Application of

Differentiation

Md. Aktar Kamal

Assistant Professor ( Management)
 Cost Function

Cost Function:
If x is the quantity produced of a certain product by a
firm at total cost C, then we write the total cost
function C=C(x)

For example:
C(x) =200x+300,000 [linear cost function]
C(x) =20x2+3x+300 [non linear cost function]
 Cost Function
Average Cost: The average cost of production or
cost per unit is obtained by dividing the total cost by
number of units.
For example:
• If C(x) =200x+300,000 is a linear cost function
then the average cost is obtained by C(x) by x.
That is we get C(x)/x =200+300,000/x
• If C(x) =20x2+3x +300 is a non linear cost function
then the average cost is obtained by C(x) by x.
That is we get C(x)/x =20x +3 + 300/x
 Marginal Cost

Marginal Cost: Marginal cost represents the change

in the cost for each additional unit of production.
MC is the first derivative of the total cost function
dC
The marginal cost is defined asdq

Example: If C(x) =20x2-3x+300 is the total cost of a

dC
firm then its marginal cost is MC =dx
d
 20x 2 - 3x  300 
dx

 40 x  3
 Revenue function
Total revenue function:
Revenue is the amount of money earned from the
sale of a product and depends upon the price of the
product and the quantity of the product that is
actually sold.
If Qd is the demand for the output of a firm at price
p, then the total revenue (R) collected by the firm
is R(x)=p.Qd
 Revenue function
Example: Suppose for a company the demanded
quantity is p=500-0.2x then the total revenue earned
by the company is R(x)=p.Qd
Or R(x)= p.x
= (500-0.2x)x
=500x-0.2x2
 Profit function
Total Profit function:
We know the profit is the difference between total revenue
and total cost.
Thus, P(x) = R(x) - C(x)
Where x is the number of quantity sold.
Example: Suppose for a company the revenue function is
R(x)=500x-0.2x2 and the cost function
is C(x)=25x+10,000 , then the profit function is
P(x) = R(x) - C(x)
Or P(x) = (500x - 0.2x2) - (25x + 10,000)
P(x) = - 0.2x2 + 475x -1,000
 Example

The total cost of printing x dictionaries is

C(x) = 20,000 + 10x
1. Find the average cost per unit if 1,000
dictionaries are produced.
 Example
(continued)
The total cost of printing x dictionaries is
C(x) = 20,000 + 10x
1. Find the average cost per unit if 1,000
dictionaries are produced.

 20,000  10 x
C ( x)
C ( x) 
x x
20,000  10,000
C (1,000)  = $30
1,000
 Example
(continued)
2. Find the marginal average cost at a production level of 1,000
dictionaries, and interpret the results.
 Example
(continued)
2. Find the marginal average cost at a production level of 1,000
dictionaries, and interpret the results.
d
Marginal average cost = C ' ( x)  C ( x)
dx
d  20000  10 x   20000
C ' ( x)   
dx  x  x2
 20000  0.02
C ' (1000)  2

1000
This means that if you raise production from 1,000 to 1,001
dictionaries, the price per book will fall approximately 2 cents.
 Example
(continued)
3. Use the results from above to estimate the average cost per
dictionary if 1,001 dictionaries are produced.
 Example
(continued)
3. Use the results from above to estimate the average cost per
dictionary if 1,001 dictionaries are produced.
Average cost for 1000 dictionaries = $30.00
Marginal average cost = - 0.02
The average cost per dictionary for 1001 dictionaries would be
the average for 1000, plus the marginal average cost, or
$30.00 + $(- 0.02) = $29.98
 Example

The price-demand equation and the cost function for the

production of television sets are given by
x
p( x)  300  and C ( x)  150,000  30 x
30
where x is the number of sets that can be sold at a price of $p
per set, and C(x) is the total cost of producing x sets.

1. Find the marginal cost.

 Example
(continued)
The price-demand equation and the cost function for the
production of television sets are given by
x
p( x)  300  and C ( x)  150,000  30 x
30
where x is the number of sets that can be sold at a price of $p
per set, and C(x) is the total cost of producing x sets.

1. Find the marginal cost.

Solution: The marginal cost is C’(x) = $30.

 Example
(continued)
2. Find the revenue function in terms of x.
 Example
(continued)
2. Find the revenue function in terms of x.
x2
The revenue function is R ( x)  x  p ( x)  300 x 
30
3. Find the marginal revenue.
 Example
(continued)
2. Find the revenue function in terms of x.
x2
The revenue function is R ( x)  x  p ( x)  300 x 
30
3. Find the marginal revenue.
x
The marginal revenue is R' ( x)  300 
15
4. Find R’(1500) and interpret the results.
 Example
(continued)
2. Find the revenue function in terms of x.
x2
The revenue function is R ( x)  x  p ( x)  300 x 
30
3. Find the marginal revenue.
x
The marginal revenue is R' ( x)  300 
15
4. Find R’(1500) and interpret the results.
1500
R' (1500)  300   $200
15
At a production rate of 1,500, each additional set increases
revenue by approximately $200.
 Example
(continued)
6. Find the profit function in terms of x.
 Example
(continued)
6. Find the profit function in terms of x.
x2
The profit is revenue minus cost, so P( x)    270 x  150000
30
7. Find the marginal profit.
 Example
(continued)
6. Find the profit function in terms of x.
x2
The profit is revenue minus cost, so P( x)    270 x  150000
30
7. Find the marginal profit.
x
P ' ( x)  270 
15
8. Find P’(1500) and interpret the results.
 Example
(continued)
6. Find the profit function in terms of x.
x2
The profit is revenue minus cost, so P( x)    270 x  150000
30
7. Find the marginal profit.
x
P ' ( x)  270 
15
8. Find P’(1500) and interpret the results.
1500
P' (1500)  270   170
15
At a production level of 1500 sets, profit is increasing at a rate of
about $170 per set.
 Application of Differentiation
Finding Maximum or Minimum Value of profit or Cost using
differentiation.
To find the maximum or minimum value of profit or cost we
follow the following steps:
Step-1: Differentiate the profit or cost function.
Step-2: Differentiate the profit or cost function again. We call it second
derivative.
Step-3: We set first derivative equal to zero and solve for the quantity.
Step-4: We put this quantity in the second derivative of the profit or cost
function.
Decision:
1. If the result of step 4 is positive then it is minimum
2. If the result of step 4 is negative then it is maximum
Find the maximum and minimum values
of the function 2x3/3 + x2/2 - 6x + 8

Solution:
Let f(x) = 2x3/3 + x2/2 - 6x + 8 --- --- (i)
Step – 1:
Differentiation with respect to ‘x’
/(X) = 6x2/3 + 2x/2 – 6 = 2x2 + x – 6 = 2x2 + 3x – 2x – 6
= (x + 2)(2x – 3)
Step- 2: Again differentiate with respect to ‘x’
We have,
//(x) = 4x +1
Step – 3: For the values of ‘x’
We have, /(x) = 0
 (x + 2)(2x – 3) = 0
Either (x + 2) = 0 or (2x – 3) = 0
 x=-2  x = 3/2
Step- 4:
(i) When x = – 2 then //(- 2) = – 8+1 = – 7 i .e. negative
Hence f(x) has a maximum at x = – 2.
Therefore, the maximum value is
50
f (–2) = (– 2) 3 + (–2) 2 – 6(–2) + 8 = 3
3
(ii) When x = 3/2, then  ( 2) = 4 3/2 + 1 = 7 i. e, positive
//

Hence f(x) has a minimum at x = – 2.

Therefore, the maximum value is
3 19
f ( ) = (2 )3 + ( 2 )2 – 6(2 ) + 8 = 8
3 3 3

2
Therefore the minimum value is 19/8
 Home Work
• Find the maximum and minimum values of the
function x4 + 2x3 – 3x2 – 4x + 4
A company has examined its cost structure and revenue structure
and has determined that C the total cost, R total revenue, and x the
number of units produced are related as: C = 100 + 0.015x2 and
R = 3x .
Find the products rate x that will maximize profits of the company.
Find that profit. Find also the profit when x = 120.
Solution:
Given, the cost function, C = 100 + 0.015x 2
and Revenue function, R = 3x
Let, P denote the profit of the company, then
profit = Revenue – Cost
P(x) = R(x) – C(x)
= 3x – 100 – 0.015x2
Step – 1: Differentiate with respect to ‘x’
dp d
 dx = dx (3x – 100 – 0.015x2)
= 3 – 30x/1000
 Application of Differentiation
• Step – 2:
Again differentiate with respect to ‘x’
d dp
dx ( dx
) = d
dx
(3 – 30x/1000)

d2p
= – 30/1000
dx 2

• Step – 3: For maximum or minimum,

dp
dx = 0
 3 – 30x/1000 = 0
 x = 100
 Application of Differentiation
• Step – 4:
2
d p
When x = 100, then dx is negative
2

Profit is maximum when x =100.

Maximum profit = 3x – 100 – 0.015x2
= 3100 – 100 – 0.015(100) 2
= 50 rupees.
Again, when x = 120 then profit = 3x –100 – 0.015x2
= 3120 – 100 – 0.015 (120)2
= 44 rupees
The total cost function of a firm is given by
C(q)=0.04q3-0.9q2+10q+10
Then find the
(a) Average cost (AC)
(b) Marginal cost (MC)
(c) Slope of AC
(d) Slope of MC
(e) Value of q at which average variable (AVC) cost is
minimum
(f) Show that the average value is minimum at the value of
q obtained in question (e)
Solution:
Total Cost C ( q )
a. The Average cost (AC) = q

10
0.04q2 - 0.9q  10 
q
dC
b. The marginal cost MC =
dq
d
 0.04q3 - 0.9q2  10q  10
dq
=0.12q2-01.8q+10
 d
( AC )
c. The slope of the average cost = dq

d  10 
=  0.04q 2
- 0.9q  10  
dq  q 

10
= 0.08q - 0.9 
q2

d. The slope of the marginal cost d

= dq ( MC )

d
= 0.12q2 - 01.8q  10
dq

= 0.24q - 1.8
e. The variable cost is VC=0.04q3-0.9q2+10q

Total Variable Cost

So, the average variable cost, AVC = q

AVC=(0.04q3-0.9q2+10q) / q

Or AVC= 0.04q2 - 0.9q +10

d d
The slope of AVC =dq ( AVC ) = dq
( 0.04q 2 - 0.9q  10 )

= 0.08q - 0.9
 d2 d
and ( AVC )  (0.08q - 0.9)
dq 2
dq
 0.08

When the AVC is minimum, the slope of AVC is zero.

For minimum AVC, 0.08q - 0.9  0

0.9
q  11.25
0.08

When q = 11.25 then we have d

( AVC )  0 .08  0
2
dq

Hence The AVC is minimum at q=11.25

 Application of Differentiation
The demand function faced by a firm is p =500 –
0.2x and its cost function is given by C(x) = 25x +
10,000 (where p is the price and x is the output
unit). Find the
(a) Profit function
(b) Output at which profit is maximum.
(c) The maximum profit.
(d) The price the company will charge.
Solution:
Given, The demand function p = 500- 0.2x and
cost function c(x) =25x + 10,000
where p is the price and x is the output unit
(a) We know,
The revenue function is R(x) = p. Qd = p. x

= (500 – 0.2x) x
= 500x – 0.2x2
The cost function is C(x) = 25x +10,000
So the profit function is P(x) = R(x) – C(x)
= (500x – 0.2x2) – (25x +10,000)
= – 0.2x2 + 475x – 10,000 --- --- (i)
(b) Differentiating with respect to ‘x’ then we have
d
P/(x) = dq (– 0.2x2 + 475x – 10,000)
P/(x) = – 0.4x + 475
Again differentiating with respect to ‘x’
d
dx

P//(x) = – 0.4
For maximum or minimum,
P/(x) = 0
Or, – 0.4x + 475 = 0
Or, x = 1187.50
When, x = 1187.50 then P//(x) = – 0.4 which is negative.
So when output (x) = 1187.50 then the profit will be
maximum.
(c) The maximum profit is
P (1187.50) = – 0.2 (1187.50) 2 + 475(1187.50) – 1,000
= – 28031.25 + 564062.5 – 1,000
= 281031.25
(d) At this level, the price is given by P =500 – 0.2x
= 500 –
0.2(1187.5) = 262.50 (Ans.)
Problem: Suppose the total cost C(x) (in thousands of
dollars) for manufacturing x sailboats per year is given by
the function
C(x) = 575 + 25x – 0.25x2, 0x50
 
(a) Find the marginal cost at a production level of x boats
per year.
(b) Find the marginal cost at a production level of 40 boats
per year and interpret the results.
(c) Use the total cost function to find the exact cost of
producing the 41st boat and discuss the relationship
between this result and the marginal cost found in part (b).
Problem:
A company finds that it can sell out a certain product that
it produces, at the rate of $2 per unit. It estimates the cost
function of the product to be
$ 1000  1  q  for q units produced.
2


 2  50  


i) Find the expression for the total profit, if q units are

produced and sold.
ii) Find the number of units produced that will maximize
profit.
iii) What is the amount of this maximum profit?
iv) What would be the profit if 6000 units are produced?
Problem:
The demand function for a particular commodity is y=15e-
x/3
for 0 x 8, where y is the price per unit and x is the
number of units demanded. Determine the price and the
quantity for which the revenue is maximum.
 Home Work

Book : V. K. Kapoor
Page – ACE-22 to 42
Problems: 13,14,15,17,1819,20,21,30,
Page – 703 to 715
Problems: 47,48,50,51,52,53,54