Differentiation and its Uses in

Business Problems
8

The objectives of this unit is to equip the learners with

differentiation and to realize its importance in the field of business.
The unit surveys derivative of a function, derivative of a
multivariate functions, optimization of lagrangian multipliers and
Cobb-Douglas production function etc. Ample examples have been
given in the lesson to demonstrate the applications of
differentiation in practical business contexts. The recognition of
School of Business

differentiation in decision making is extremely important in the

filed of business.

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Lesson-1: Differentiation
After studying this lesson, you should be able to:

Explain the nature of differentiation;

State the nature of the derivative of a function;

State some standard formula for differentiation;

Apply the formula of differentiation to solve business problems.

Introduction
Calculus is the most important ramification of mathematics. The present
and potential managers of the contemporary world make extensive uses
of this mathematical technique for making pregnant decisions. Calculus
is inevitably indispensable to measure the degree of changes relating to
different managerial issues. Calculus makes it possible for the
enthusiastic and ambitious executives to determine the relationship of
different variables on sound footings. Calculus in concerned with
dynamic situations, such as how fast production levels are increasing, or
how rapidly interest is accruing.
The term calculus is primarily related to arithmetic or probability
concept. Mathematics resolved calculus into two parts - differential
calculus and integral calculus. Calculus mainly deals with the rate of
changes in a dependent variable with respect to the corresponding Differential calculus
change in independent variables. Differential calculus is concerned with is concerned with the
average rate of
the average rate of changes, whereas Integral calculus, by its very nature, changes.
considers the total rate of changes in variables.
Differentiation
Differentiation is one of the most important operations in calculus. Its
theory solely depends on the concepts of limit and continuity of
functions. This operation assumes a small change in the value of The techniques of
dependent variable for small change in the value of independent differentiation of a
variable. In fact, the techniques of differentiation of a function deal with function deal with the
the rate at which the dependent variable changes with respect to the rate at which the
independent variable. This rate of change is measured by a quantity dependent variable
changes with respect
known as derivative or differential co-efficient of the function. to the independent
Differentiation is the process of finding out the derivatives of a variable.
continuous function i.e., it is the process of finding the differential co-
efficient of a function.
Derivative of a Function
The derivative of a function is its instantaneous rate of change.
Derivative is the small changes in the dependent variable with respect to
a very small change in independent variable.

dy
Let y = f (x), derivative i.e. means rate of change in variable y with
dx
respect to change in variable x.

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The derivative has many applications, and is extremely useful in

optimization- that is, in making quantities as large (for example profit)
or as small (for example, average cost) as possible.

Some Standard Formula for Differentiation

Following are the some standard formula of derivatives by means of
which we can easily find the derivatives of algebraic, logarithmic and
exponential functions. These are :

dc
1. = 0, where C is a constant.
dx

dx n d
2. = [xn] = n. xn-1
dx dx

d d
3. a. f (x ) = a [ f (x )]
dx dx
− ( n +1)
d  − n 
1
1
4. x = − .x n
dx  
 n

de x d x
5. =
dx dx
( )
e = ex

d g (x ) d
6.
dx
e[ ] = e g ( x ) . [g (x )]
dx

dy dy du
7. If y = f(u) and U = g(x) then = ×
dx du dx

d x
8.
dx
( )
a = a x . log e a

d [ f ( x ) ± g (x )] d [ f ( x )] d [g (x )]
9. = ±
dx dx dx

d
10. (log e x ) = d ln x = 1
( )
dx dx x
n dy n d [ f ( x )]
11. If Y = [f(x)] then, = n [f(x)] –1 .
dx dx

d 1
12. loga x = x loga e
dx

d [ f ( x ).g ( x )] d [g (x )] d [ f ( x )]
13. = f (x ) + g (x )
dx dx dx

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 f (x ) d [ f ( x )] d [g ( x )]
d 
 g ( x )  g ( x ) dx − f ( x ) dx
14. =
dx [g (x )]2
d g (x) d
15. a = a g ( x ) . [g (x )]. log a e
dx dx

du  f (x + dx. y ) − f ( x, y ) 
16. If U = f(x, y), =  and
dx  dx 
du  f ( x, y + dy ) − f ( x, y ) 
= 
dy  dy 

de ax
17. If y = eax, then its first derivative is equal to = eax
dx

d 2 e as = 2 ax
Second derivative is equal to ae
dx 2

d 3 e ax = 3 ax
Third derivative is equal to a e and the nth derivative is
dx3
denoted by

d n e ax = n ax
a e
dx n
Derivative of Trigonometrically Functions
d d
18. dx(Sin x) = Cos x. dx (Cos x) = − Sinx

d d
19. dx(tan x) = Sec2x. dx (Cot x) = − Cosec2x

d d
20. dx (Sec x) = Sec x. tan x; dx(Cosec x) = − Cosec x. Cot x

d 1 d 1
21.
dx
( )
Sin −1 x = ;
dx
(
Cos −1x = − )
1 − x2 1 − x2

d 1 d 1
22. ( )
tan −1 x = ; (
Cot −1x = −)
dx 1+ x2 dx 1+ x2

d 1 d 1
23.
dx
(
Sec −1x =) ; (
Co sec −1x = − )
x. x 2 −1 dx x x2 −1

Sin x
Sin2x + Cos2x = 1; tan x = Cos x

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Cos x
Sec2x – tan2x = 1; Cot x = Sin x

When x and y are separately expressed as the functions of a third

variable in the equation of a curve is known as parameter. In such cases
dy
we can find dx without first eliminating the parameter as follows:

Thus, if x =Q (t), y = ψ (t)

dy dy dx
Then, dt = dx . dt

dy
dy dt
∴ =
dx dx
dt
Let us illustrate these different derivatives by the following examples.
Example – 1:

dx
If y = f(x) = a; find
dy
Solution:
dy d(a)
dx = dx =0, since a is a constant, i.e.,'a' has got no relationship with
variable x.
Example – 2:
Differentiate the following functions, with respect to x,

(i) y = x , (ii) y = 8x−5 (iii) y= 3x3 − 6x2+2x − 8

Solution:
1
We know that x = x2
1
d  2  1 2 −1
1 1
dy 1 −2 1 dy 1
= x = . x = x = . Hence =
dx dx   2 2 2 x dx 2 x
 

dy d
(ii) dx = dx (8x−5)

d −40
= 8 dx (x−5) = 8(−5) x−6 = − 40x–6 = .
x6

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dy − 40
Therefore, dx = 6
x

dy d
(iii) dx = dx (3x3 − 6x2+2x − 8)

d d d d
= dx (3x3) − 2
dx (6x ) + dx (2x)
−
dx (8)

= 3.3x3−1− 2.6.x2−1+ 2−0 = 9x2−12x+2

dy
Thus, dx = 9x2 − 12x + 2.

Example –3:

Differentiate ex(log x) . (2x2+3) with respect to x.

Solution:

Let y = ex.(log x) . (2x2 + 3)

dy x d 2 x 2 d 2 d x
dx =e (log x)dx (2x +3) +e (2x +3). dx (logx) + (log x). (2x +3).dx (e )

1
=ex(logx)(4x)+ex(2x2+3)x + logx(2x2+3)ex

2x2+3
= ex[4x.logx + x + (2x2 +3) logx]

dy 2x2+3
So, dx = ex[4x.logx + x + (2x2 +3) logx]

Example–4:
2+3log x dy
If y = 2 , find dx
x +5

Solution:
2+3log x
y=
x2+5

d d
( x 2 + 5) (2 + 3 log x) − (2 + 3 log x) ( x 2 + 5)
dy dx dx
=
dx ( x 2 + 5) 2

3 15 15
(x2+5) (x)–(2+3logx)(2x) x –x –6xlogx . x –x –6xlogx
dy
= = Thus, =
(x2+5)2 (x2+5)2 dx (x2+5)2

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Example–5:
2
Find the differential co-efficient of e x +5 x +7
with respect to x.

Solution:

Let y= ex2+5x+y
dy x 2 +5 x + y d
2

dx = e . dx (x2 +5x +y) = ex + 5x + y. (2x + 5)

dy 2
x + 5x + y
dx = (2x + 5). e

Example–6:
dy
Find dx , if y = log 4x+3

Solution:

Let y = log 4x+3

1
1
= log (4x + 3) 2 = log (4x +3)
2
dy d 1 1 1 d 1 1 2
dx = dx [ 2 log (4x +3)] = 2 . 4x+3 . dx (4x +3) = 2 . 4x+3 . 4 = 4x+3

dy 2
∴
dx = 4x+3
Example–7:

Find the first, second and third derivatives when y = x.ex2

Solution:

y = x.ex2
First derivative,
dy d x2 x2 d x2 x2 x2 2
dx = x dx e +e . dx (x) = x.e . 2x + e .1 = e (2x +1)

d2y
Second derivative, 2 = ex2.2x(2x2+1) +ex2.4x
dx

2 x2 2 2
= ex . 4x3 + e .2x + ex . 4x = ex . (4x3 + 2x + 4x)

= ex2. (4x3 + 6x)

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Third derivative,

d3y = x 2
e 2x (4x3 + 6x) + ex2 (12x2 + 6)
dx3

2
e x 12x2 + ex2 (12x2 + 6) = ex2 (8x4 + 12x2 + 12x2 + 6)
2
= ex . 8x4 +

= ex2 (8x4 + 24x2 + 6)

Example–8:
dy
If y = xlogx, find dx

Solution:

Given, y = xlogx
Taking logarithm of both sides, we have

log y = log (xlogx) = logx. logx = (logx)2

Differentiating with respect to x, we get
1 dy d 2 =2 (logx)2-1 d (logx) = 2 logx. 1
. =
y dx dx (logx) dx x

dy 1 2xlogx. logx
Hence, dx = y (2 logx. x ) = x

Example–9:
Find the derivative of log (ax + b) with respect to x.
Solution:
Let y = log (ax +b)
dy d 1 d a
So, dx = dx [log (ax + b)] = (ax+b) dx (ax + b) = ax+b .

dy a
Therefore, dx = ax + b

Example–10:
Differentiate y = loga x with respect to x.
Solution:
log e x
We know that log a x =
log e a

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dy d d  log e x 
So, = (log a x ) =  
dx dx dx  log e a 

1 d 1 1 1
= . log e x = . =
log e a dx log e a x x. log e a

dy 1
So, =
dx x. log e a

Example–11:

x dy
If y = xx , find dx

Solution:
x
y = xx
Taking logarithm of both sides, we have Let y = xx
x
log y = log x x = xx log x. Then log y= x log x
d 1
Differentiating with respect to x, we get, dx(log y) = 1(log x) + x. x
1 dy x d d x
y . dx = x dx (log x) + log x dx( x ) = 1 + log x

1 dy 1 1 dy
or, y . dx = xx . x + log dxx (1+logx) y dx = 1+ log x

dy 1 dy
∴dx = y [xx . x + log xx (1+log x)] So, dx = y (1+log x)

x dy
= xx [xx 1+ log xx (1+log x)] So, dx = xx (1+ log x)
–

Example–12:

Differentiate y = log [Sin (3x2+5)] with respect to x.

Solution:

y = log [Sin (3x2+5)]

dy d 2
dx = dx [log {Sin (3x +5)}]

1 d
= . [Sin (3x2+5)]
Sin(3x2+5) dx

1 d
= 2 . Cos (3x2+5) . dx (3x2+5)
Sin(3x +5)

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=
1
. Cos(3x
( 2
)
2+5) . 6x = 6x. Cos 3 x + 5 = 6x.Cot (3x2+5)
Sin(3x2+5) ( )
Sin 3x 2 + 5

dy
So, dx = 6x.Cot (3x2+5)

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Questions for Review:

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions :
1. Define differentiation. What are the fundamental theorems of
differentiation?
2. Why is the study of differentiation important in managerial
decision making?
3. Find the derivative of the following functions with respect to x.

3 5x2+9
i) 5x4+x5 – 8x2+7x, (ii) (2x3–5x–2+2) (4x2–3 x ) (iii) 3x–2

x
(iv) (3x2–2x+5)3/2 (v) 5exlogx, (vi) x2+3xy+y3=5 (vii) ex

d4y 6
4. If y=x3 log n, show that =
dx4 x

5. Differentiate the following w. r. to x

sin x
(i) Sin x Cos x (ii) cos x (iii) e4x+log sin x

iv) (sin–1x)log x

d3y
6. If y = 8x3–5x3/2+3x2–7x+5 : find
dx3

Multiple Choice Questions (√ the most appropriate answer)

dy
1. Find dx when y = log2x

1
i) log2e (ii) 2 log2e (iii) 2log2e (iv) loge

1+x
2. Find the derivatives of the function 1–x

2 1 2
i) 1–x (ii) (iii) (iv) (1–x) 2
(1–x)2 (1–x)2

3. If f(x) = x3 – 2px2 – 4x + 5 and f (2) = 0, find p.

i) 1 (ii) 3 (iii) 4 (iv) 5

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d
4. If f(x)=2x3–3x2+4x–2, find the value of f ( x = −2 )
dx
i) 30 (ii) 40 (iii) 25 (iv) 35

2 x+4 d
5. If f(x)= 2x – +
x 4–x , find f (x = 2 )
dx
i) 2.75 (ii) 2 (iii) 2.5 (iv) 2.45

6. Find the derivative of xx

i) xn(1+log n) (ii) x log n (iii) x2log n (iv) x2(1+log n)

d2y
7. If y = 8x3 – 5x3/2 + 3x2 – 7x +5. find
dx2

15 15
i) 24x2 – 2 x 1/2+6x – 7 (ii) 48x – 2 x1/2+6

15 15
(iii) 48 + (iv) 48x – +7
8 x3 2 x

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Lesson-2: Differentiation of Multivariate Functions

Lesson Objectives:
After studying this lesson, you will be able to:

State the nature of multivariate function;

Explain the partial derivatives;

Explain the higher- order derivatives of multivariate functions;

Apply the techniques of multivariate function to solve the
problems.
Introduction
The concept of the derivative extends directly to multivariate functions.
During the discussion of differentiation, we defined the derivative of a
function as the instantaneous rate of change of the function with respect
to independent variable. In multivariate functions, there are more than
one independent variable involved and thereby, the derivative of the
function must be considered separately for each independent variable.
For example, z = f (x, y) is defined as a function of two independent
variables if there exists one and only one value of z in the range of f for
each ordered pair of real number (x, y) in the domain of f. By
convention, z is the dependent variable; x and y are the independent
variables.
To measure the effect of a change in a single independent variable (x or To measure the effec
y) on the dependent variable (z) in a multivariate function, the partial of a change in a
derivative is needed. The partial derivative of z with respect of 'x' single independent
measures the instantaneous rate of change of z with respect to x while y variable (x or y) on
the dependent
dz df variable (z) in a
is held constant. It is written , , fx (x, y), fx or Zx. The partial
dx dx multivariate function
derivative of z with respect to y measures the rate of change of z with the partial derivativ
is needed.
dz df
respect to y while x is held constant. It is written as: , , fy (x, y), fy
dy dy
or Zy.
Mathematically it can be expressed in the following way:

dz f ( x + ∆x, y ) − f ( x, y )
= lim
dx ∆ x → 0 ∆x

dz f ( x, y + ∆y ) − f ( x, y )
= lim
dy ∆x →0 ∆y

Partial differentiation with respect to one of the independent variables

follows the same rules as differentiation while the other independent
variables are treated as constant.
This is illustrated by the following examples.

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Example−1:

Find the partial derivatives of M = f (x, y, z) = x2+5y2+20xy+4z.

Solution:
To determine the partial derivative of f with respect to x, we treat y and z
as constants.
dm
dx = fx´ = 2x + 20y.

Similarly, in determining the partial derivative of f with respect to y, we

dm
treat x and z as a constants. dy = fy´ = 10y + 20x

Finally, treating x and y as constants, we obtain the partial derivative of f

dm
with respect to z dz = fz´ = 4

The same procedure is applied in the following examples.

Example − 2:
Determine the partial derivatives of

Z = 5x3 −3x2y2 + 7y5

Solution:
dz d 3 2 d 2 d 5
dx = dx (5x ) −3y dx (x ) + dx (7y )

= 15x2−6xy2+0
dz
∴ dx = 15x2−6xy2

dz d d d
Again dy = dy (5x3) −3x2 dy (y2) + dx (7y5)

= 0 − 6x2y + 35y4
dz
∴dy = 35y4 − 6x2y.

Example−3:
Find the partial derivatives of z = (5x + 3) (6x + 2y)
Solution:
dz d d
dx = (5x + 3).dx (6x+2y) + (6x + 2y). dx (5x+3)

= (5x +3). 6 + (6x +2y). 5

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= 30x +18 +30x +10y

dz
∴dx = 60x +10y +18

dz d d
Again dy = (5x + 3). dy (6x+2y) + (6x + 2y). dx (5x+3)

= (5x + 3). 2 + (6x + 2y). 0

dz
∴dy = 10x + 6 + 0 = 10x + 6

Example−4:
6x+7y
Determine the partial derivatives of Z = 5x+3y

Solution:
d d
(5x+3y) dx (6x+7y) – (6x+7y) dx (5x+3y)
dz
dx = (5x+3y)2

(5x+3y). 6−(6x+7y).5
=
(5x+3y)2

dz 30x+18y−30x−35y
dx = (5x+3y)2

dz −17y
∴ dx =
(5x+3y)2

d d
(5x+3y). dy (6x+7y)−(6x+7y). dy (5x+3y)
dz
Again dy =
(5x+3y)2

(5x+3y).7 − (6x+7y).3
=
(5x+3y)2

35x+21y−18x-21y
=
(5x+3y)2

dz 17x
∴dy =
(5x+3y)2

Higher-Order derivatives of Multivariate Functions

The rules for determining higher-order derivatives of functions of one Derivatives of multi-
independent variable apply to multivariate functions. Derivatives of variate functions are
multivariate functions are taken with respect to one independent variable taken with respect to
at a time, the remaining independent variables being considered as one independent
variable at a time.

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constants. The same procedure applies in determining higher-order

derivatives of multivariate functions.
For instance, a function f (x, y) may have four second-order partial
derivatives as follows:
Original function First partial derivatives Second-order partial
derivatives

d2f d2 f
f xx′′ (x, y) or dx dx or
dx 2
d(f)
f y′′ (x, y) or dx

d2f
f yx′′ (x, y) or dy dx

f (x, y)

d(f) d2f
f y′ (x, y) or dy ′′ (x, y) or dx dy
f yx

d2f d2 f
f yy′′ (x, y) or dy dy or
dy 2

The second-order partial derivatives f xx′′ and f xy′′ are obtained by

differentiating f x′′ , with respect to x and with respect to y respectively.
Similarly the second-order partial derivatives f yx′′ and f yy′′ are obtained by
differentiating fy, with respect to x and with respect to y respectively.

The cross (or mixed) partial derivative f xy′′ or f yx′′ indicates that first the
primitive function has been partially differentiated with respect to one
independent variable and then that partial derivative has in turn been
partially differentiated with respect to the other independent variable:

d2z
f xy′′ = ( f x′ ) y = dy dx = dydx
′ d dz
 

d2z
= dx dy = dxdy
d dz
( )′
f yz′′ = f y′ x
 
The cross partial is a second-order derivative, which are equal always.
That is

d2z d2z
=
dydx dxdy

or , f xy′′ = f yx′′

This is illustrated by the following examples.

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Example−5:
Determine (a) first, (b) second and (c) cross partial derivatives of Z =
7x3 + 9xy +2y5.
Solution:
dz dz
(a) dx = Zx = 21x2 + 9y; 4
dy = Zy = 9x + 10y .

d2z d2z
(b) = Zxx = 42x; = Zyy = 40y3.
dx2 dy2

d2z d dz d
(c) dydx = dy . dx = dy (21x2+9y) = Zxy = 9

d2z d dz d 4
dxdy dx dy dx (9x+10y ) = Zyx = 9.
= . =

Example−6:
Determine all first and second-order derivatives of

Z = (x2+3y3)4
Solution:
dz 2 3 3. 2 33
dx = 4 (x +3y ) 2x = 8x (x +3y )

dz 2 33 2 2 2 33
dy = 4 (x +3y ) . 9y = 36y (x +3y )

d2z
= 8x[3(x2+3x3)2 (2x)] + (x2+3y3)3. 8
dx2

= 48x2 [x2+3x3]2 + 8(x2+3y3)3

d2z
= 36y2 [3(x2+3y3)2 (9y2)] + (x2+3y3)3 72y
dy2

d2z d dz 2 32 2
dydx = dy . dx = 8x [3(x +3y ) (9y )]+0

= 216xy2 (x2+3y3)2

d2z d dz 2 2 32
dxdy = dx . dy = 36y [3 (x +3y ) . 2x]

= 216xy2 (x2+3y3)2

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Optimization of Multivariate Functions

For a multivariate function such as z = f (x, y) to be at a relative
minimum or maximum, the following three conditions must be fullfiled
/met:

1. Given z = f (x, y), determine the first-order partial derivatives, f x′

(x, y) and f y′ (x, y) and all critical point/values (a, b); that is,
determine all values (a, b) such that f x′ (a, b) = f y′′ (a, b) = 0

2. Determine the second-order partial derivatives,

f xx′′ (x, y ), f xy′′ ( x, y ), f yx′′ ( x, y ) and f yy′′ ( x, y )

[Note: the cross partial derivatives f xy′′ ( x, y ) (x, y) and f y′′(x, y ) (x, y) must be
equal to one another; otherwise the function is not continuous.]

3. Where (a, b) is a critical point on f, let D = f xx′′ (a, b). f yy′′ (a, b) −
[ f xy′′ (a, b)]2

Then

(i) If D>0 and f xx′′ (a, b) < 0, f has a relative maximum at (a, b)

(ii) If D>0 and f xx′′ (a, b) > 0, f has a relative minimum at (a, b).

(iii) If D<0, f has neither a relative maximum nor a relative

minimum at (a, b)
(iv) If D = 0, no conclusion can be drawn; further analysis is
required.
This is illustrated by the following example.

Example−7:
Determine the critical points and specify whether the function had a
relative maximum or minimum,

z = 2y3−x3+147x−54y+12.
Solution:
By taking the first-order partial derivatives, setting them equal to zero,
and solving for x and y:

zx = −3x2 + 147 = 0 zy = 6y2−54=0

or, x2 = 49 or, 6y2 = 54

∴x=+7 ∴y=+3

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This mean that we must investigate four critical points, namely (7, 3), (7,
−3), (−7, 3) and (−7, −3).
The second-order partial derivatives are

Zxx = −6x Zyy = 12y

(1) Zxx (7, 3) = −6(7) = −42 <0 Zyy (7, 3) = 12 × 3 = 36 > 0

(2) Zxx (7, −3) = −6 (7) = −42 <0 Zyy (7, −3) = 12x −3 =−26 < 0

(3) Zxx (−7, 3) = –6(−7) = 42>0 Zyy (−7,3) = 12x3 = 36 > 0

(4) Zxx (–7, −3) = –6 (−7) = 42>0 Zyy (−7, −3) = 12x −3 = −36 < 0
Since there are different signs for each of the second-order partials in (1)
and (4), the function cannot be at a relative maximum or minimum at (7,
( )
3) or (−7, −3). When f xy′′ and f yy′′ are of different signs, f xx′′ . f yy′′ cannot
′′ and the function is at a saddle point.
be greater than f xy

With both signs of second-order partials negative in (2) and positive in

(3), the function may be at a relative maximum at (7, −3) and at a
relative minimum at (−7, 3), but the third condition must be tested first
to ensure against the possibility of an inflection point.
From the first partial derivative, we obtain cross partial derivatives and
check to make sure that Zxx (a, b), Zyy (a, b) > [Zxy (a, b)]2
Hence, Zxy = 0 and Zyx = 0

Zxx (a, b).Zyy (a, b)> [Zxy (a, b)]2

From (2), (−42). (−36)>(0)2

∴1512 > 0

From (3), (42). (36) > (0)2

∴ 1512 > 0.

Hence the function has a relative maximum at (7, −3) and a relative
minimum at (−7, 3).

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Questions for Review

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions:

1. Determine first, second and cross − partial derivatives of

f (x, y) = 2x2 + 4xy2 − 5y2 + y3

2. Determine the first and second−order partial derivatives of the

function

f (x, y, z) = x2ey In z.

3. Examine the function, z (x, y) = x2 + y2 − 4x + 6y for relative

maxima or minima by using second- order derivative test.
4. Find the partial derivatives for z = (6x + 4) (4x + 2y)

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Lesson-3: Optimization with Lagrangian Multipliers

and Cobb-Douglas Production Functions
After studying this lesson, you should be able to:

Discuss the nature of constrained optimization with lagrangian
multipliers;

Discuss the nature of optimization of Cobb-Douglas Production
functions;

Apply the techniques to solve the relevant problems.
Constrained Optimization with Lagrangian Multipliers
Differential calculus is also used to maximize or minimize a function
Differential calculus
subject to constraints. Given a function f (x, y) subject to a constraint g is also used to maxi-
(x, y) = k (a constant), a new function F can be formed by– (1) setting the mize or minimize a
constraint equal to zero, (2) multiplying it by λ (the lagrange multiplier), function subject to
constraints.
and (3) adding the product to the original function :

F (x, y, λ) = f (x, y) + λ [k−gcx, y)].

Here F (x, y, λ) = Lagrangian functions

f (x, y) = original or objective function
and g (x, y) = constraint.

Since the constraint is always set equal to zero, the product λ [k−g (x, y)] Since the constraint
also equals zero, and the addition of the term does not change the value always set equal to
of the objective function. Critical values x0, y0 and λ0, at which the zero, the product λ
[k−g (x, y)] also
function is optimised, are found by taking the partial derivatives of F equals zero.
with respect to all three independent variables, setting them equal to
zero, and solving simultaneously:

Fx (x, y, λ) = 0 Fy (x, y, λ) =0; Fz (x, y, λ) = 0

This is illustrated by the following examples.
Example–1:
Determine the critical points and optimise the function
Z = 4x2 + 3xy + 6y2 subject to the constraint x + y = 56.
Solution:
Setting the constraint equals to zero, 56 – x – y = 0
The lagrangian expression is,

F (x, y, λ) = Z = 4x2 + 3xy + 6y2 + λ(56 – x – y) ...(1)

and the partial derivatives are

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d(F)
dx = Zx = 8x + 3y – λ= 0 ... (2)

d(F)
dy = Zy = 3x +12y – λ= 0 ... (3)

d(F)
dl = Zλ = 56 – x – y = 0 ... (4)

Subtracting (3) from (2) to eliminate λ gives

5x – 9y = 0
or 5x = 9y

∴x = 1.8y ... (5)

Substituting x = 1.8y in equation (4)
1.8y + y – 56 = 0
or, 2.8y = 56

∴ y = 56/2.8 = 20.

Substituting y = 20 in equation (5) we get

x = (1.8 × 20) = 36

Substituting x = 36 and y = 20 in equation (2) we have

8 (36) + 3(20) – λ = 0

or, 288 + 60 – λ = 0

or, 348 – λ = 0

∴ λ = 348

Substituting the critical values, x = 36, y = 20 and λ = 348 in lagrangian

function, we have,

Z = 4(36)2 + 3(36) (20) + 6(20)2 + 348(56 – 36 – 20)

= 4 (1296) + 3(720) + 6(400) + 348 (0) = 9744.
Example–2:

Use lagrange multipliers to optimize the function, f (x, y) = 26x–3x2 +

5xy – 6y2 + 12y subject to the constraint 3x + y = 170.
Solution:
The lagrangian function is

F = 26x–3x2+5xy–6y2+12y+λ (170–3x–y) ... (1)

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Thus Fx = 26–6x + 5y – 3λ = 0 ... (2)

Fy = 5x–12y +12–λ = 0 ... (3)

Fλ = 170 – 3x – y = 0 ... (4)

Multiplying equation (3) by 3 and subtracting from equation (2) to
eliminate λ, we have
–21x + 41y – 10 = 0 ... (5)
Multiplying equation (4) by 7 and subtracting from equation (5) to
eliminate x, we have
48y – 1200 = 0

∴ 48y = 1200

∴ y = 25
Substituting y=25 in equation (4), we get
170 – 3x – 25 = 0
or, –3x = –145
1
∴ x = 483

1 1
Then substituting x = 483 and y = 25 in equation (2), we get λ = – 463

1 1
Using x0 = 483 , y = 25 and λ = – 463 in lagrangian expression, we get

F=26483 –3 483 +5483 (25) –6(25)2+12(25)+170–3483 –25

1 1 2 1 1
         
∴ F = – 3160
Example–3:

Determine the critical points and the constrained optima for Z = x2 + 3xy
+ y2 subject to x + y = 100
Solution:

The lagrangian expression is F (x, y, λ) = f (x, y) + λ. g (x, y)

= x2 + 3xy + y2+λ (x + y –100)

and the partial derivatives are
dF
dx = 2x + 3y + λ = 0

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dF
dy = 3x + 2y + λ = 0

dF
= x + y – 100 = 0
dλ
The three equations are solved simultaneously to obtain x = 50, y = 50
and λ = 250.

The critical values of x, y and λ can be substituted into the lagrangian

expression to obtain the constrained optimum.

F (50, 50, –250) = (50)2+3(50) (50)+(50)2–250 (50+50–100)

= 2500 + 7500 + 2500 – 0 = 12,500.
To determine whether the function reaches a maximum or a minimum,
we evaluate the function at points adjacent to x = 50 and y = 50. The
function is a constrained maximum, since adding ∆x and ∆y to the
function in both directions gives a functional value less than the
constrained optimum, i.e.
F (49, 51, – 250) = 12499
F (51, 49, – 250) = 12,499
Optimization of Cobb-Douglas Production Functions
Economic analysis is frequently couched in terms of the Cobb-Douglas
production function, Q = AKαLβ (A>0; 0<α, β<1) where Q is the
quantity of output in physical units, K the quantity of capital, and L the
quantity of labor. Here α (the output elasticity of capital) measures the
percentage change in Q for a 1 percent change in K while L is held
constant; β (the output elasticity of labor) is exactly parallel; and A is an
efficiency parameter reflecting the level of technology.

rict cobb-douglas A strict cobb-douglas function, in which α + β = 1, shows constant

ction, in which α + returns to scale and decreasing returns to scale if α+β <1. A cobb-
1, shows constant douglas function is optimized subject to a budget constraint. This is
rns to scale and
reasing returns to
illustrated by the following examples.
e if α+β <1.
Example–4:

Optimize the Cobb-Douglas production function, Q = k0.4 L0.5, given

Pk = 3, PL= 4 and B = 108.

Solution:
By setting up the lagrangian function, we get

Q = k0.4 L0.5 λ (108 – 3k – 4L)

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Using the simple power function rule, taking the first-order partial
derivatives, setting them equal to zero and solving simultaneously for K0
and L0 (and λ0, if desired)

d(Q) –0.6. 0.5

dk = Qk = 0.4K L – 3λ = 0 ... (1)

dQ 0.4 –0.5
dL = QL = 0.5K . L – 4λ=0 ... (2)

dQ
dl = 108–3k–4L = 0 ... (3)

Rearranging, then dividing (1) by (2) to eliminate λ, we get.

0.4 K −0.6 . L05

0.5 K 0.4 . L−0.5

or, .8k–1L1 = 0.75

L 0.75
or, K = 0.8

∴L = 0.9375k.
Substituting L = 0.9375k in equation (3), we get
108–3k–4 (0.9375k) =0

∴Ko=16.

Then by substituting Ko=16 in equation (3), we have

108–3 (16)–4L = 0
or, 108–48–4L=0
or, – 4L = –60

∴ L0=15
Example–5:
From the following information find least cost input combination and the
minimum cost of production:
Qn = 500, Pd = Tk.10 and Pk = Tk.0.50. Subject to Qn = 1.01 L0.75. K.0.25

Solution:
It can be stated that minimize,
C = 10L + 0.50K

Subject to 500 = 1.01L0.75 K0.25

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Where, A. b, a are positive constants, a +b=1

b = 0.75; a = 0.25; A = 1.01
This can be solved through the lagrangian multiplier technique. The
lagrangian expression would be

V = LPL + KPK + λ [Q – ALb Ka ]

or, V = 10L + 0.50K + λ [500 – 1.01 L0.75 K0.25]

Where λ is the lagrangian multiplier, and V is the minimum cost.

The necessary condition for optimization is that each of the partial
derivatives of V with respect to L And K must be equal to zero.
dV –0.25
dL or V'(L) = 10– λ [1.01(0.75) L K0.25] = 0

10
So, λ = ----------- (L)
0.7575 L−0.25 . K 0.25

d(V) 0.75(0.25)K–0.75] = 0
dK or V'(K) = 0.50 – λ [1.01 L

∴ 0.50 – λ [0.2525 L0.75 K –0.75] = 0

0.50
So, λ = ---- -----(K)
0.2525 L0.75 . K −0.75

We know that
Marginal physical product of labor (MPPL) PL
=
Marginal physical product of capital (MPPK) PK

Then we get,

0.7575 L−0.25 K 0.25 10

0.75 − 0.75
=
0.2525 L K 0.50

3K 10
or, L = 0.50

or, 1.5K = 10L

10L
So, K = ∴K = 6.67L
1. 5
Substituting the value of K in the original subject to the production
function, we have

500 = 1.01 L0.75 (6.67 L )0.25

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Taking logarithm of both sides, we get

log 500 = log1.01+0.75logL+0.25log(6.67)+0.25log L
or, log 500 – log 1.01 = log L + 0.25log(6.67)
or, 2.69897 – 0.00432 = log L + 0.25(0.82413)
or, log L = 2.48862
So, L = anti-log 2.48862 = 308.05 = 309 units (app),
Substituting the value of L, we have
K = 6.67 L
= 6.6 (308.7) = 2054.69 units (app) rounded to = 2055 Units
Substituting the value of L and K, we have,
C = 10L + 0.50K = 10 (309) + 0.50 (2055) = 3090 + 1027.50
= Tk.4117.50
Hence the least cost input combination is L = 309 and K = 2055 units
and the minimum cost of production is Tk.4117.50

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Questions for Review

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions:

1. Defermine the critical points and optimize the function

f(x, y)=5x2+6xy–3y2+10 subject to the constraint x+2y=24.

2. Find the maxima and minima of the following function subject to

the constraining equation.

f (x, y)=12xy – 3y2 – x2 and x + y = 16.

3. Optimize the following Cobb-Douglas production functions

subject to the given constraint. Q = K0.3L0.5 subject to 6K + 2L =
384.

4. Optimize the following Cobb-Douglas production function subject

to given constraints by Q = 10k0.7×L0.1 given Pk = 28, PL = 10
and β = 4000.

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Lesson-4: Business Applications of Differentiation

Lesson Objectives:
After studying this lesson, you should be able to:

State the key concepts related to business applications of
differentiation;

Apply the techniques of differentiation to solve business
problems.

Key Concepts
Total costs (TC): Total cost is the combination of fixed cost and variable
cost of output. If the production increases, only total variable cost will
increase in direct proportion but the fixed cost will remain unchanged
within a relevant range.
Total revenue (TR): Total revenue is the product of price/demand
function and output.
Profit: Profits are defined as the excess of total revenue over total costs.
Symbolically it can be expressed as, P (profit) = TR – TC. i.e., (Total
Revenue – Total Cost)

The rules for finding a The rules for finding a maximum point tell us that P is maximized when
maximum point tell us the derivative of the profit function is equal to zero and the second
that P is maximized derivative is negative. If we denote the derivatives of the revenue and
when the derivative of
the profit function is
cost functions by dTR and dTC we have,
equal to zero and the
second derivative is 'P' is at a maximum when dTR - dTC = 0. This equation may be written
negative. as dTR = dTC.
The derivative of the total revenue function must be equal to the
derivative of the total cost function for profits to be maximized.
d(profit function)
Profit Maximizing output = dx

dp d2p
Condition: In case of maximization, the conditions are dx = 0 and 2
dx
must be Negative.
d(total cost function)
Cost Minimizing output = dx

dTCy
Condition: In case of minimization, the conditions are dx = 0 and
d2TC
must be Positive.
dx2

Marginal Cost (MC): MC is the extra cost for producing one additional
unit when the total cost at certain level of output is known. Hence, it is

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the rate of change in total cost with respect to the level of output at the
dTC
point where total cost is known. Therefore, we have, MC = dx where
total cost (TC) is a function of x, the level of output.
Marginal Production (MP): MP is the incre–mental production, i.e., the
dTP
additional production added to the total production, i.e. MP = dx

Marginal Revenue (MR): MR is defined as the change in the total MR is defined as the
revenue for the sale of an extra unit. Hence, it is the rate of change total change in the total
in revenue with respect to the quantity demanded at the point where total revenue for the sale of
dTR an extra unit.
revenue is known. Therefore, we have, MR = dx where total revenue
(TR) is a function of x, the quantity demanded.
Let us illustrate these concepts by the following examples.
Example–1:
The profit function of a company can be represented by P =f (x) = x –
0.00001x2, where x is units sold. Find the optimal sales volume and the
amount of profit to be expected at that volume.
Solution:
The necessary condition for the optimal sales volume is that the first
derivative of the profit function is equal to zero and the second
derivative must be negative. Where the profit function is:

P = x – 0.00001x2

dP d
=
dx dx
(
x − 0.00001x 2 )
Marginal Profit = 1 – 0.00002x
To get maximum profit now we put marginal profit = 0
So, 1 – 0.00002x = 0
or, 0.00002x = 1
So, x = 0.00002 = 50,000 units.
The second derivative of profit function, i.e.

d2P d
2 = (1 − 0.00002 x ) = − 0.00002 < 0
dx dx
Now by putting the value of x in profit function we get maximum profit.

P = x – 0.00001x2

= 50,000 – 0.00001(50,000)2 = 50,000 – 0.00001(2500000000)

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= 50,000 – 25,000 = 25,000.

The optimum output for the company will be 50,000 units of x and
maximum profit at that volume will be Tk.25,000.
Example – 2:
If the total manufacturing cost 'y' (in Tk.) of making x units of a product
is : y = 20x + 5000, (a) What is the variable cost per unit? (b) What is
the fixed cost? (c) What is the total cost of manufacturing 4000 units?
(d) What is the marginal cost of producing 2000 units?
Solution:
We have the cost-output equation : y = 20x + 5000. We know that, if the
production increases, only total variable cost will increase in direct
proportion but the fixed cost will remain unchanged in total. So, the
derivative of y with respect to the increase in x by 1 unit will give the
variable cost per unit.
d
(a) Variable cost per unit = dx (cost-output equation)

d
= dx (y)

d
= dx (20x + 5000) = 20.

∴ Variable cost per unit is Tk.20.

(b) Total fixed cost will remain unchanged even if we don't produce
any unit. If we don't produce any unit, there will be no variable
cost and only fixed cost will be the total cost. So, if we put x=0 in
the cost-output equation, we will get the fixed cost.

∴ Fixed Cost = y = [20.(0) + 5,000] = Tk.5000

(c) If we put x=4000 in the cost-output equation, we will get the total
cost of producing 4,000 units.
∴ Total cost of producing 4000 units = y = 20 (4,000) + 5,000 = Tk.85,000.

(d) We know that the marginal cost of 'n'th unit = TCn–TCn–1

∴ Marginal cost of 2000th unit

= TC of 2000 units – TC of (2000–1) units
= [20 (2000) + 5000] – [20 (1999 Tk. + 5000] = [45,000 – 44,980] = 20.

Example–3:

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5
The total cost of producing x articles is 4 x2 + 175x + 125 and the price
5
at which each article can be sold is 250 – 4 x. What should be the output
for a maximum profit. Calculate the profit.
Solution:

 5   5x2
Total revenue (TR) =  250 − x  x  = 250 – 2
 4  

5x2
Total cost (TC) = 4 + 175x +125

So, profit (P) = TR – TC

5x2 5x2 –10x2–5x2 –15x2

= 250x – 2 – 4 – 175x -125 = 4 + 75x –125 = 4 + 75x -125

d(p) –30x
dx = 4 +75

The necessary condition for optimization is that the first derivative of a

profit function is equal to zero and second derivative must be negative.
According to the assumption, we have
–30x
4 + 75 = 0

–30x + 300
or, 4 =0

or, –30x +300 = 0

or, –30x = –300
or, x = 10

d 2 p d dp d  − 30 x  − 30
and = . =  + 75  = <0
dx 2 dx dx dx  4  4

Therefore the profit is maximum when the output (x) is 10

–15x2
Profit function = 4 + 75(x) – 125

Putting the value of x in profit function, we get,

–15(10)2
Profit = 4 + 75(10) – 125

–1500
= 4 +750 – 125 = –375 +750 – 125 = 750 – 500 = 250

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Hence the profit is Tk. 250.

Example–4:
1
The total cost function of a firm is C= 3 x3 – 5x2 + 28x +10, where C is
total cost and x is output. A tax at the rate of Tk.2 per unit of output is
imposed and the producer adds it to his cost. If the market demand
function is given by P = 2530 – 5x, where P is the price per unit of
output, find the profit maximizing output and price.
Solution:

Total Revenue (TR) = (2530 – 5x) x = 2530x – 5x2

1
Total cost (TC) = (3 x3 – 5x2+28x + 10) + (Taxes i.e.2x)

1 1
= 3 x3 – 5x2 + 28x + 10 + 2x = 3 x3 – 5x2 + 30x + 10

So, profit (P) = TR –TC

1 1
= 2530x – 5x2 – 3 x3 + 5x2 – 30x – 10 = 2500x – 3 x3 – 10.

d(P) 3x2
So, dx = 2500 – 3 = 2500 – x2

The necessary condition for maximization is that the first derivative of a

profit function is equal to zero and second derivative must be negative.
According to the condition, we can write

2500 – x2 = 0

or, – x2 = – 2500
So, x = 50

d2 p
and = – 2x = – 2x 50 = –100 < 0
dx 2
Hence the profit maximizing output of the firm is 50 units.
At this level, the price is given by

Price = 2530 – 5x = 2530 – 5 × 50 = 2530 – 250 = Tk.2280.

Example–5:
A motorist has to pay an annual road tax of $50 and $110 for insurance.
His car does 30 miles to the gallon which costs 75 Pence (per gallon).
The car is serviced every 3000 miles at a cost of $20, and depreciation is
calculated in pence by multiplying the square of the mileage by 0.001.

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Obtain an expression for the total annual cost. Hence find an expression
for the average total cost per mile and calculate the annual mileage
which will minimize the average cost per mile.
Solution:
Suppose he covers x miles in a year.
Tax per annum = $50; Insurance per annum $ 110

.75x 20x
Cost of petrol = ; Service charges = 3000 .20
30
0.001x2
Depreciation = 100 (0.001 is in pence and is divided by 100 to get $ amount)

0.75x 20 x
Total cost: C = 50+110 + + 0.00001x 2
30 3000
C 160 0.75 20
Average TC per mile: x = M = x + 30 +3000 +0.00001x

dM d –1 0.75 20
dx = dx 160 x + 30 + 3000 + 0.00001x

= –160 x–2 + 0 + 0 + 0.00001

160
= − + 0.00001
x2

dM d2M
The necessary condition for minimization of cost is dx = 0, and
dx2
must be positive.
–160
According to the condition, we can write + 0.00001 = 0
x2

160
or, 2 = 0.00001
x

or, 0.00001x2 = 160

160
or, x2 = 0.00001 = 16000000

or, x = 4000

d2M
The average cost is a minimum since = –160 x–2 + 0.00001
dx2

320
= 320 x–3 + 0 = >0
x3

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So, the motorist can cover 4000 miles in a year to minimize the average
cost per mile.

Example–6:
The yearly profits of ABC company are dependent upon the number of
workers (x) and the number of units of advertising (y), according to the
function

P(x,y) = 412 x + 806y–x2–4y2–xy–50,000

(i) Determine the number of workers and the number of units in
advertising that results in maximum profit.
(ii) Determine maximum profit.
Solution:
(i) To determine the values of x and y, we equate the partial derivatives
of the profit function with zero.
Px (x, y) = 412–2x-y = 0 ... (1)
Py (x, y) = 806–x–8y = 0 ... (2)
The two equation are solved simultaneously to obtain the values of x and y.

412 – 2x – y = 0
1612–2x–16y = 0
-----------------------
– 1200 +15y = 0
or, 15y=1200

∴ y = 80
Substituting the value of y in equation (1), we get
412–2x–80=0
or – 2x = –332

∴x = 166
and
Pxx (x, y) = –2<0
Pyx (x, y) = –8 <0
(ii) The profit generated from using these values is:

P (166, 80) = 412 (166)+806 (80) – (166)2 – 4 (80)2– (166) (80) –50000

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= 68392 + 64640 – 27556 –25600 – 13280– 50,000

=16595
Example – 7:
The cost of construction (c) of a project depends upon the number of
skilled workers (x) and unskilled workers (y). If cost is given by, C (x, y)
= 50000+9x3–72xy+9y2
(i) Determine the number of skilled workers and unskilled workers
that results in minimum cost.
(ii) Determine the minimum cost.
Solution:
To determine the number of skilled workers (x) and unskilled workers
(y), we equate the partial derivatives of the cost function with zero.

Cx (x, y) = 27x2–72y = 0 ... (1)

Cy (x, y) = –72x + 18y = 0 ... (2)
Solving the two equations simultaneously gives

27x2 – 72y = 0
–288x + 72y = 0 [Multiplying equation (2) by 4]
---------------------------
By adding 27x2 – 288x = 0
or, x (27x – 288) = 0
or, 27x – 288 = 0
or, 27x = 288

∴ x = 10.66 rounded to
Substituting x = 11 in equation (2) we get
–72 (11) + 18y = 0
or, –792 +18y = 0
or, 18y = 792
792
∴ y = 18 = 44

(ii) Putting the value of x and y in cost function, we get:

C (11, 44) = 50000 + 9 (11)3–72 (11) (44) + 9 (44)2

= 44,555

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Questions for Review:

These questions are designed to help you assess how far you have
understood and can apply the learning you have accomplished by
answering (in written form) the following questions:
1. A study has shown that the cost of producing sign pens of a
manufacturing concern is given by, C = 30 + 1.5x + 0.0008x2.
What is the marginal cost at x = 1000 units? If the pens sells for
Tk.5.00 each, for what values of x does marginal cost equal
marginal revenue?

2. The demand function faced by a firm is P=500 – 0.2x and its cost
function is C=25x+10,000. Find the optimal output at which the
profits of the firm and maximum. Also find the price it will
charge.
3. The demand function of a profit maximizing monopolist is, P–3Q–
30 = 0 and his cost function is, C = 2Q2+10Q. If a tax of taka 5 per
unit of quantity produced is imposed on the monopolist, calculate
the maximum tax revenue obtained by the Government.

4. A company produces two products, x units of type –A and y units

of type –B per month. If the revenue and cost equation for the
month are given by-
R (x, y) = 11x +14y, C (x, y) = x2 – xy +2y2 + 3x + 4y +10
5. Total cost function is given by, TC = 3Q2+7Q+12, Where C=Cost
of production, Q = output. Find
(i) marginal cost
(ii) Average cost if Q = 50

6. The total cost of production for the electronic module

manufactured by ABC Electronics is
TC = 0.04Q3 – 0.30Q2 + 2Q + 1
7. Determine MC, AC, AFC and TVC function. Find out the output
level for which MC is minimum. What is the amount of MC, AC
and TC at this level of output.
8. The transport authority of the city corporation areas has
experimented with the fare structure for the city’s public bus
system. The new system is fixed fare system in which a passenger
may travel between two points in the city for the same fare. From
the survey results, system analysis have determined an appropriate
demand function, P=2000–125Q, where Q equals to the average
number of riders per hours and p equals the fare in taka.
Required:

Unit-8 Page-200
 Bangladesh Open University

(i) Determine the fare which should be charged in order to

maximize hourly bus for revenue.
(ii) How many rider are expected per hour under this fare?
(iii) What is the expected maximum annual revenue?

Business Mathematics Page-201