§ 2.

Applications of Derivatives to Business and

Economics

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 1 of 107

 Section Outline
 Cost, Revenue and Profit
 Demand and Revenue
 Taxes, Profit and Revenue

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 2 of 107

Cost, Revenue & Profit
EXAMPLE

(Cost and Profit) A one-product firm estimates that its daily total cost function
(in suitable units) is C(x) = x3 – 6x2 + 13x + 15 and its total revenue function is
R(x) = 28x. Find the value of x that maximizes the daily profit.
SOLUTION

To find the value of x that maximizes the daily profit, we must first have a
profit function. Since P(x) = R(x) – C(x)

P(x) = 28x – (x3 – 6x2 + 13x + 15)

P(x) = – x3 + 6x2 + 15x – 15.

So, the value of x which we are seeking, will be the one that corresponds to the
highest point on the P(x) graph for x ≥ 0. Upon looking at the graph on the
next page, it would appear that this occurs at about x = 5.

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 3 of 107

Cost, Revenue & Profit
CONTINUE
D
100
80
60
40
20
P(x)

0
-20 0 2 4 6 8 10
-40
-60
-80
-100
x

To determine the exact value of x for which P(x) is maximized, we must find
the value of x for which P΄(x) = 0.

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 4 of 107

Cost, Revenue & Profit
CONTINUE
D
P(x) = – x3 + 6x2 + 15x – 15 This is the profit function.
P΄(x) = –3x2 + 12x + 15 Differentiate.
–3x2 + 12x + 15 = 0 Set this equation equal to 0.
(–3x – 3)(x – 5) = 0 Factor.
x = -1, 5 Solve for x.

Therefore, profit is maximized when x = -1 or x = 5. Since x = -1 is not in the

domain of P(x), the solution is x = 5.

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 5 of 107

Demand & Revenue
EXAMPLE

(Demand and Revenue) A swimming club offers memberships at the rate of

$200, provided that a minimum of 100 people join. For each member in excess
of 100, the membership fee will be reduced $1 per person (for each member).
At most 160 memberships will be sold. How many memberships should the
club try to sell in order to maximize its revenue?
SOLUTION

We are trying to find the value of x that maximizes revenue. We must first
have a revenue function. In order to do this, we must first create a demand
equation, p = f (x).

Since we are guaranteed that at least 100 memberships will be sold, we do not
have to worry about situations involving x < 100. Further, for each
membership that is sold, the price of a membership falls by $1. In other words,
as x increases 1 unit, y decreases 1 unit.

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 6 of 107

Demand & Revenue
CONTINUE
D
Now, because of this continual reduction of price (up to 160 memberships), we
know that when x = 100 memberships, the price p = $200 each. We also know
that when x = 100 + 60 = 160 memberships, the price p = $200 - $60 = $140.
Thus, we have two points corresponding to the demand equation: (100, 200)
and (160, 140). Using these two points, we can determine the slope of the
demand equation.
140  200
m  1
160  100

We can now use the point-slope form of a line to find the demand equation.

y  y1  m x  x1  This is the point-slope form a

line.
y  200  1 x  100 m = -1, x1 = 100, and y1 = 200.
y   x  300 Simplify.

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 7 of 107

Demand & Revenue
CONTINUE
D
Now that we have the demand equation, f (x) = -x + 300, we can determine the
revenue function by using R(x) = x·p = x·f (x).
R x   x  x  300   x 2  300 x

Now we will differentiate the revenue function and determine for what
value(s) R΄(x) = 0.

R x    x 2  300 x This is the revenue function.

R x   2 x  300 Differentiate.
 2 x  300  0 Set this equation equal to 0.
x  150 Solve for x.
Therefore, revenue is maximized when x = 150. This is “verified” in the
graph on the next page.

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 8 of 107

Demand & Revenue
CONTINUE
D

25000

20000

15000
R(x)

10000

5000

0
0 50 100 150 200 250 300 350
x

Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 9 of 107

Taxes, Profit, and Revenue
EXAMPLE

(Taxes, Profit, and Revenue) The demand equation for a monopolist is p = 200
– 3x, and the cost function is C(x) = 75 + 80x – x2, 0 ≤ x ≤ 40.

(a) Determine the value of x and the corresponding price that maximize the
profit.
(b) Suppose that the government imposes a tax on the monopolist of $4 per
unit quantity produced. Determine the new price that maximizes the profit.

SOLUTION

(a) We first determine the profit function, given by

P(x) = R(x) - C(x)
P(x) = xp - C(x)
P(x) = x(200 – 3x) – (75 + 80x –
xP(x)
2
) = -2x2 + 120x -
75.
Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 10 of 107
Taxes, Profit, and Revenue
CONTINUE
D
We can now differentiate P(x) and then find the value of x for which P is
maximized.
P x   2 x 2  120 x  75 This is the profit function.
P x   4 x  120 Differentiate.
 4 x  120  0 Set this equation equal to 0.
x  30 Solve for x.
Therefore, profit is maximized when x = 30. Now we will determine the
corresponding price per unit. To do this, we will evaluate the demand equation
p at x = 30.
p(x) = 200 – 3x
p(30) = 200 – 3(30) = 110
So the price per unit that maximizes profit is $110 per unit.
Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 11 of 107
Taxes, Profit, and Revenue
CONTINUE
D
(b) For each unit sold, the manufacturer will have to pay $4 to the government.
in other words, 4x dollars are added to the cost of producing and selling x
units. The cost function is now

 
C  x   75  80 x  x 2  4 x   x 2  84 x  75.

Now we will repeat the process we have already done, relative to our new cost
function. The profit function is determined as follows.

P(x) = R(x) - C(x)

P(x) = xp - C(x)
P(x) = x(200 – 3x) – (75 + 84x –
x2)
P(x) = -2x2 + 116x -
75.
Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 12 of 107
Taxes, Profit, and Revenue
CONTINUE
D
We can now differentiate P(x) and then find the value of x for which P is
maximized.
P x   2 x 2  116 x  75 This is the profit function.
P x   4 x  116 Differentiate.
 4 x  116  0 Set this equation equal to 0.
x  29 Solve for x.
Therefore, profit is maximized when x = 29. Now we will determine the
corresponding price per unit. To do this, we will evaluate the demand equation
p at x = 29.
p(x) = 200 – 3x
p(29) = 200 – 3(29) = 113
So the price per unit that maximizes profit is $113 per unit.
Goldstein/Schneider/Lay/Asmar, CALCULUS AND ITS APPLICATIONS, 11e – Slide 13 of 107