Mathematics for Business

1Part 2: Calculus
Calculus

• Functions
• Derivatives
• Optimization
• Newton’s Method
• Antiderivatives
• Integral
• Differential Equations
• Multivariate Function
• Sequences and Series
Calculus
1
Functions
Functions
Represent of Functions

• Algebraically (explicit formulas)

• Numerically (tables)
• Verbally (words)
• Visually (graphs)
Examples
1) In a certain state the maximum speed permitted on freeways is 100 kmyh
and the minimum speed is 60 kmyh. The fine for violating these limits is
$15 for every kilometer per hour above the maximum speed or below the
minimum speed. Express the amount of the fine F as a function of the
driving speed x and graph f(x) for 0 < x < 150.
2) An electricity company charges its customers a base rate of $10 a month,
plus 6 cents per kilowatt-hour (kWh) for the first 1200 kWh and 7 cents per
kWh for all usage over 1200 kWh. Express the monthly cost E as a function
of the amount x of electricity used. Then graph the function E for 0 < x <
2000.
3) In a certain country, income tax is assessed as follows. There is no tax on
income up to $10,000. Any income over $10,000 is taxed at a rate of 10%,
up to an income of $20,000. Any income over $20,000 is taxed at 15%.
(a) Sketch the graph of the tax rate R as a function of the income I.
(b) How much tax is assessed on an income of $14,000? On $26,000?
(c) Sketch the graph of the total assessed tax T as a function of the income I.
Modelling Process
Exponential Functions
Inverse Functions
Inverse Functions
Logarithmic Functions
Logarithmic Functions
Essential Functions
Essential Functions
 Examples
1) If the recommended adult dosage for a drug is D (in mg), then to determine
the appropriate dosage c for a child of age a, pharmacists use the equation c =
0.0417D(a + 1). Suppose the dosage for an adult is 200 mg.
(a) Find the slope of the graph of c. What does it represent?
(b) What is the dosage for a newborn?
2) The manager of a weekend flea market knows from past experience that if he
charges x dollars for a rental space at the market, then the number y of spaces
that will be rented is given by the equation y = 200 – 4x.
(a) Sketch a graph of this linear function. (Remember that the rental charge per
space and the number of spaces rented can’t be negative quantities.)
(b) What do the slope, the y-intercept, and the x-intercept of the graph represent?
 Examples
3) The percentage, y, of households possessing refrigerators, t years after they
have been introduced in a developed country, is modelled by
y = 100 − 95e−0.15t
(1) Find the percentage of households that have refrigerators
(a) at their launch; (b) after 1 year; (c) after 10 years; (d) after 20 years.
(2) What is the market saturation level?
Click
(3) Sketch a graph of y against t andto addgive
hence texta qualitative description of the
growth of refrigerator ownership over time.
4) The percentage, y , of households possessing microwave ovens t years after
they have been launched is modelled by

(1) Find the percentage of households that have microwaves

(a) at their launch; (b) after 10 years;(c) after 20 years;(d) after 30 years.
(2) What is the market saturation level?
(3) Sketch a graph of y against t and hence give a qualitative description of the
growth of microwave ownership over time.
 Examples
1) A company sells packs of printer ink cartridges for $24. If a customer orders
more than 100 packs, the company is prepared to reduce the unit price by 4 cents
for each pack bought above 100 up to a maximum of 300 in a single order.
(a) How much does it cost to buy 130 packs?
(b) If the cost is $5324, how many packs are ordered?
2) Given the supply and demand functions
P = Q2S + 14QS + 22 and P = −Q2D − 10QD + 150
calculate the equilibrium price and quantity.
Combination of Functions
Calculus
1
Derivatives
Derivatives and Rates of Change (ROC)
Examples
A manufacturer produces bolts of a fabric with a fixed width. The cost of
producing x yards of this fabric is
C = f (x) dollars.
(a) What is the meaning of the derivative f (x)? What are its units?
(b) In practical terms, what does it mean to say that f (1000) = 9?
(c) Which do you think is greater, f (50) or f (500)? What about f (5000)?
Calculus
1
Marginal Functions
Marginal Function

• Suppose C(x) is the total cost that a company incurs in

producing x units of a certain commodity. The function C is
called a cost function. The instantaneous rate of change of
cost with respect to the number of items produced, is called
the marginal cost by economists:

• Eg. Suppose a company has estimated that the cost (in

dollars) of producing x items is
C (x) = 10,000 + 5x + 0.01x2
Compute the marginal cost function is
Notations
x − Number of units produced.
C(x) − Total cost to produce x number of units.
R(x) − Total revenue earned by selling x number of units.
P(x) − Total profit earned by selling x number of units.
Average Cost (AC) = (C(x)/x) Average Revenue (AR) = (R(x)/x)
Average Profit (AP) = (P(x)/x) Marginal revenue (MR) = (d/dx) (R(x))
Marginal Profit (MP) = (d/dx) (P(x))
Marginal product of labour The extra output produced by 1 more unit of
labour: MPL = dQ/dL.
Marginal propensity to consume The fraction of a rise in national income
which goes into consumption: MPC = dC/dY.
Marginal propensity to save The fraction of a rise in national income which
goes into savings: MPS = dS/dY.
Examples
1) The total cost C(x) of a firm is C(x) = 0.0005x3 – 0.7x2 - 30x + 3000, where x
is the output. Determine, (i) AC, (ii) slope of AC, (iii) MC, (iv) slope of MC
and (v) value of x, for which MVC = AVC, where VC denotes the variable cost.
2) The total cost, C(x) associated with producing and marketing x units of an
item is given by C(x) = 0.05x3 – 0.02x2 – 30x + 1000 find,
(i) Total cost when x = 5 (ii) Average cost and AC at x = 2
(iii) Marginal cost MC and MC at x = 3.
3) The demand for a certain product is represented by the relation p = 20 + 5x -
x2 where x is the number of units demanded and p is the price per unit.
Construct the marginal revenue function. What is the marginal revenue at x =
4?
4) The demand for a certain product is represented by the equation p = 300 -
6x, where p is the price per unit and x is the number of units demanded. Find
the revenue function. What is the slope of the revenue function? At what price
is the marginal revenue zero?
Calculus
1
Elasticity
Price Elasticity of Demand
Examples
1) Given the demand function
P = 100 − Q
calculate the magnitude of the price elasticity of demand when the price is
(a) 10 (b) 50 (c) 90
Is the demand inelastic, unit elastic or elastic at these prices?
2) Given the demand function
P = −Q2 − 4Q + 96
find the price elasticity of demand when P = 51. If this price rises by 2%, calculate the
corresponding percentage change in demand.
Elasticity
• Price elasticity of supply

• Given y = f(x), then the elasticity of y at some point x is

Examples
1) Given the supply function

find the price elasticity of supply

(a) averaged along an arc between Q = 100 and Q = 105;
(b) at the point Q = 100.
2) If the supply equation is
Q = 150 + 5P + 0.1P2
calculate the price elasticity of supply
(a) averaged along an arc between P = 9 and P = 11;
(b) at the point P = 10.
3) If an airline increases prices for business class flights by 8%, demand falls
by about 2.5%. Estimate the elasticity of demand. Is demand elastic, inelastic or
unit elastic? Explain whether you would expect a similar result to hold for
economy class flights.
Calculus
1
Optimization
 Derivative Test

1) A store has been selling 200 flat-screen TVs a week at $350 each. A market
survey indicates that for each $10 rebate offered to buyers, the number of TVs
sold will increase by 20 a week. Find the demand function and the revenue
function. How large a rebate should the store offer to maximize its revenue?
2) A baseball team plays in a stadium that seats 55,000 spectators. With ticket
prices at $10, the average attendance had been 27,000. When ticket prices were
lowered to $8, the average attendance rose to 33,000.
(a) Find the demand function, assuming that it is linear.
(b) How should ticket prices be set to maximize revenue?
 Examples
1) During the summer months Terry makes and sells necklaces on the beach. Last
summer she sold the necklaces for $10 each and her sales averaged 20 per day. When
she increased the price by $1, she found that the average decreased by two sales per day.
(a) Find the demand function, assuming that it is linear.
(b) If the material for each necklace costs $6, what selling price should Terry set to
maximize her profit?
2) Suppose that the total cost (in thousands of dollars) of producing q units of output
(assuming that there is no fixed cost) of a firm is given by the function C = f (q) =
40q−9q2 +q3. Find the level of output at which the average cost of the firm is a
minimum, and the minimum average cost.
3) Assume that a firm produces q units of output employing l units of labor. Also
assume that the firm’s production function is given by q=f (l)=50l2−5l3. How many units
of labor should the firm employ in order to maximize the total output produced?
4) Assume that the total revenue, R, of a company from the sale of q units of a good is
given by the function R = f (q) = 50q−5q2 −0.1q3, where R is in thousands of dollars.
How many units of the good should the company sell to maximize its total revenue?
Calculus
1
Newton’s Method
Newton’s Method

𝑓 ( 𝑥 )=0

Eg. A store has been selling 200 flat-screen TVs a week at $350 each. A
market survey indicates that for each $10 rebate offered to buyers, the
number of TVs sold will increase by 20 a week. Find the demand
function and the revenue function. How large a rebate should the store
offer to maximize its revenue?
Calculus
1
Antiderivatives
Antiderivative
Example

A firm’s marginal cost function is

MC = Q2 + 2Q + 4
(a) Find the total cost function if the fixed costs are 100.
(b) The marginal revenue function of a monopolistic producer is
MR = 10 − 4Q
Find the total revenue function and deduce the corresponding demand
function.
(c) Find an expression for the consumption function if the marginal
propensity to consume is given by

and consumption is 85 when income is 100.

Calculus
1
Integrals
Integrals
Example
1) A firm’s marginal cost function is MC = Q2 + 2Q + 4
(a) Find the total cost function if the fixed costs are 100.
(b) The marginal revenue function of a monopolistic producer is MR = 10 − 4Q
Find the total revenue function and deduce the corresponding demand function.
(c) Find an expression for the consumption function if the marginal propensity to
consume is given by and consumption is 85 when income is 100.
2) The marginal cost of producing x liters of orange juice is C’(x) = 0.82 – 0.00003x
+ 0.000000003x2 (measured in dollars per liter). The fixed start-up cost is C(0) =
$18,000. Find the cost of producing the first 4000 liters of juice.
3) A company estimates that the marginal revenue (in dollars per unit) realized by
selling x units of a product is 48 + 0.0012x. Assuming the estimate is accurate, find
the increase in revenue if sales increase from 5000 units to 10,000 units.
4) A mining company estimates that the marginal cost of extracting x tonnes of
copper ore from a mine is 0.6 + 0.008x, measured in thousands of dollars per ton.
Start-up costs are $100,000. What is the cost of extracting the first 50 tonnes of
copper? What about the next 50 tonnes?
 Surplus

1) If the demand function is p = 20 – 2x, p is the price and x is the amount demanded.
Find the consumer’s surplus when p = 6.
2) The supply curve for a commodity is and the quantity sold is 7 units. Find the
producer’s surplus.
3) The demand function of a commodity is y = 36 - x2 . Find the consumer’s surplus for
y0 = 11.
4) Find the producer’s surplus defined by the supply curve s(x) = 4x + 8 and the quantity
sold is 5 units.
Example

1) Given the demand curve p = 50 – x and the supply curve p = 20 x for a

good, at what quantity and price is the market for the good in equilibrium?
Find the consumer surplus and the producer surplus when the market is in
equilibrium.
Total Surplus The sum of consumer surplus and producer surplus is called
the total surplus; it is one measure economists use as an indicator of the
economic health of a society. Total surplus is maximized when the market
for a good is in equilibrium.
2) The demand function for an electronics company’s car stereos is p(x) =
228.4 – 18x and the supply function is pS(x) = 27x + 57.4, where x is
measured in thousands. At what quantity is the market for the stereos in
equilibrium? Compute the maximum total surplus for the stereos.
3) A camera company estimates that the demand function for its new digital
camera is p(x) = 312e–0.14x and the supply function is estimated to be pS(x) =
26e0.2x, where x is measured in thousands. Compute the maximum total
surplus.
 Investment Flow

Net Investment = Rate of Change of Capital Stock I(t) = K’(t)

1) If the investment flow is (t is in years) calculate
(a) the capital formation from the end of the first year to the end of the fourth
year;
(b) the number of years required before the capital stock exceeds $100 000.
2) If the net investment function is given by I(t) = 800t1/3 calculate
(a) the capital formation from the end of the first year to the end of the eighth
year;
(b) the number of years required before the capital stock exceeds $48 600.
Calculus
1
Differential Equations
 Examples
1) Consider the two-sector model
Y’t = 0.5(C + I – Y) C = 0.8Y + 400 I = 600
Find an expression for Y(t) when Y(0) = 7000. Is this system stable or unstable?
2) Consider the market model
QS = (3P – 4) QD = –5P + 20 P’(t) = 0.2(QD – QS)
Find expressions for P(t), QS(t) and QD(t) when P(0) = 2. Is this system stable or
unstable?
3) Consider the two-sector model
Y’t = 0.5(C + I – Y) C = 0.8Y + 300 I = 0.7Y + 600
Find an expression for Y(t) when Y(0) = 200. Is this system stable or unstable?
4) A principal of $4000 is invested at an annual interest rate of 6%, and the future value
of this investment t years later is S(t), which satisfies S’(t) = 0.06S
(a) Solve this equation to express S in terms of t.
(b) What type of compounding is represented by this model?
 Examples
5) Consider the two-sector model
Y’t = 0.2(C + I – Y) C = 0.8Y + 420 I = 300
(a) Find an expression for Y(t) when Y(0) = 800. Is this system stable or unstable?
(b) Hence find an expression for the savings function, S(t).
(c) Find the time taken for income to fall to 4150, and find the rate of change of income
at this time. Give your answers to the nearest whole number.
 Models for Population Growth

Natural Growth: , , k: reproduction rate

Logistic Model: , , , M: carrying capacity
Logistic with constant harvesting model:
Logistic with minimum population for extinction model:

1) The Pacific halibut fishery has been modeled by the differential equation , where y(t) is
the biomass (the total mass of the members of the population) in kilograms at time t
(measured in years), the carrying capacity is estimated to be M = 8 × 107 kg, and k = 0.71
per year.
(a) If y(0) = 2 × 107 kg, find the biomass a year later.
(b) How long will it take for the biomass to reach 4 × 107 kg?
 Examples

1) The population of the world was about 6.1 billion in 2000. Birth rates around that time
ranged from 35 to 40 million per year and death rates ranged from 15 to 20 million per
year. Let’s assume that the carrying capacity for world population is 20 billion.
(a) Write the logistic differential equation for these data. (Because the initial population is
small compared to the carrying capacity, you can take k to be an estimate of the initial
relative growth rate.)
(b) Use the logistic model to estimate the world population in the year 2010 and compare
with the actual population of 6.9 billion.
(c) Use the logistic model to predict the world population in the years 2100 and 2500.
2) (a) Assume that the carrying capacity for the US population is 800 million. Use it and
the fact that the population was 282 million in 2000 to formulate a logistic model for the
US population.
(b) Determine the value of k in your model by using the fact that the population in 2010
was 309 million.
(c) Use your model to predict the US population in the years 2100 and 2200.
(d) Use your model to predict the year in which the US population will exceed 500
million.
 Examples

Consider a population P = P(t) with constant relative birth and death rates α and β,
respectively, and a constant emigration rate m, where α, β, and m are positive constants.
Assume that α > β. Then the rate of change of the population at time t is modeled by the
differential equation , where k = α − β
(a) Find the solution of this equation that satisfies the initial condition P(0) = P0.
(b) What condition on m will lead to an exponential expansion of the population?
(c) What condition on m will result in a constant population? A population decline?
(d) In 1847, the population of Ireland was about 8 million and the difference between the
relative birth and death rates was 1.6% of the population. Because of the potato famine in
the 1840s and 1850s, about 210,000 inhabitants per year emigrated from Ireland. Was the
population expanding or declining at that time?
 Predator-Prey Equations

1) Suppose that populations of rabbits and wolves are described by the Lotka-Volterra
equations with k = 0.08, a = 0.001, r = 0.02, and b = 0.00002. The time t is measured in
months.
(a) Find the constant solutions (called the equilibrium solutions) and interpret the
answer.
(b) Use the system of differential equations to find an expression for dW/dR.
(c) Suppose that, at some point in time, there are 1000 rabbits and 40 wolves. Draw the
corresponding solution curve and use it to describe the changes in both population levels.
2) Lynx eat snowshoe hares and snowshoe hares eat woody plants like willows. Suppose
that, in the absence of hares, the willow population will grow exponentially and the lynx
population will decay exponentially. In the absence of lynx and willow, the hare
population will decay exponentially. If L(t), H(t), and W(t) represent the populations of
these three species at time t, write a system of differential equations as a model for their
dynamics. If the constants in your equation are all positive, explain why you have used
plus or minus signs.
Calculus
1
Multivariate Function
Multivariate Function

Wind-chill index as a function of air temperature and wind speed

Examples
A company makes three sizes of cardboard boxes: small, medium, and large. It costs
$2.50 to make a small box, $4.00 for a medium box, and $4.50 for a large box. Fixed
costs are $8000.
(a) Express the cost of making x small boxes, y medium boxes, and z large boxes as a
function of three variables: C = f (x, y, z).
(b) Find f (3000, 5000, 4000) and interpret it.
(c) What is the domain of f ?
Cobb – Douglas Function
In 1928 Charles Cobb and Paul Douglas published a study in which they
modeled the growth of the American economy during the period 1899–
1922. They considered a simplified view of the economy in which
production output is determined by the amount of labor involved and the
amount of capital invested. While there are many other factors affecting
economic performance, their model proved to be remarkably accurate. The
function they used to model production was of the form
P(L, K) = bLK1 – 
where P is the total production (the monetary value of all goods produced
in a year), L is the amount of labor (the total number of person-hours
worked in a year), and K is the amount of capital invested (the monetary
worth of all machinery, equipment, and buildings).
Cobb – Douglas Function
• Cobb and Douglas used economic data published by the government
to obtain Tables.
Cobb – Douglas Function
They took the year 1899 as a baseline and P, L, and K for 1899 were each
assigned the value 100. The values for other years were expressed as
percentages of the 1899 figures. Cobb and Douglas used the method of
least squares to fit the data of Table to the function
P(L, K) = 1.01L0.75K 0.25
If we use the model given by the function in Equation to compute the
production in the years 1910 and 1920, we get the values
P(147, 208) = 1.01(147)0.75(208)0.25  161.9
P(194, 407) = 1.01(194)0.75(407)0.25  235.8
which are quite close to the actual values, 159 and 231.
P(L, K) = bLK1 – 
The production function has subsequently been used in many settings,
ranging from individual firms to global economics. It has become known as
the Cobb-Douglas production function.
Its domain is {(L, K) | L  0, K  0} because L and K represent labor and
capital and are therefore never negative.
Graphs
Level Curves

Average air temperature near sea level in July (°F)

Limits
Limits
Continuity
Partial Derivatives
Partial Elastic and Marginal Functions
Suppose that the demand, Q, for a certain good depends on its price, P, the price of
an alternative good, PA, and the income of consumers, Y, so that
Q = f (P, PA, Y )
price elasticity of demand:

cross-price elasticity of demand:

income elasticity of demand:

Eg. Given the demand function

Q = 100 − 2P + PA + 0.1Y, where P = 10, PA = 12 and Y = 1000, find the
(a) price elasticity of demand;
(b) cross-price elasticity of demand;
(c) income elasticity of demand.
Is the alternative good substitutable or complementary?
Terms
Utility The satisfaction gained from the consumption of a good U = U(x1,x2).
Output: Q = f(K,L)
Marginal product of capital The additional output produced by a 1 unit increase in
capital: MPK = ∂Q/∂K.
Marginal product of labour The additional output produced by a 1-unit increase in
labour: MPL = ∂Q/∂L.
Marginal rate of commodity substitution (MRCS) The amount by which one input
needs to increase to maintain a constant value of utility when the other input
decreases by 1 unit: MRCS = ∂U/∂x1 ÷ ∂U/∂x2.
Marginal rate of technical substitution (MRTS) The amount by which capital
needs to rise to maintain a constant level of output when labour decreases by 1 unit:
MRTS = MPL/MPK.
Marginal utility The extra satisfaction gained by consuming 1 extra unit of a good:
∂U/∂xi.
Superior good A normal good for which the percentage rise in consumption exceeds
the percentage increase in income.
Examples
1) Given the demand function
Q = 500 − 3P − 2PA + 0.01Y, where P = 20, PA = 30 and Y = 5000, find
(a) the price elasticity of demand;
(b) the cross-price elasticity of demand;
(c) the income elasticity of demand.
If income rises by 5%, calculate the corresponding percentage change in demand.
Would this good be classified as inferior, normal or superior?
2) The satisfaction gained by consuming x units of good 1 and y units of good 2 is
measured by the utility function U = 2x2 + 5y3. Currently an individual consumes 20
units of good 1 and 8 units of good 2.
(a) Find the marginal utility of good 1 and hence estimate the increase in satisfaction
gained from consuming one more unit of good 1.
(b) Find the marginal utility of good 2 and hence estimate the increase in satisfaction
gained from consuming one more unit of good 2.
Examples
3) Evaluate MPK and MPL for the production function Q = 2LK + given that the current
levels of K and L are 7 and 4, respectively. Hence
(a) write down the value of MRTS;
(b) estimate the increase in capital needed to maintain the current level of output given
a 1-unit decrease in labor.
4) The demand functions for two commodities, A and B, are given by
QA = AP−0.5Y0.5 and QB = BP−1.5Y1.5
where A and B are positive constants
(a) Find the price elasticity of demand for each good and hence comment on the relative
sensitivity of demand due to changes in price.
(b) Find the income elasticity of demand for each good. Which good is normal and
which is superior? Give a reason for your answer.
5) A firm’s production function is given by Q = 10 + 3L, with K = 90 and L = 40.
(a) Find the values of the marginal products, MPK and MPL.
(b) Use the results of part (a) to estimate the overall effect on Q when K increases by 3
units and L decreases by 2 units.
(c) State the value of the marginal rate of technical substitution and give an
Functions of More Than Two Variables

In general, if u is a function of n variables, u = f (x1, x2,…, xn), its partial

derivative with respect to the i th variable xi is

and we also write

Directional Derivatives
Examples
1) A utility function is given by U = 2x2 + y2. Calculate the marginal utilities at (4, 2)
and hence work out the gradient of the curve at this point.
2) Given the utility function U = x11/2x21/3 determine the value of the marginal utilities
at the point (25, 8). Hence
(a) estimate the change in utility when x1 and x2 both increase by 1 unit;
(b) find the marginal rate of commodity substitution at this point.
 Higher Derivatives

If f is a function of two variables, then its partial derivatives fx and fy are

also functions of two variables, so we can consider their partial derivatives
(fx)x, (fx)y, (fy)x, and (fy)y, which are called the second partial derivatives of f.
If z = f (x, y), we use the following notation:
Higher Derivatives

Thus the notation fxy (or ∂2f / ∂y ∂x) means that we first differentiate with
respect to x and then with respect to y, whereas in computing fyx the
order is reversed.
 Examples
An individual’s utility function is given by U = Ax10.7x20.5 where x1 and x2 denote the
number of units consumed of goods 1 and 2.
(a) Show that the marginal utility of x1 is positive and give an interpretation of this
result.
(b) Show that the second-order derivative is positive and give an interpretation of this
result.
(c) Show that the second-order derivative is negative and give an interpretation of this
result.
Higher Derivatives

Partial derivatives of order 3 or higher can also be defined. For instance,

and using Clairaut’s Theorem it can be shown that

fxyy = fyxy = fyyx

if these functions are continuous.

The Cobb-Douglas Production Function
We have described the work of Cobb and Douglas in modeling the total production
P of an economic system as a function of the amount of labor L and the capital
investment K.
Here we use partial derivatives to show how the particular form of their model
follows from certain assumptions they made about the economy. If the production
function is denoted by P = P(L, K), then the partial derivative ∂P/∂L is the rate at
which production changes with respect to the amount of labor. Economists call it the
marginal production with respect to labor or the marginal productivity of labor.
Likewise, the partial derivative ∂P/∂K is the rate of change of production with
respect to capital and is called the marginal productivity of capital. In these terms,
the assumptions made by Cobb and Douglas can be stated as follows.
(i) If either labor or capital vanishes, then so will production.
(ii) The marginal productivity of labor is proportional to the amount of production
per unit of labor.
(iii) The marginal productivity of capital is proportional to the amount of production
per unit of capital.
The Cobb-Douglas Production Function
Because the production per unit of labor is P/L, assumption (ii) says that

for some constant . If we keep K constant (K = K0), then this partial differential
equation becomes an ordinary differential equation:

If we solve this separable differential equation, we get

P(L, K0) = C1(K0)L
Notice that we have written the constant C1 as a function of K0 because it could
depend on the value of K0.
Similarly, assumption (iii) says that

and we can solve this differential equation to get

P(L0, K) = C2(L0)K
The Cobb-Douglas Production Function
Comparing the equations, we have
P(L, K) = bLK 
where b is a constant that is independent of both L and K. Assumption (i)
shows that  > 0 and  > 0.
Notice from this equation that if labor and capital are both increased by a
factor m, then
P(mL, mK) = b(mL)(mK) = m + bLK = m + P(L, K)
If  +  = 1, then P(mL, mK) = mP(L, K), which means that production is also
increased by a factor of m. That is why Cobb and Douglas assumed that  +
 = 1 and therefore
P(L, K) = bLK1 – 
This is the Cobb-Douglas production function.
The Chain Rule
The Chain Rule
Eg. 1: Wheat production W in a given year depends on the average
temperature T and the annual rainfall R. Scientists estimate that the average
temperature is rising at a rate of 0.15°C/year and rainfall is decreasing at a
rate of 0.1 cm/year. They also estimate that at current production levels,
∂W/∂ T = −2 and ∂W/∂R = 8.
(a) What is the significance of the signs of these partial derivatives?
(b) Estimate the current rate of change of wheat production, dW/dt.
Implicit Differentiation
The Chain Rule can be used to give a more complete description of the
process of implicit differentiation. We suppose that an equation of the
form F (x, y) = 0 defines y implicitly as a differentiable function of x, that
is, y = f (x), where F (x, f (x)) = 0 for all x in the domain of f.
If F is differentiable, we can apply Case 1 of the Chain Rule to
differentiate both sides of the equation F (x, y) = 0 with respect to x.

i.e. , and in the case the implicit function z(x,y) defined by F(x,y,z) = 0:
Maximum and Minimum Values
 Absolute Maximum and Minimum Values

Eg. A model for the yield Y of an agricultural crop as a function of the nitrogen level N
and phosphorus level P in the soil (measured in appropriate units) is
Y(N, P) = kNPe – N – P
where k is a positive constant. What levels of nitrogen and phosphorus result in the best
yield?
 Examples

1) Assume that the inverse demand functions in two markets that a discriminating
monopolist faces for its product are given by
p1 = f (q1) = 100 − 2q1 and p2 = g(q2) = 60 − 2q2,
where p1, p2, q1, and q2 denote the prices charged in market one, in market two, the
quantity demanded in market one, and in market two, respectively. Also assume that the
total cost (C) of the monopolist in supplying the good in the two markets is given by
C = h(q1,q2) = 10+20q1 +20q2.
Find the levels of q1 and q2 that should be supplied to the two markets so that the
combined profit of the monopolist will be maximized.
2) Suppose that the total cost (C), of producing two goods by a multiproduct firm is
given by C = f (q1,q2) = 100+3q12 + 2q22 − 2q1q2 − 4q1 − 4q2, where q1 and q2 represent the
quantities of good 1 and good 2, respectively. How many units of the two goods must the
firm produce in order to minimize the total cost? What will be minimum cost to the
firm?
3) 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 = 2Q12 + 2Q1Q2 + Q22
where Q1 and Q2 denote the output levels of G1 and G2, respectively. Find the maximum
 Examples

4) Assume that a firm uses capital (K) and labor (L) to produce a good. The quantity (q)
of the good produced is given by the function q = f (K,L) = 4K1/3L1/2. Also assume that
the total cost of production (C) is given by the function C =g(K,L)=0.1K + 2L, and the
price (p) of the good is $1 per unit. Find the quantities of capital and labor that the firm
must employ to maximize its profits. Also find the profit-maximizing quantity of the
good produced and the maximum profit.
Lagrange Multipliers

• The number  is called a Lagrange multiplier.

Examples

1) The Shannon index (sometimes called the Shannon-Wiener index or Shannon-

Weaver index) is a measure of diversity in an ecosystem. For the case of three
species, it is defined as
H = −p1lnp1 − p2lnp2 − p3lnp3
where pi is the proportion of species i in the ecosystem.
(a) Express H as a function of two variables using the fact that p1 + p2 + p3 = 1.
(b) What is the domain of H ?
(c) Find the maximum value of H. For what values of p1, p2, p3 does it occur?
2) Three alleles (alternative versions of a gene) A, B, and O determine the four blood
types A (AA or AO), B (BB or BO), O (OO), and AB. The Hardy-Weinberg Law
states that the proportion of individuals in a population who carry two different
alleles is
P = 2pq + 2pr + 2rq
where p, q, and r are the proportions of A, B, and O in the population. Use the fact
that p + q + r = 1 to show that P is at most 23.
 Examples

3) Assume that the output q produced by a firm using k units of capital and l units of
labor is given by the Cobb–Douglas production function q = f (k, l) = kαl1−α. Also assume
that the firm’s budget constraint is given by r.k +w.l = s, where r, w, and s denote interest
rate, wage rate, and available fund in dollars, respectively.
(i) Find the quantities of k and l that the firm must use to maximize its output assuming α
= 0.5, r = 0.1 (or 10 percent), w = $10, and s = $100.
(ii) Find the elasticity of substitution between the two factors.
4) Assume that a consumer’s total utility, U, from the consumption of two goods, x1 and
x2, is given by the Cobb–Douglas utility function U = f (x1, x2) = 10x10.7 + x20.3. Also
assume that the price of one unit of x1 is $4, the price of one unit of x2 is $5, and the
money available for spending is $20. Find the quantities of x1 and x2 that maximize the
consumer’s total utility.
5) Suppose that a firm’s total output, q, from the employment of two factors, capital, k ,
and labor, l, is given by the Cobb–Douglas production function q = f (k, l) = 10k0.6l0.4.
Also suppose that the price of one unit of k is $0.05, the price of one unit of l is $4, and
the money available for spending is $100. Find the quantities of capital and labor that
maximize the firm’s output.
Calculus
1
Sequences and Series
 Examples
1) The salary of a mechanic begins at $150 a month and rises by $12 every year. Find the
total amount he had been paid at the end of 25 years.
2) A man borrows $1200 at the total interest of $168. He repays the entire amount in 12
installments, each installment being less than the preceding one by $20. Find the first
installment.
3) Two posts are offered to a person. The first carries a starting salary of $1000 per month
and an annual increment of $40. The second carries a starting salary $800 and an annual
increment of $50. Assuming that he has worked for 25 years, which job he has to select?
4) Suppose X repays a loan of $3250 by paying $20 in the first month and then increases
the payment by $15 every month. How long will he take to clear his loan?
5) A firm increases its research and development program by $20,000 annually following
the first year of its operation at a level of $75,000. Find the amount spent over 6 years of
operation.
6) A firm X starts producing 10,000 units a year and decreases the production by 500 units
a year. Another firm Y starts producing 6000 units and increases the production 300 units a
year.
(i) In which year X and Y produce the same amount?
(ii) What will be the production of Y when X produces no unit?
Sequences
A sequence can be thought of as a list of numbers written in a definite order:
a1, a2, a3, a4, . . . , an, . . .
The number a1 is called the first term, a2 is the second term, and in general an is the
nth term. We will deal exclusively with infinite sequences and so each term an will
have a successor an + 1.

Notice that for every positive integer n there is a corresponding number an and so a
sequence can be defined as a function whose domain is the set of positive integers.

But we usually write an instead of the function notation f (n)

for the value of the function at the number n.

Notation: The sequence {a1, a2, a3, . . .} is also denoted by

{an} or
 Examples

1) If $1000 is invested at 6% interest, compounded annually, then after n years the

investment is worth an = 1000(1.06)n dollars.
(a) Find the first five terms of the sequence {an}.
(b) Is the sequence convergent or divergent? Explain.
2) If you deposit $100 at the end of every month into an account that pays 3% interest per
year compounded monthly, the amount of interest accumulated after n months is given by
the sequence
(a) Find the first six terms of the sequence.
(b) How much interest will you have earned after two years?
3) A fish farmer has 5000 catfish in his pond. The number of catfish increases by 8% per
month and the farmer harvests 300 catfish per month.
(a) Show that the catfish population Pn after n months is given recursively by
Pn = 1.08Pn-1 - 300 P0 = 5000
(b) Find the number of catfish in the pond after six months.
Sequences

A sequence an = n/(n + 1), can be pictured either by plotting its terms on

a number line, as in Figure 1, or by plotting its graph, as in Figure 2.
Figure 2
Figure 1
Sequences
Figure 3 illustrates Definition 1 by showing the graphs of two sequences
that have the limit L.

Figure 3
Graphs of two sequences with
Sequences
A more precise version of Definition 1 is as follows.
Sequences
Definition 2 is illustrated by Figure 4, in which the terms
a1, a2, a3 , . . . are plotted on a number line.

Figure 4
No matter how small an interval (L – ε, L + ε) is chosen, there exists an N
such that all terms of the sequence from aN+1 onward must lie in that
interval.
Sequences
Another illustration of Definition 2 is given in Figure 5.
The points on the graph of {an} must lie between the horizontal lines y =
L + ε and y = L – ε if n > N. This picture must be valid no matter how
small ε is chosen, but usually a smaller ε requires a larger N.

Figure 5
Sequences

You will see that the only difference between limn  an = L and limx f
(x) = L is that n is required to be an integer. Thus we have the following
theorem, which is illustrated by Figure 6.

Figure 6
Sequences

In particular, since we know that limx  (1/xr) = 0 when r > 0, we

have

if r > 0
If an becomes large as n becomes large, we use the notation limn  an =
. Consider the definition

If limn  an = , then the sequence {an} is divergent but in a special

way. We say that {an} diverges to .
Sequences
The Limit Laws also hold for the limits of sequences and their proofs are
similar.
Limit Laws for Sequences
Sequences
The Squeeze Theorem can also be adapted for sequences as follows (see
Figure 7).
Squeeze Theorem for Sequences

Figure 7

The sequence {bn} is squeezed between the sequences {an} and {cn}.
Sequences
Another useful fact about limits of sequences is given by the following
theorem.

The following theorem says that if we apply a continuous function to the

terms of a convergent sequence, the result is also convergent.
Sequences
Sequences

1) A person is entitled to receive an annual payment which for each year is less by
one-tenth of what it was for the year before. If the first payment is $100, show that
he cannot receive more than $1000, however long he may live.
Series
In general, if we try to add the terms of an infinite sequence
we get an expression of the form

a 1 + a2 + a3 + . . . + an + . . .

which is called an infinite series (or just a series) and is denoted, for short,
by the symbol
Series
We consider the partial sums
s 1 = a1
s 2 = a1 + a 2
s 3 = a1 + a 2 + a3
s 4 = a1 + a 2 + a3 + a4
and, in general,

s n = a1 + a 2 + a 3 + . . . + an =

These partial sums form a new sequence {sn}, which may or may not have a
limit.
Series
Series
Series
Examples

When money is spent on goods and services, those who receive the money also
spend some of it. The people receiving some of the twice-spent money will spend
some of that, and so on. Economists call this chain reaction the multiplier effect. In a
hypothetical isolated community, the local government begins the process by
spending D dollars. Suppose that each recipient of spent money spends (c×100)%
and saves (s×100)% of the money that he or she receives. The values c and s are
called the marginal propensity to consume and the marginal propensity to save and,
of course, c + s = 1.
(a) Let Sn be the total spending that has been generated after n transactions. Find an
equation for Sn.
(b) Show that , where k = 1/s. The number k is called the multiplier. What is the
multiplier if the marginal propensity to consume is 80%?
Note: The federal government uses this principle to justify deficit spending. Banks
use this principle to justify lending a large percentage of the money that they receive
in deposits.