UNIT 2

Applications of Linear Equations and Non-Linear Functions

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Basic calculus rules
• If 𝑦 = 𝐴𝑥 𝑛 , where 𝐴 is a constant and 𝑛 is any real number then the
derivative of 𝑦 will be given by:

𝑑𝑦
= 𝑛𝐴𝑥 𝑛−1
𝑑𝑥

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Example
Find the derivative of the following:
i. 𝑦 = 2𝑥 0
1
ii. 𝑦 = 2
𝑥
iii. 𝑦 = 3𝑥 3 + 4
iv. 𝑦 = 𝑥 2 − 𝑥 + 4

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Rules of differentiation
• Below are some rules of differentiation for the single independent
variable case.
• Rule 1 (Constant function rule)
• If 𝑦 = 𝑏, where b is a constant:
𝑑𝑦
=0
𝑑𝑥
• Rule 2 (Linear function rule)
• If 𝑦 = 𝑎𝑥 + 𝑏, where 𝑎 is the coefficient of 𝑥 and 𝑏 is a constant:
𝑑𝑦
=𝑎
𝑑𝑥

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• Rule 3 (Power function rule)
• If 𝑦 = 𝑐𝑥 𝑛 , where 𝑐 is a constant and 𝑛 is any real number:
𝑑𝑦
= 𝑛𝑐𝑥 𝑛−1
𝑑𝑥

• Rule 4 (Sum rule)

• If 𝑦 = 𝑔(𝑥) + ℎ(𝑥), where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions:
𝑑𝑦
= 𝑔′ 𝑥 + ℎ′ (𝑥)
𝑑𝑥

• Rule 5 (Difference rule)

• If 𝑦 = 𝑔 𝑥 − ℎ(𝑥), where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions:
𝑑𝑦
= 𝑔′ 𝑥 − ℎ′ (𝑥)
𝑑𝑥
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• Rule 6 (Product rule)
• If 𝑦 = 𝑓(𝑥)𝑔(𝑥), where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions:

𝑑𝑦 𝑑𝑓 𝑑𝑔
= 𝑔 𝑥 + 𝑓(𝑥)
𝑑𝑥 𝑑𝑥 𝑑𝑥

• Rule 7 (Quotient rule)

𝑓 𝑥
• If 𝑦 = , where 𝑔(𝑥) and ℎ(𝑥) are both differentiable functions;
𝑔 𝑥
𝑑𝑓 𝑑𝑔
𝑑𝑦 𝑑𝑥 𝑔 𝑥 − 𝑑𝑥 𝑓(𝑥)
=
𝑑𝑥 𝑔(𝑥) 2

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• Rule 8 (Chain rule)
• Given a composite function, also called a function of a function, in which 𝑦 is
a function of 𝑢 and 𝑢 in turn is a function of 𝑥, that is, 𝑦 = 𝑓(𝑢) and 𝑢 =
𝑔(𝑥), then 𝑦 = 𝑓[𝑔(𝑥)] and the derivative of 𝑦 with respect to 𝑥 is equal to
the derivative of the first function with respect to 𝑢 times the derivative of
the second function with respect to 𝑥:
𝑑𝑦 𝑑𝑦 𝑑𝑢
=
𝑑𝑥 𝑑𝑢 𝑑𝑥
• Rule 9 (Exponential function rule)
• If 𝑦 = 𝑒 𝑓(𝑥)

𝑑𝑦 𝑑𝑢
= 𝑓′ 𝑥 𝑒𝑓 𝑥 𝑜𝑟 𝑒𝑢
𝑑𝑥 𝑑𝑥

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Higher order derivatives
𝑑𝑦
• Recall that a derivative, , is simply a function derived from a
𝑑𝑥
primitive function, 𝑦 = 𝑓(𝑥).
• As a function this implies that a derivative can also be differentiated
with respect to 𝑥.
• Hence differentiating the primitive function 𝑦 = 𝑓(𝑥) is known as the
first derivative.
• If we differentiate the first derivative, then we get the second
derivative; the derivative of the second derivative is the third
derivative and so forth.

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Higher order derivatives
• We denote the first derivative as:

𝑑𝑦
𝑜𝑟 𝑓 ′ (𝑥)
𝑑𝑥

• Likewise, the second derivative is:

𝑑2 𝑦 ′′
2
𝑜𝑟 𝑓 (𝑥)
𝑑𝑥

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Higher order derivatives
• The third derivative is:

𝑑3 𝑦 ′′′ (𝑥)
𝑜𝑟 𝑓
𝑑𝑥 3

• Hence in general the 𝑛𝑡ℎ derivative is:

𝑑𝑛 𝑦 𝑛 (𝑥)
𝑜𝑟 𝑓
𝑑𝑥 𝑛

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In-class exercise
• Find the successive derivatives of the following (from the first to the highest
order derivative):
1. 𝑦 = 2𝑥 3 − 3𝑥 2 − 20𝑥 + 20
6𝑥 2 − 6𝑥 − 20
12𝑥 − 6
12
0
1. 𝑦 = 𝑥 3 + 3𝑥 2 + 9𝑥 − 7
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Partial derivatives
• If a function has two or more independent variables, the rate of
change of the dependent variable is analyzed using partial derivatives.

• Given a function

𝑧 = 𝑓(𝑥, 𝑦)

• The partial derivative of 𝑍 with respect to 𝑥 measures the

instantaneous rate of change of 𝑍 with respect to 𝑥 while 𝑦 is held
constant.
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Partial derivatives
𝜕𝑍
• The partial derivative in this case would be denoted as , 𝑍𝑥 (𝑥, 𝑦) or
𝜕𝑥

𝑍𝑥 . Similarly, the partial derivative of 𝑍 with respect to 𝑦 measures

the instantaneous rate of change of 𝑍 with respect to 𝑦 while 𝑥 is
held constant.

𝜕𝑍
• The partial derivative in this case would be denoted as , , 𝑍𝑦 (𝑥, 𝑦)
𝜕𝑦

or 𝑍𝑦 .

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In-class exercise
• Find the first order partial derivatives for the following functions:
1. 𝑧 = 8𝑥 2 + 14𝑥𝑦 + 5𝑦 2
2. 𝑧 = 3𝑥 2 (5𝑥 + 7𝑦)
3. 𝑧 = 𝑥𝑦
𝑥+𝑦
4. 𝑧 = 𝑥 2 +1

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Optimisation

• This can be divided in two types: that is unconstrained and

constrained optimization.

• Recall that firms always want to maximise profits and levels of output
as well as minimise costs and the use of scarce natural resources.

• The objective of maximization and minimization can be attained using

differential calculus or differentiation techniques.

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 Unconstrained optimization
• Unconstrained optimization encompasses the simplest form of
optimization problems without conditions (constraints).
• The set-up is such that the analyst only has an objective function,
which is sufficient to derive the optimal solution using the approach
discussed below.
• Let’s assume we want to maximise utility given by the following
function 𝑈=𝑈 (𝑋1 ,𝑋2 ).
• Under unconstrained optimization, a consumer can keep taking ever
increasing amounts of 𝑋1 and 𝑋2 and therefore, lead to an infinite
solution with regard to the total utility.
• The following steps will be used to solve unconstrained optimization
problems.

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• Case 1: Functions of one variable.
• Assume 𝑦 = 𝑓(𝑥)
• Step 1
• Solve for the derivative of y which is 𝑦 ′ or 𝑓 ′ (𝑥) and equate to zero and to
find the stationary points, let’s say x = z.
• Step 2
i. If f´´ (z) > 0. Then the function has a minimum at x=z
ii. If f´´ (z) < 0. Then the function has a maximum at x=z
iii. If f´´ (z) =0. Then the point cannot be classified using the available
information.

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 Example
• Maximise 𝝅 for a firm with 𝑇𝑅 = 4000𝑄 − 33𝑄 2 and 𝑇𝐶 = 2𝑄 3 −
3𝑄 2 + 400𝑄 + 5000 assuming 𝑄 > 0.
Solution
• Set up the 𝝅 function
𝝅 = 𝑇𝑅 − 𝑇𝐶
𝝅 = 4000𝑄 − 33𝑄 2 − 2𝑄 3 − 3𝑄 2 + 400𝑄 + 5000
𝝅 = −2𝑄 3 − 30𝑄 2 + 3600𝑄 − 5000
• Find the critical points/stationary points by finding the derivative of
π(Q) and equating it to zero.
𝜋 ′ = −6𝑄 2 − 60𝑄 + 3600 = 0
−6𝑄 2 − 60𝑄 + 3600 = 0

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 −(−60) ± (−60)2 −4(−6)(3600)
𝑄=
2(−6)

60 ± 3600 + 86400 60 ± 90000

𝑄= =
−12 −12
60 ± 300
𝑄=
−12
• Solving the above, we have
• Q = -30 and Q = 20, as the critical points
• Since Q cannot be negative, we ignore the negative output (Q = -30) because it has no
economic significance.
• Therefore, find the second derivative and evaluate it at Q = 20 to verify that Q = 20 is at
the maximum.

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 𝜋 ′′ 𝑄 = −12𝑄 − 60
𝜋 ′′ 20 = −12 20 − 60 = −300 < 0
• Confirming that Q=20 is indeed at the maximum (i.e. Concave). Thus
the maximum profit is:
𝜋 20 = −2(20)3 − 30 20 2 + 3600 20 − 5000 = 39000.

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• Case 2: Functions of two variables
• Assume 𝑧 = 𝑓(𝑥, 𝑦)
• Step 1
• Find the stationary points by solving the simultaneous equations below:
𝜕𝑧
= 𝑓𝑥 𝑥, 𝑦 = 0
𝜕𝑥
𝜕𝑧 𝑠𝑦𝑠𝑡𝑒𝑚 𝑜𝑓 𝑡𝑤𝑜 𝑒𝑞𝑢𝑎𝑡𝑖𝑜𝑛𝑠 𝑤𝑖𝑡ℎ 𝑡𝑤𝑜 𝑢𝑛𝑘𝑛𝑜𝑤𝑛𝑠 𝑥 𝑎𝑛𝑑 𝑦
= 𝑓𝑦 𝑥, 𝑦 = 0
𝜕𝑦
• Step 2
• If (a, b) are the stationary/critical points obtained from solving the system of
equations above, then;
• The point (a, b) is a minimum iff;

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 2
𝜕2𝑧 𝜕2𝑧 𝜕2𝑧 𝜕2𝑧 𝜕2𝑧
> 0, > 0, − >0
𝜕𝑥 2 𝜕𝑦 2 𝜕𝑥 2 𝜕𝑦 2 𝜕𝑥𝜕𝑦
2
𝑓𝑥𝑥 𝑎, 𝑏 > 0, 𝑓𝑦𝑦 𝑎, 𝑏 > 0 𝑎𝑛𝑑 𝑓𝑥𝑥 𝑎, 𝑏 × 𝑓𝑦𝑦 𝑎, 𝑏 − 𝑓𝑥𝑦 𝑎, 𝑏 >0
• The point (a, b) has a maximum iff;
2 2 2 2 2 2
𝜕 𝑧 𝜕 𝑧 𝜕 𝑧 𝜕 𝑧 𝜕 𝑧
2
< 0, 2 < 0, 2 2
− >0
𝜕𝑥 𝜕𝑦 𝜕𝑥 𝜕𝑦 𝜕𝑥𝜕𝑦
2
𝑓𝑥𝑥 𝑎, 𝑏 < 0, 𝑓𝑦𝑦 𝑎, 𝑏 < 0 𝑎𝑛𝑑 𝑓𝑥𝑥 𝑎, 𝑏 × 𝑓𝑦𝑦 𝑎, 𝑏 − 𝑓𝑥𝑦 𝑎, 𝑏 >0

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 Example
• Find and classify the stationary points of the function
𝑍 = 3𝑥 2 − 𝑥𝑦 + 2𝑦 2 − 4𝑥 − 7𝑦 + 12
Solution
• Step 1
• Find the stationary points by solving the simultaneous equations below:
𝜕𝑧
= 𝑧𝑥 = 0
𝜕𝑥
𝜕𝑧 𝑆𝑜𝑙𝑣𝑒 𝑡ℎ𝑒 𝑠𝑦𝑠𝑡𝑒𝑚 𝑜𝑓 𝑒𝑞𝑢𝑎𝑡𝑖𝑜𝑛𝑠
= 𝑧𝑦 = 0
𝜕𝑦
𝑍𝑥 = 6𝑥 − 𝑦 − 4 = 0
𝑍𝑦 = −𝑥 + 4𝑦 − 7 = 0

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• Solving gives us;
• x = 1, y = 2, i.e (1, 2) is the critical point
• Step 2
• Find the second derivative and evaluate them at the critical points
𝑍𝑥𝑥 = 6, 𝑍𝑦𝑦 = 4,
𝑍𝑥𝑥 1,2 = 6 > 0 𝑎𝑛𝑑 𝑍𝑦𝑦 1,2 = 4 > 0
• The cross partial derivatives are:
𝑍𝑥𝑦 = −1, 𝑍𝑦𝑥 = −1,
𝑍𝑥𝑦 1,2 = −1 𝑎𝑛𝑑 𝑍𝑦𝑥 1,2 = −1
𝑍𝑥𝑦 × 𝑍𝑦𝑥 = −1 × −1 = 1 > 0
• Since 𝑍𝑥𝑥 > 0 , 𝑍𝑦𝑦 > 0 and 𝑍𝑥𝑦 × 𝑍𝑦𝑥 > 0, the function has a minimum at
the point (1,2)

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 Constrained optimisation
• Constrained optimization includes optimization problems
that maximize or minimize a function subject to constraints.
• Given a function 𝑓(𝑥, 𝑦) subject to a constraint 𝑔 𝑥, 𝑦 =
𝑘 (a constant), a new function ℒ can be formed by
i. Setting the constraint equal to zero
ii. Multiplying the rearranged constraint by 𝜆 (the Lagrange
multiplier)
iii. Adding the product to the original function.

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• This leads to a new function called the Lagrangian function.
• The Lagrangian equation is a mathematical expression that combines
the objective function and the constraint to help solve for the optimal
choice of a given optimization problem.
• With the Lagrangian equation, we introduce a third-choice variable
called the Lagrange multiplier which is denoted by the Greek letter,
lamda.
• The Lagrange multiplier approximates the marginal impact of the
objective function caused by a small change in the constant of the
constraint.
• Constrained optimization can have several constraints including
equality and inequality constraints. In this unit, we will only focus on
constrained optimization problems with one equality constraint
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 Example
• Let’s assume that a firm wants to maximise its output Q=f (K, L).
• Let’s also assume that the unit costs of capital and labour are 𝑃𝑘 and
𝑃𝑙 respectively. The cost of the firm is given by;
𝑃𝑘 𝐾 + 𝑃𝑙 𝐿 = 𝑀
• This is the fixed cost the firm is willing to spend
• Thus, the problem the firm faces is that it wishes to:
𝑀𝑎𝑥𝑖𝑚𝑖𝑠𝑒 𝑄 = 𝑓 𝐾, 𝐿
𝑠𝑢𝑏𝑗𝑒𝑐𝑡 𝑡𝑜 𝑡ℎ𝑒 𝑐𝑜𝑛𝑠𝑡𝑟𝑎𝑖𝑛𝑡 𝑃𝑘 𝐾 + 𝑃𝑙 𝐿 = 𝑀

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 • On a diagram the above will look
like this.
• The curves are known as
isoquants and along each
isoquant the output is the same
even though using different
combinations of capital and
labour.
• The optimal combination occurs
at point A.

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Solving constrained optimisation
• Differential calculus can be used to solve the constrained
maximization problem.
• Given the objective function 𝑓(𝑥 , 𝑦) subject to a constraint
𝒈(𝒙 , 𝒚) = 𝒌, the Lagrangian function can be obtained by adhering
to the following steps:
• Set the constraint equal to zero i.e. 𝒌 − 𝒈(𝒙, 𝒚) = 𝟎
• Then multiply it by Lagrange multiplier (𝝀) 𝒊. 𝒆. 𝝀[𝒌 − 𝒈(𝒙, 𝒚)], and then
• Add the product to the objective or original function to obtain the lagrangian
function F.
𝐹(𝑥, 𝑦, 𝜆) = 𝑓(𝑥, 𝑦) + 𝜆[𝑘 − 𝑔(𝑥, 𝑦)]

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• The stationary points/critical values 𝑥0 , 𝑦0 and 𝜆 at which the
function is optimized are found by taking the derivative of
𝐹(𝑥, 𝑦, 𝜆) with respect to all the independent variables, set them
equal to zero and solve simultaneously.
𝐹𝑥 𝑥, 𝑦, 𝜆 = 0, 𝐹𝑦 𝑥, 𝑦, 𝜆 = 0 𝑎𝑛𝑑𝐹𝜆 𝑥, 𝑦, 𝜆 = 0

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 Example
• Use the Lagrange multiplier method to optimise the objective function
below subject to the given constraint.
𝑍 = 4𝑥 2 – 2𝑥𝑦 + 6𝑦 2
𝑆𝑢𝑏𝑗𝑒𝑐𝑡 𝑡𝑜: 𝑥 + 𝑦 = 72
Solution
• Set the constraint to zero, multiply it by λ and add it to the objective
function to obtain
𝐹(𝑥, 𝑦, 𝜆) = 4𝑥 2 – 2𝑥𝑦 + 6𝑦 2 + 𝜆(72 – 𝑥 – 𝑦)
• F.O.C
𝐹𝑥 = 8𝑥 – 2𝑦 – 𝜆 = 0 … … . . (𝑖 )
𝐹𝑦 = −2𝑥 + 12𝑦 – 𝜆 = 0 … … . . (𝑖𝑖)

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 𝐹𝜆 = 72 – 𝑥 – 𝑦 = 0 . . . (𝑖𝑖𝑖) • Substituting 𝑥 and 𝑦 into equation (i)
• Subtract equation (ii) from or (ii) gives us
equation (i) to eliminate λ, we 𝜆 = 276
have • The critical point is;
10𝑥 – 14𝑦 = 0 𝑥 = 42, 𝑦 = 30, 𝜆 = 276
𝑥 = 1.4𝑦 … … (𝑖𝑣) • Thus, the optimum point is;
• Substitute equation (iv) into 𝑭(𝒙, 𝒚, 𝝀)
equation (iii) = 𝟒(𝟒𝟐)𝟐 – 𝟐(𝟒𝟐)(𝟑𝟎)
1.4𝑦 + 𝑦 = 72 + 𝟔(𝟑𝟎)𝟐 + 𝟐𝟕𝟔(𝟕𝟐 – 𝟒𝟐 – 𝟑𝟎)
𝑦 = 30 = 𝟗𝟗𝟑𝟔
• Using 𝑥 = 1.4𝑦, substituting y
gives us
𝑋 = 1.4𝑥30 = 42
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 Interpretation of the lagrangian multiplier

• The Lagrangian multiplier λ approximates the marginal impact on the

objective function caused by a small change in the constant of the
constraint.

• E.g. a 1 unit increase (decrease) in the constant of the constraint

causes F to increase (decrease) by approximately λ units.

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 End of Unit 2

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