns dY .,.,,.
These ~ d im plif yin ... "' dC 1•
Cram er s rule an s g notation. we ha ve
-•~
h'm' f' +
d}' == l - f' dM - 1 - f' dT 1
1- f' dG
f'h 'm' f' dT + f' ·;
dC = l - f' dM - l - f '
1 - f'
dG

We have now found the differ

entials d Y , d C, d I , and dr ex
terms of the differentials dM , pressed ~ 1 )
dT , and dG . From {8] an
compute the partial derivatives d [6), we can• ~
of Y , C, I, and r with respe
ct to M. r. Ill
G. Forewnple, aY /a T -f
0 < f' < l , we have aY /aT
='/( 1 - / ') an d or/oT = 0.
N ot et ba i~
the taX level (keeping M and
=-
f' /( 1 - / ') < 0. Thus, a sm
all l'Ila'3SeJ
G constant) decreases natio
model, but not if the extra tax nal income m~
revenue is all spent by the
=
if dT =d G dx (and dM govewoCIU h
= 0), then dY = dx and dC
If dM , dT , and dG are sm = di =cir = l
all in absolute value, then
6Y = Y(Mo + dM , To + dT
, Go + dG ) - Y(Mo, To,
Go) ::::: dY
Note that when computing d
Y in this case , the partial
evaluated at the initial equilibr derivatives have to lJt
ium point Po .
Prob~rn.s

1. Cons uSer th
c systcm of equations:

3
XU + V = y- ~

3uv - x = 4
a. Differentiate th
b. Co mpute , e sy 5lem. So and J,
lve for du aud dv in tenns
of dx
2. Suppo~ that
t
c. (x . Y. u . t1)u•:::an(O
d t1' b ·
Y using the results in pa n (a)
.
·
· · 413. 1) satisfies l•] . Comp , Ibis ~
-< 1 and x? by Yt and "\;.,. ar .
ute u~ and v, a1 .()1)5~
l e unplicitly defined as differ . bl fu.OCO
cona e
 ■

Sec 16 10 I The lmfJ/icJt Function Th

eorem r~ 11 609
~t the system Fix . y. u. v) = Oand G(x y
nose th f ' f ' ' u' IJ) :!! fJ den~_; "
3. St1Pr11 differentiable uncuons o x and ~ f:.xpJa,n h
a.Jld ~ press1on for this pan1al den vauvc "'" Lo hnt1 Ii , ~
find an ex
2
ute aZu/Bx when u and II are defined a\ funu ion, of 1 a
4. Cont~ . + u u = I and x u + Yu = 0. nd . lr1 rt,c
equauons xy
version of the "IS-LM'· macroeconom,c model ◊nrrmall ,._
S· J.A R. Hicks leads to th e system of equauons & I ur: w:,A "l'r.

[ I ] / (r ) = S(Y) f2] aY 4 l<rJ = M

where a is a parameter, and / , S. and L are given differ~nr,at,e ~UDQJrJt.$ ,

Suppose that the system defines Y and , 1.mplicnly as dJf.~~nua:ik ~ #

of O and M. Find expressions for ar /B M and br/iJ M •

Hardtr Problems

6. Suppose that F(x , y, z) = 0 and w = G(x, y. zJ. Prove tha:. .1.-::h apv!)pr..l!I!
requirements on the functions F and G.

(Subscripts refer to the variables that are held constanLJ

7. In demand theory. we encounter systems of the form

u;cx,.x2) = i..p,
U~(x,. xi) = ;,,I":
13]

where U(x,, x2) is a given utility funcuon. Suppose WL I.be S'Sttm Jc~
x, · x2, and >.. as differentiable functions of Pi. P: , and'" fuid lD t > \ ~
fO!' a.x,/ap, .

16.10 ,.
he Implicit Function Theorem (Optional)
~stern (16.4 I l in the previous section is a general system or C'QlilOOfb ,n v. htcb_
th
~ Variables appear symmetrically. When econ(lm1n:. deal 1111th s, :.tcm~_N
cquat:ions• notablu · , ta,;c analusis
~ in comparaove s u 1 · •
!hr v11.nablc:1 11t usu.all\ d.w1nC\1
~

~-- - Equation (I] is the IS cquwon i.ovolvms lllc in,~tmen• run,:wo 1 &nJ u,,1\1> n.a..""OOII S
""'t1Qli0n , dily P"fctt"ce funcuon /
...,e LM Muation involves the hqu1
(2] · .. \ 1/1( .k,~ lllr lftOOc) I
"lei ,~-
- - · UM:Ol'M and t ~ i 11\ltt'UI "It
...: .
"...,,,ey supply. M . Tbe vanablc r dc~i 111u.......
' - -, •
f:jlU vnillJIUI ' ., ,
dogenou• vanabJcs the model n intendClj 11
a pnon into rwo rypcs;.,. en are supposed ro be determmcd by "force,~·expt.,,ri, .,,IA
vanableli m .SI od I ,, <,u~1,._ .,
exogenous depends on the m c in que..uon A var,abJ •Je o,
model Th1 \ class,ncau~n ,n.1ght be exogenous in one model, but en: llke Pl.lbfv
ex.pendarurc. for e.xamp e. ~ '>ge~, 1
another " g,vc nsc: 10 a general t.yMem of 1tructurat
Such models o,ren tq~
haV1ng the form

f 1 (x 1 • x 2. ... , ..tn , Yi , Yl • · · · · Ym) == 0

/2(X1, X2, . • • • ..tn , YI · Y2, · · · · Ym) == 0
[I~4;
'·

wbe~ x ,. . x,, are the exogenous variables, whereas y, • ... , y,,, are the endoge.
00\U vanables. An ..equilibrium" solution (xO,,°) =
(x?, ... ,x~, yf ... .. f. , is
frequend y known. or else assumed to exist. This equilibrium might, for inst~
represenr a state in which there is equality between supply and demand for each
good
Note that if the counting rule applies, then system [16.43] with m tq)a[icms
=
m n + m unknowns has n + m - m n degrees of freedom. Suppose it deiJCS
) , . . ..• Jm as C I functions of x 1, • •• , Xn in a neighborhood of (i'. Y"°). 11a
the system can be solved "in principle" for YI, .. . , Ym in terms of .t i . . . .. .:. ro
give

In this case, [ 16,44) is said to be the reduced form of the structural ~

system (16.43]. The endogenous variables have all been expressed as functiccs or
the exogenous variables.
Now, at the initial equilibrium (xO, y 0 ), we usually have some inf~
ab~,n ~Ystem (16.43]. For instance, we might know the signs of some paiUJI
~vanves_~f ~ ~nctions f;. The questions that naturally arise are: ( 1>
r.h1: ndi
co _oons 15 H possible io put (16.43) into its reduced form? (2) \\'bal
ua:
pr~es ~f the functions 'Pi?
The unplicir fu · · ns Evto
th . . ncuon theorem has answers to both these quesoo · is
ough the prec1.SC stareme t d . • · inessast
easy to grasp N n ~ proof are rather compbcated. 1ts maw ·ned
it is 5eldo · ~tc that even if the functions / 1, ••• , /,,, are completel)' spect rJfi
m P0551ble, except in th 1, . as eJerne0-
functions of .x . e •near case, to express y, • . . .• '"' ,o tie
. I, .. . , x Even m th 1· . may ha\'e
mvened. "· e 1near case. a large matnX
Suppose that / t (bat die
functions <PJ in [J 6.~ · · · · • f,,, are, C' func_lions, and ass~e ~or a rno~ and~
1are also C • If we msen th.is solubon into [I 6.4
r Sec. 16. 10 I The I
m,:,/icft Func,1or,
ni.orem (OrJt,onatJ 611
,1;fferential of each equation . w e~
~~

.. . ... . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .
aJ,,. of,,, a ····· ···· ·· r16 4SJ
-d x, + ... + - d x" + f,,.
of,
ax, OXn ayIdy, + · ·· + oy,,. -.:::..d
y'" =
O

.
Moving the first n terms in each equation over to the ngb t-hand side gives
·

aJ, of,y, ,, = ---aJ o/ x

3..dX1 - ··· - -d
-d
ay, y, + · · · + -d oy'" 'l
ax,.
1
11
<1X1

... ... ... ... .. ... ... ... . ... ... ..... ... . ... ... ... . .. [ 16 46)

. . . afm . _ of,,.
of,.
aJ,,. d JI +
.
+ uym d x, -
~. dym - - -ax, ··· - -d xn
ax,,
a.YI

linear sys tem of m equ atio ns for the m unknowns dy1• ••• • tty,,. m
Solving this tials of y 1• •• • • y.. wuh ,especr
dxn wo uld giv e us all the par
terms of dx 1• • •• ,
be uniquely solved for d) , .
t, the equ ations in [16.46 ] can
to x, ... . , Xn . In fac
Jacobian detmninant of system {16.43]
!S
. . . • dy,,, provid ed tha t the follow ing
different from 0:
aJ, a/,
ay, ay,,.
[16.-r1
0(/1 •.. . . J,.) =
a(y , .. ... y,,. ) af,,. ~ I
ay, a\·
. "'
s
· t. h nun
c 1 (unctions of ., , ,
{Jo. -'~/
tha t [16 .43) def ine s y, , · · · · y.. asif h JacobiQ/1 de11rmlJIIJllJ
We ass um
~Ut that if
ed
J, . ... • Im are c Jun 1
ctio ns ~ I I: "'· ., •,..
t1ofl.S o_r
aJ C' /iu1 c_
n
6.43J
then { I.,/> will dejin , .i.,s ,s the unph..:1t run.:oo
LS nor singular at (xo , •J.o) , o) 1n essence, uu
•Y ·
x', •.. , x,. in a neigh borhood of (
theorem.
. 16 9 w11.h " and t ' as tht
£ le )6.33 in secuon ~;brium poU1t
and tht
lalnple 16.35 . an dete &D1
nnio
( l , - J) is an el Jacobi
Consider system [ l J in fxa mP 1 0 (1 , 0, 1. - 1), e . of x and Y in a
endogeneous var·iab · Zu• - ti. · ~t
les . H~ re C' {unCU005
as
Jacobiao detemunantd is define u and v
•
is 2, so system [l] oes
neighborhood of (1. 0. 1. -l ).