CHAPTER 2 : BASIC

TRAINING
Functional Relationship
Function shows relationship between
dependent and independent
variables
1. Univariate
y = f (x)
Y: dependent X: Independent

2. Multivariate
y = g ( x , z , w , .)
Y is dependent
Again, x,z,w are all independent variables
F and g just show that the functional
relationship; meaningless on its own

Types of Functions
1. Linear Function

y = a + bx

a = y-intercept
b = slope / gradient / rate of change in
y as x changes by 1 unit or dy/dx

2.Quadratic Function (maximum

or minimum)
y = ax + bx + c

if a > 0

the graph is concave up

if a < 0

the graph is concave down

3.Cubic Function (minimum and

maximum point)
y = 1/3x3 - 3x + 8 x + 7
4. Multivariate Function

y = f (x,z)

y = xz + 9x + 3z

4. Derivative
Given Y = f (X)
dy/dx = slope of the
curve
(dy/dx) Rate of change in the
dependent variable as a result of a
change in the independent variable.

Rules of Differentiation
Constant function
y = f(x) = c

then dy/dx = 0

Example: Y = 10

then dy/dx = 0

Power function
n
y = f(x) = ax
Example:
y = f(x) = 3x

n-1
then dy/dx = nax

then

dy/dx = 6x

Sum and Different function

y= u+v

then dy/dx = du/dx + dv/dx

y = 16x + 9x then dy/dx = 16 + 18x

y= u-v
y = 16x - 9x

then dy/dx = du/dx - dv/dx

then dy/dx = 16 - 18x

Product of 2 Functions
y = uv

then dy/dx = udv/dx + vdu/dx

Eg. y = (2x + 7)(x 9)

then dy/dx
= (2x + 7) 1 + (x 9) 2
= 2x + 7 + 2x 18
= 4x - 11

Quotient of 2 Functions
y = u/v
then dy/dx = (vdu/dx - udv/dx) / v
example.on the board

Function of a Function
y = f (u)
where u = g (x)
then dy/dx = (dy/du)(du/dx)
Example: y = u2 + 5 where u = 3x2
then dy/dx
= 2u6x
=2(3 x2)(6x)
= 36x3

Multivariate Function (Partial differentiation)

Example 1:
y
dy/dx
dy/dz

=
=
=

3x2 + 10z -3xz

6x - 3z
10 - 3x

When solving a problem, that is finding the extremum of any

function, setting the first derivative equal to zero is called the firstorder condition. This condition is necessary for an extremum but not
sufficient to determine if the function is at a maximum or a
minimum..
The second-order condition, using second derivative is a test for a
maximum or a minimum. Will discuss this more when we do the
optimization of a function.

Solving Simultaneous Equations

Example 1:
from eq.2

6x - 3z = 0 --------eq.1
10 - 3x = 0 --------eq.2
3x
x

subs. eq.3 into eq.1

then
3z
z

= 10
= 10/3 -------eq.3
6(10/3) 3z
=0
20 3z = 0
= 20
=20/3 or 6.666666

solution :x = 10/3 and z = 20/3

Factorization
Example1:

x2 3x + 2 = 0
(x 1) ( x 2) =0
x = 1 or x = 2

Example 2:

x2 2x + 5 = 0

Notes:
Quadratic Formula

(- b b2 4ac)
2a

V.

Optimization Technique
Optimization is the process of determining the best possible
solution to a given problem.
It requires finding the maximum or minimum value of a function.
Determining a maximum or minimum value by calculus

Optimization Method for Univariate Function.

Rules:
i)
Determining optimal values.
Set the first derivative equals to zero.
if y = ax3 + bx2 + cx + d
maximum or minimum value for x,
dy / dx = 0

Distinguishing between a maximum and a minimum point.

Find second derivative.
d2y/dx2 = +ve

------------> x is a minimum point

d2y/dx2 = -ve

------------> x is a maximum point

Example 1:
The demand function is given as P = 30 2Q. Find the total
output that will maximize total revenue.
Solution:
TR = PQ
TR = (30 2Q)Q
TR = 30Q 2Q2
d(TR)/dQ = 30 4Q = 0.*
To check whether a maximum exist find the second derivative
d2(TR) /dQ2 = -4,

maximum point

Next find the maximum value by solving *

4Q = 30
Q = 7.5
So the total output that maximizes revenue is 7

Example 2:
Given a total cost function TC = Q3 12Q2 + 60Q. At what output level is
average cost minimize and what is the minimum average cost?
Solution: from theory we know AC = TC / Q
AC = TC / Q = Q2 12Q + 60.
d(AC)/dQ = 2Q 12 = 0 *
2Q = 12
Q = 6, the output where AC is minimize
From * we know a minimum exist as the second derivative is equal to 2.
Thus to get the minimum AC, substitute Q = 6 into the equation:
AC = TC / Q = 6 12(6)+ 60 = 24

2. Optimization Method for Multivariate Function

Without Constraint
Given a function, to find the values that maximizes the function .
Steps:
1)
2)
Suppose

Take all partial derivatives and set = 0

Solve the equation simultaneously

y = 50 + 18x + 10z - 5xz - 2x

Find the value of x and z that maximizes the function y.

Solution:
dy/dx = 18 - 5z - 4x
dy/dz = 10 - 5x
from (2)

10 - 5x
x = 2
Substitute (3) into (1):
18 - 5z - 4(2)
z

= 0
= 0

(1)
(2)

= 0
(3)
= 0
= 2

(4)

Thus function y is maximum when x = z = 2

Substitute both x and z into function y.
y = 50 + 18(2) + 10(2) - 5(2)(2) - 2
= 78 (the maximum value for y)

With Constraint
In many decision problems, there are constraints imposed
that limit the options of choices available to the decision makers
Example:
A firm is trying to minimize cost of production that is given by:
TC = 3x + 6y - xy
where

x = output produced by line 1

y = output produced by line 2

But the firm is facing the constraint that is given by

x + y = 20
Find the value of x and y that minimize the cost of production
subject to the given constraint.

Substitution Method
TC

= 3x + 6y - xy
x + y = 20, i.e x=20-y

(1)
(2)

Substitute (2) into (1):

TC
TC

= 3(20 - y) + 6y - (20 - y)y

= 1200 - 140y + 10y

(3)

d(TC)/dy = -140 + 20y = 0

y = 7

(4)

Substitute (4) into (2)

(5)

x = 13

Substitute (4) and (5) into (1):

TC
TC

= 3(13) + 6(7) - (13)(7)

= RM710

Thus: at x = 13 and y = 7, total cost is minimized with the given constraint

Some review questions.

1. Optimize the following functions and find the value of x at the optimum
point. Then determine whether x is a minimum or maximum
point.
a)
y = 3x2 4x + 25
b)

y = (3x 2 )2

2. Given the following total revenue and total cost functions of a firm:
TR = 22Q 0.5Q2
TC = 1/3Q3 8.5Q2 + 50Q + 90
Determine,

3.

a)

the level of output at which the firm maximizes its

total profit.

b)

the maximum profit that the firm could earn.

Find the partial derivative for the following functions.

a)

y = 4 x2 2z + xz + 2z2

b)

AC = x2 + 2y2 2xy 2x -6y + 20

4. For the following total-profit function of a firm:

=

144X 3X2 XY 2Y2 + 120Y - 35

Determine,
i)

the level of output of each commodity at which the firm

maximizes its total profit,

ii)

the value of the maximum amount of the total profit of the

firm.

5. Given the firms demand curve function

Q

= 40 2P

Where P = price and Q = rate of output, and

TC = 100 + 2Q + 0.25Q2
Where TC = total cost, determine
a) The marginal revenue and marginal cost functions and find the rate of output
for which marginal revenue equals marginal cost.
b) Find the level of output that maximizes total profit. (Use aggregate
approach). Compare your answer to that obtained in part (a). Is there
correspondence between these answers?

any

6. Given the multivariate function

Y = 50 + 18X + 10Z 5XZ 2X

Determine the values of X and Z that maximize the function.

(hint: take partial derivatives and set equal to zero, then solve the
simultaneous equation for the values of X and Z)
7. The total revenue (TR) function for a firm is given by

TR = 1 000Q 10Q
Where Q is the rate of output per period. Determine the rate of output
that results in maximum total revenue. (be sure you have a maximized,
not minimized total revenue)