Multivariate Calculus

Professor Peter Cramton

Economics 300
 Multivariate calculus
Calculus with single variable (univariate)
y f ( x)
Calculus with many variables (multivariate)
y f ( x1 , x2 ,..., xn )
 Partial derivatives
With single variable, derivative is change in y in
response to an infinitesimal change in x
With many variables, partial derivative is change in
y in response to an infinitesimal change in a single
variable xi (hold all else fixed)
Total derivative is change in all variables at once
 Cobb-Douglas production function
1 1
Q 20 K L 2 2

How does production change in L?

Q 1 1
10 K 2 L 2
L
Marginal product of labor (MPL)
Partial derivatives use instead of d
 Cobb-Douglas production function
1 1
Q 20 K L 2 2

How does production change in K?

Q 12 12
10 K L
K
Marginal product of capital (MPK)
Partial derivatives use instead of d
 Cobb-Douglas production function
1 1
Q 20 K L2 2

Q 1 1
Note MPL 10 K 2 L 2 0
L
Q 12 12
MPK 10 K L 0
K
Produce more with more labor, holding capital fixed
Produce more with more capital, holding labor fixed
 Second-order partial derivatives
Differentiate first-order partial derivatives
Q Q 12 12
10 K L
1 1
10 K 2 L 2
L K
Q Q 2
1 3

5 K 2
L 2

L L L2

Q Q 2
32 12
5 K L
K K K 2
 Second-order partial derivatives
Note
Q Q 2
1 3

5 K 2
L 2
0
L L L2

Q Q 2
32 12
5 K L 0
K K K 2

MPL declines with more labor, holding capital fixed

MPK declines with more capital, holding labor fixed
Diminishing marginal product of labor and capital
 Second-order cross partial derivatives
1 1 Q 1 1 Q 1 1
Q 20 K 2 L2 10 K 2 L 2 10 K 2 L2
L K
What happens to MPL when capital increases?
Q Q 2
12 12
5K L 0
K L K L
What happens to MPK when labor increases?
Q Q 2
12 12
5K L 0
L K LK
By Youngs Theorem cross-partials are equal
Q2
Q 2
12 12
5K L 0
LK K L
Labor demand at different levels of capital
Q 1 1
10 K 2 L 2 0
L

Q
2
1 3
5 K 2
L 2
0
L2

K = K0 K = K1
 1 1
Q 20 K L
2 2
 Contour plot
Isoquant is 2D projection in K-L space of Cobb-
Douglas production with output fixed at Q*
1 1
Q 20 K L2 2
 Implicit function theorem
Each isoquant is implicit function
1 1
Q AK L
* 2 2

Implicit since K and L vary as dependent variable

Q* is a fixed parameter
Solving for K as function of L results in explicit
function * 2
Q
A
K ( L)
L
Use implicit function theorem when cant solve K(L)
 Implicit function theorem
For an implicit function F ( y, x1 ,..., xn ) k
0 0 0
defined at point ( y , x1 ,..., xn ) with continuous
partial derivatives Fy ( y , x1 ,..., xn ) 0,
0 0 0

there is a function y f ( x1 ,..., xn ) defined in

0 0
neighborhood of ( x1 ,..., xn ) corresponding to
F ( y, x1 ,..., xn ) k such that
y 0 f ( x10 ,..., xn0 )
F ( y , x ,..., x ) k
0 0
1
0
n

Fxi ( y 0 , x10 ,..., xn0 )

fi ( x ,..., x )
0
1
0
n
Fy ( y 0 , x10 ,..., xn0 )
 Verifying implicit function theorem
1 1
Cobb-Douglas production Q AK L
* 2 2

2
Explicit function for isoquant Q *

A
K ( L)
L
Derivative of isoquant * 2
Q
A
dK ( L)
KL
2
K
2
dL L L L
Slope of isoquant = marginal rate of technical substitution
Essential in determining optimal mix of production inputs
 Implicit function theorem
0 0 0
Fxi ( y , x ,..., x )
fi ( x ,..., x )
0 0 1 n
1 n 0 0 0
Fy ( y , x ,..., x )
1 n
1 1 Q 1 1 Q 1 1
Q AK L
2 2
10 K 2 L 2 10 K 2 L2
L K
Q 1 1
dK 10 K L K
2 2

L
dL Q 2 2
10 K L
1 1
L
K
Implicit function theorem from differential
For multivariate function Q F ( K , L)
Differential is
Q Q
dQ dK dL
K L
Holding quantity fixed (along the isoquant)
Q Q
dQ dK dL 0
K L
Thus Q
dK
L
MPL
dL Q MPK
K
Isoquants for Cobb-Douglas
1
Q AK L
1 1
dK AK L K


dL (1 ) AK L 1 L
K bL
 Homogeneous functions
When all independent variables increase by factor
s, what happens to output?
When production function is homogeneous of degree
one, output also changes by factor s
A function is homogeneous of degree k if
s Q F ( sK , sL)
k
 Homogeneous functions
Is Cobb-Douglas production function
homogeneous?
1
Q AK L
1 1 1
A( sK ) ( sL) As s K L sQ
Yes, homogeneous of degree 1
Production function has constant returns to scale
Doubling inputs, doubles output
 Homogeneous functions

Is production function Q AK L
homogeneous?

A( sK ) ( sL) As K L s Q
Yes, homogeneous of degree +
For + = 1, constant returns to scale
Doubling inputs, doubles output
For + > 1, increasing returns to scale
Doubling inputs, more than doubles output
For + < 1, decreasing returns to scale
Doubling inputs, less than doubles output
Properties of homogeneous functions
Partial derivatives of a homogeneous of degree k
function are homogeneous of degree k-1
1
Q AK L
Q 1 1
AK L
L
1 1 0 1 1 Q
A( sK ) ( sL) As K L
L
Cobb-Douglas partial derivatives dont change as
you scale up production
Isoquants for Cobb-Douglas
1
Q AK L
1 1
dK AK L K


dL (1 ) AK L 1 L
K bL
 Eulers theorem
Any function Q = F(K,L) has the differential
Q Q
dQ dK dL
K L
Eulers Theorem: For a function homogeneous of
degree k,
Q Q
kQ K L
K L
1
Let Q = GDP and Cobb-Douglas Q AK L
Marginal products are associated with factor prices
Q 1 Q
L AK L Q K (1 )Q
L K
In US, .67
 Chain rule
y f ( x1 ,..., xn )
xi gi (t1 ,..., tm )
y f x1 f xn
...
ti x1 ti xn ti
 Chain rule exercise
y 3 x 2 xw w
2 2

x 8 z 18
w 4z
What is dy/dz?

dy y x y w

dz x z w z
(6 x 2 w)8 (2 w 2 x)4