Partial Differentiation (part 2)

Learning objectives

1 2 3
Perform mathematical Perform mathematical Perform mathematical
operations to optimize operations to optimize operations to optimize
unconstrained constrained function functions using the
functions Lagrange multipliers
method
Unconstrained
optimization
Stationary Point
For the functions of two independent variables:
The stationary points are found by solving the
simultaneous equations:
or
Minimum Point
•A stationary point is classified as a minimum if all three
of the following conditions hold:
• or

• or

or
Maximum Point
•A stationary point is classified as a maximum if all three
of the following conditions hold:
• or

• or

or
Saddle Point
•A stationary point is classified as a saddle
point if the following condition hold:

or
Exercise
Find and classify the stationary
points of the function
Finding maximum profit
Suppose a firm produces two goods and . The prices are related to quantities and
according to the demand functions

The total cost function is:

The maximum profit is reached when:

are the marginal revenues of G1 and G2.

are the marginal costs of G1 and G2.
Exercise

A firm is a monopolistic producer of two goods and . The prices are related to
quantities and according to the demand functions

The total cost function is:

a. Find the firm’s profit function
b. Find the value of and which maximize and deduce the corresponding
prices.
Exercise

A firm has the possibility of charging different prices in its domestic and foreign
markets. The corresponding demand equations are given by

The total cost function is:

Where + .
Determine the prices that the firm should charge to maximize profit with price
discrimination and calculate the value of this profit.
Constrained
optimization
Steps to solve constrained optimization

We want to optimize a function: (objective function), subject to a constraint .

• Step 1: Use the constraint to express in terms of .
• Step 2: Substitute the expression above for y into the objective function
Step 3: Use the theory of stationary points of functions for one variable to
optimize
Optimizing production function

Suppose a firm wants to maximize output, the production function form is:

The costs of each unit of capital and labour be and respectively. The cost to
the firm of using as input units of capital and units of labour is
Optimizing production
function (cont.)

• The isocost curve is a straight line with slope and

intercept .
• Point A lies on the isocost line and it maximizes
output because it also lies on the highest isoquant.
• The slope of the isocost line is the same as that of
the isoquant at A.
Exercise
A firm’s production function is given by

Unit capital and labour cost are $2 and $3 respectively. Find the
values of and which minimizes total input costs if the
production quota is 1200.
Exercise
A firm’s total cost function is given by

Where and denote the number of items of goods G1 and G2,

respectively, that are produced. Find the values of and which
minimizes costs if the firm is committed to providing 40 goods
of either type in total.
Optimizing utility function

Given the utility function

Where , denote the number of items of goods G1, G2 that an individual buys.
If the prices of these goods are denoted by and and the individual has a fixed budget, , to
spend on these goods:

The ratio marginal utility to price is the same for all goods consumed.
Exercise
An individual’s utility function is given by

Where and denote the number of items of two goods, G1

and G2. The prices of the goods are $2 and $10,
respectively. Assuming that the individual has $400
available to spend on these goods,
a. Find the utility-maximizing the values of and .
b. Verify that the ratio of marginal utility is the same for
both goods at the optimum.
Review

Descriptions Formulas
Max profit with two types of goods and

Max output with constraints

• Use the constraint to express in terms of

Max utility with constraints

• Use the constraint to express in terms of
Lagrange multiplier
Constrained optimization with Lagrange
multiplier
Given a function , subject to the constraint . To optimize function :
• Step 1: Define a Lagrange function

( is called the Lagrange multiplier)

• Step 2: Solve the simultaneous equations
Exercise
Use Lagrange multipliers to optimize , subject to
Lagrange multiplier in economics

The Lagrange multiplier represents:

• With profit function: the (approximate) change in optimal profit brought about by a 1
unit increase in .
• With production function: the (approximate) change in optimal production brought
about by a 1 unit increase in .
• With utility function: the (approximate) change in optimal utility brought about by a 1
unit increase in .
Exercise
A consumer’s utility functions is given by

Where and denote the number of items of two goods G1 and

G2 that are bought. Each item costs $1 for G1 and $2 for G2.
Use the Lagrange multipliers to find the maximum value of if
the consumer’s income is $83. Estimate the new optimal utility
if the consumer’s income rises by $1.
Exercise

Use the Lagrange multipliers to find expressions

for and which maximize the utility function

Subject to the general budgetary constraint

Reference

Jacques, I. (2015). Mathematics

for economics and business.
Pearson Education.
Teaching
quality survey
– Partial
Differentiation
(part 2)