Economics Dr.

Sauer

Chapter 6 Lecture Handout 6.1 Derivatives The power rule First: bring all exponents to numerator and write all radicals as exponents. Always differentiate with respect to the RHS variable. (a) (b) (c)

(d) y = x3

(e) y = x1/4

(f) P = Q2.6

(g) C = Q2

(h) C = Q-1

The derivative of a constant is zero (a) y = 4 (b) C = 100 (c) U = 5000

The derivative of a constant times a function (a) y = 5x7 (b) C = 0.75Y2 (c) U = 25Q
1

The derivative of the sum or difference of several terms (a) TC = 0.5Q3 12Q2 + 300 (b) AC = 5 + 2/Q

Higher Derivatives (a) P = 25Q4 10Q2 + 200 (b)

(PE 6.1 page 266) ______________________________________________________________________ Determine whether a function is increasing or decreasing A. Use the first derivative to determine whether the function is increasing or decreasing. The sign of dy/dx indicates whether y is increasing or decreasing as x is increasing since: when y is increasing y is becoming more positive y ' > 0 (slope is positive). when y is decreasing y is becoming less positive y ' < 0 (slope is negative).

B. Use the second derivative to determine whether slope is increasing or decreasing The sign of d2y/dx2 indicates whether slope is increasing or decreasing as x is increasing since: when y ' is increasing y ' (slope) is becoming more positive when y ' is decreasing y ' (slope) is becoming less positive y '' > 0. y '' < 0.

Note: More positive can also be described as less negative.

(a) Show, using calculus, that the slope of any straight line, y = mx + c, is m (a constant).

(b) Determine the equation for the slope of the curve, y = 3x2 - 0.1x 3 , and the equation for the rate of change of slope.

(c) For each of the following, differentiate and simplify state whether the function is increasing or decreasing for the stated range find the second derivative state whether the slope is increasing or decreasing for the stated range (i) y = x2 + 5 (x>0) (ii) (Q>0) (iii) (x>0)

(iv)

(Q>0)

(v) P = 3 + Q2 (Q >0)

(vi) TR = 250Q 10Q2 (0<Q<5)

6.2 Applications Average Functions The average function gives an expression for the average value of an economic variable throughout an interval. 1. Average Revenue AR = TR / Q Average Revenue and Price are always equal. AC = TC / Q AFC = TFC / Q AVC = TVC / Q

2. Average Cost AC = AFC + AVC

3. Average Product (of Labor) AP = Q / L 4. Average Propensity to Consume and Save APC = C/Y

APS = S/Y

Marginal Functions The marginal function gives an expression for the rate of change in the total function. 1. Marginal Revenue 2. Marginal Cost 3. Marginal Product of Labor The production of output (Q) is typically a function of Labor, Capital, Raw Materials, Technology, Land, and Enterprise. Labor is the input most commonly associated with marginal product. 4. Marginal Propensity to Consume and Save Y=C+S

5. Marginal Utility

U = f(x)

Ex: P = 6 0.5Q

Find the expressions for average revenue and marginal revenue. When Q increases from 2 to 3, by how much does TR change?

Ex: TC = 10 + 4Q

Find the expressions for average cost and marginal cost. When Q increases from 19 to 20, by how much does TC change?

Ex:

Find the expressions for average cost and marginal cost When Q increases from 10 to 11, by how much does TC change?

Ex:

Find an expression for marginal cost.

Ex: Q = 15L2 0.5L3

Find expressions for average product and marginal product.

Ex: C = 20 + 3Y0.4

Find expressions for the APS, APC, MPS and MPC.

Ex: U = -x2 + 20x 86

Find an expression for marginal utility.

Perfect Competition vs Monopoly Ex: A perfectly competitive firm faces demand of P=20. Find expressions for average revenue and marginal revenue. Show on a graph.

Ex: A monopolist faces demand of P = 50 2Q. Find expressions for average revenue and marginal revenue. Show on a graph.

Note: A monopolist will not produce output that results in negative marginal revenue. (PE 6.3 page 278, PE 6.4 page 283) _______________________________________________________________________ 6.3 Optimization Use the second derivative sign test to determine if a turning point is a maximum or a minimum. If the second derivative, evaluated at x=turning point, is negative, the turning point is a maximum. If the second derivative, evaluated at x=turning point, is positive, the turning point is a minimum. If the second derivative, evaluated at x=turning point, is zero then the second derivative test doesnt work. - in this situation, plug in a value for x immediately before and after the turning point and see if the slope changes from positive to negative or vice versa. Ex: y = -x3 + 9x2 24x + 26

Ex: P = -2Q2 + 8Q

Ex:

Ex: C = Y + 100

Ex: U = 8x0.6

(PE 6.6 page 292) ____________________________________________________________________

6.4 Applications Total Revenue, Average Revenue and Marginal Revenue Ex: P = 50 2Q

Breaking Even, Profits and Losses Ex: P = 50 2Q TC = 160 + 2Q

When profit is maximized, MR = MC

and MR < MC

Ex: A perfectly competitive firm faces demand P=121 and costs given by and TFC = 500. Find the profit maximizing level of output.

Ex: A monopolist faces demand of P=152.5 3Q and has costs given by and TFC = 300. Find the profit maximizing level of output.

(PE 6.5 page 315) ____________________________________________________________________

6.5 Curvature and More Applications Ex: y = 3x4 + 20 Determine whether the curve is increasing or decreasing. Concave up or concave down? Convex or concave to the origin (in the first quadrant)?

Ex: Determine whether the curve is increasing or decreasing. Concave up or concave down? Convex or concave to the origin (in the first quadrant)?

Inflection Points Points of inflection occur when the curvature changes from concave up to concave down (or vice versa). - must be at a point where y=0 and y changes sign before and after the point Ex: y = 3x2 0.1x3

Ex: TC = Q3 6Q2 + 3Q

Ex: TR = Q(120 0.8Q)

Ex:

(PE 6.10 page 323) ___________________________________________________________________ Relationship between various cost functions Ex:

___________________________________________________________________ 6.6 More Differentiation Exponentials and logs (a) C=100(1-eY) (b) TC = 10 + lnQ (c) y = e2.5x

(d)

(e) P = 20 + 20lnQ

(f)

(g)

(h) C = x2 -5ex + ln(x)

(i)

(PE 6.12 page 332) ______________________________________________________________________ The Chain Rule (a) (5x + 7)-4 (b) e(5x+7) (c) ln(5x + 7)

(d) y = (4 5x)3

(e)

(f) P = 800e-1.4Q

(g)

(h)

(i)

(PE 6.13 page 335) ________________________________________________________________________ Product Rule (a) y = x2ex (b) (c) C= (Y + 4)lnY

(d)

(e)

(f)

(PE 6.14 page 337) _____________________________________________________________________ Quotient Rule (a) (b) (c)

(d)

(e)

(f)

(PE 6.15 page 339) _____________________________________________________________________ Economic Applications Ex: P = 24 6ln(Q) Find the equation for Total Revenue. Find the value of Q for which TR is maximized. Find the equation for Marginal Revenue. Show that MR is concave up.

Ex: C= 800(1-e-0.2Y) Find the equation for MPC. Show that consumption has no maximum value. Describe the curvature of the consumption function.

Ex: U = 20xe-0.1x Calculate the maximum value of utility. Find an expression for marginal utility. Describe the curvature of the marginal utility.

Ex: Demand is given by P = 1600 4Q and Average Cost is

. Find the

equations for Total Revenue and Total Cost. Calculate the value of Q that will maximize profits.

(PE 6.16 page 342)

6.7 Elasticity and the Derivative

(a) P = 100 2Q

(b) Q = 80 10ln(P)

(c) P = 60 Q2

(d) Q = 45e-0.04P

(e)

(f)

(PE 6.17 page 352) Complete the Test Exercises on page 356-357.