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Topic1 1

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eyethum24
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Faculty of Management and Commerce

Topic One

Unconstrained Optimisation
(Two Variables)

Economics Lecture presentation by B. MGXEKWA

2
Lecture Outcomes

Understand First Order Conditions in two variable


case.

Understand second derivative test for functions of two


variables.
First Order Conditions
(Two Variables)

A necessary condition for a differentiable function f(x,y) to have a maximum or a


minimum at an interior point (x0,y0) of its domain is that (x0,y0) is a stationary
point of f – that is:

f1' (x0 ,y0) = 0 , f2' (x0 ,y0) = 0

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Second Derivative Test
for Functions of Two Variables

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Example 1

For the production functions


1. Q = 20K0.5L0.5
2. Q = 25K0.4L0.5
Derive MPL and MPK

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Example 2

The demand functions of a monopoly in two different markets are given by:
P1 = 53 – 4Q1
P2 = 29 – 3Q2
And the Total Cost function in C = 20 + 5Q, where P 1 and P2 are the prices and Q1 and Q2 are
the outputs in market 1 and market 2 respectively. Such that Q = Q1 + Q2.
1. Find (i) profit maximizing otput to be sold in markets 1 and 2, (ii) equilibrium prices of first
and second markets, (iii) Maximum profit.

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Example 3

Q1: A firm produces two different types A and B


of a commodity. The daily cost of producing x units
of A and y units of B is:

C (x,y) = 0.04x2+0.01xy +0.01y2+4x+2y+500

Suppose that the firm sells all its output at a price


per unit of R15 for A and R9 for B.
a) Find the production levels x and y that maximise
profit.
b) Find the maximum profit
c) Verify that this combination gives the maximum.
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Example 4

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Example 5

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ANY QUESTIONS OR CONTRIBUTIONS ?

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