Calculus of Multivariable function

More examples:

1. Find the first-order partial derivatives of the function

f (x, y) = x2 + y3 (b) f (x, y) = x2y

Solution
To differentiate the function
f (x, y) = x2 + y3
with respect to x we work as follows. By the sum rule we
know that we can differentiate each part separately and
add. Now, when we differentiate x2 with respect to x we
get 2x. However, when we differentiate y3 with respect to
x we get 0. To see this, note from the definition of partial
differentiation with respect to x that the variable y is held
constant. Of course, if y is a constant then so is y3 and, as
we discovered in Chapter 4, constants differentiate to
zero. Hence
𝜕𝑓
= 2𝑥 + 0 = 2𝑥
𝜕𝑥

In the same way

𝜕𝑓
= 0 + 3𝑦 2 = 3𝑦 2
𝜕𝑦

This time x is held constant, so x2 goes to zero, and when

we differentiate y3 with respect to y we get 3y2.

2. A firm is a perfectly competitive producer and sells two goods G1 and G2 at $1000 and
$800, respectively. The total cost of producing these goods is given by

𝑇𝐶 = 2𝑄1 2 + 2𝑄1 𝑄2 + 𝑄2 2
where Q1 and Q2 denote the output levels of G1 and G2, respectively. Find the maximum
profit and the values of Q1 and Q2 at which this is achieved.

Solution
The fact that the firm is perfectly competitive tells us that the price
of each good is fixed by the market and does not depend on Q1 and
Q2. The actual prices are stated in the ques- tion as $1000 and $800.
If the firm sells Q1 items of G1 priced at $1000 then the revenue is
 TR1 = 1000Q1

Similarly, if the firm sells Q2 items of G2 priced at $800 then the revenue is
TR2 = 800Q2

The total revenue from the sale of both goods is then

TR = TR1 + TR2 = 1000Q1 + 800Q2

We are given that the total cost is 𝑇𝐶 = 2𝑄1 2 + 2𝑄1 𝑄2 + 𝑄2 2 so the profit function is

π = TR − TC

𝜋 = (1000𝑄1 + 800𝑄2 ) − (2𝑄1 2 + 2𝑄1 𝑄2 + 𝑄2 2 )

=1000Q1 + 800Q2 − 2Q12 − 2Q1Q2 – Q22

This is a function of the two variables, Q1 and Q2, that we wish to optimize.
The first- and second-order partial derivatives are:
𝜕𝜋
= 1000 − 4𝑄1 − 2𝑄2
𝜕𝑄1
𝜕𝜋
= 800 − 2𝑄1 − 2𝑄2
𝜕𝑄2

𝜕 2𝜋
= −4
𝜕𝑄1 2
𝜕2 𝜋
= −2
𝜕𝑄2 2

𝜕 2𝜋
= −2
𝜕𝑄1 𝜕𝑄2
Step 1
At a stationary point
𝜕𝜋
=0
𝜕𝑄1
𝜕𝜋
=0
𝜕𝑄2

so we need to solve the simultaneous equations

1000 − 4Q1 − 2Q2 = 0
800 − 2Q1 − 2Q2 = 0
that is,
 4𝑄1 + 2𝑄2 = 1000 (1)
2𝑄1 + 2𝑄2 = 800 (2)
The variable Q2 can be eliminated by subtracting equation (2) from
(1) to get
2Q1 = 200
and so Q1 = 100. Substituting this into either equation (1) or
(2) gives Q2 = 300. The profit function therefore has one
stationary point at (100, 300).

Step 2

To show that the point really is a maximum we need to check that

𝜕 2𝜋
<0
𝜕𝑄1 2
𝜕 2𝜋
<0
𝜕𝑄2 2

𝜕2 𝜋 𝜕2 𝜋 𝜕2 𝜋
[ 2 ] [𝜕𝑄 2 ] − [𝜕𝑄 ]>0
𝜕𝑄1 2 1 𝜕𝑄2

at this point. In this example the second-order partial derivatives are all constant.

𝜕 2𝜋
= −4 < 0
𝜕𝑄1 2

𝜕2𝜋
= −2 < 0
𝜕𝑄2 2
𝜕2 𝜋 𝜕2 𝜋 𝜕2 𝜋
[ 2] [ 2] − [ ] = (−4)(−2) − (−2)2 = 4 > 0
𝜕𝑄1 𝜕𝑄2 𝜕𝑄1 𝜕𝑄2

confirming that the firm’s profit is maximized by producing 100 items of G1 and 300 items of G2.

The actual value of this profit is obtained by substituting Q1 = 100 and Q2 = 300 into the expression

𝜋 =1000Q1 + 800Q2 − 2Q12 − 2Q1Q2 – Q22

to get
π = 1000(100) + 800(300) − 2(100)2 − 2(100)(300) − (300)2 = $170 000
3. A firm’s unit capital and labor costs are $1 and $2 respectively. If the production function is given
by
Q = 4LK + L2

find the maximum output and the levels of K and L at which it is achieved when the total input
costs are fixed at $105. Verify that the ratio of marginal product to price is the same for both
inputs at the optimum.

Solution
We are told that 1 unit of capital costs $1 and that 1 unit of labor costs $2. If the firm uses
K units of capital and L units of labor then the total input costs are:
K + 2L

This is fixed at $105, so

K + 2L = 105
The mathematical problem is to maximise the objective function
Q = 4LK + L2

subject to the constraint

K + 2L = 105
The three-step strategy is as follows:
Step 1
Rearranging the constraint to express K in terms of L gives
K = 105 − 2L
Step 2
Substituting this into the objective function
Q = 4LK + L2
gives
Q = 4L(105 − 2L) + L2 = 420L − 7L2
and so output is now a function of the one variable, L.
Step 3
At a stationary point
𝑑𝑄
=0
𝑑𝐿
that is,
420 − 14L = 0
which has solution L = 30. Differentiating a second time gives

𝑑2 𝑄
= −14 < 0
𝑑𝐿2
confirming that the stationary point is a maximum.
The maximum output is found by substituting L = 30 into the objective function
Q = 420L − 7L2 to get:
Q = 420(30) − 7(30)2 = 6300

The corresponding level of capital is found by substituting L = 30 into the constraint

K = 105 − 2L
to get
K = 105 − 2(30) = 45
The firm should therefore use 30 units of labour and 45 units of capital to produce a
maximum output of 6300.
Finally, we are asked to check that the ratio of marginal product to price is the same for
both inputs. From the formula

Q = 4LK + L2
we see that the marginal products are given by
𝜕𝑄
𝑀𝑃𝑃𝑙 = = 4𝐾 + 2𝐿 and
𝜕𝐿

𝜕𝑄
𝑀𝑃𝑃𝐾 = = 4𝐿
𝜕𝐾

so at the optimum
MPL = 4(45) + 2(30) = 240
and
MPK = 4(30) = 120
The ratios of marginal products to prices are then
𝑀𝑃𝑃𝐿 240
= = 120 and
𝑃𝐿 2

𝑀𝑃𝑃𝐾 120
= = 120
𝑃𝐾 1

Which are equal. (In economics, this is the condition for efficiency in production.