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Calculus For Economics2020
Calculus For Economics2020
HA NOI 11/2020
PART 2
5 Review
CALCULUS AND ITS APPLICATIONS
HA NOI 11/2020
2
2.1.2 Some functions in economics
Chapter I: Functions of one variable
LESSON 1.1: Fundamental concepts for
function of one variable
2.1.1. Some basic concepts for functions of one
variable
In everyday life, a variable may depend on one or more
changing variables.
plant’s growth depends on sunlight and rainfall
speed depends on distance traveled and time taken
output depends on capital and labor v
salary depends on education, experience, etc.
Examples: y = f(x) = 5x+2
y = g(x) = 5x2 + 3x + 4
y = h(x) = (5x+1)/(3x-2).
Example: f(x) = 5x+2
f
y = f(x)
X Y
Domain Range
Some basic concepts for functions
Def 2.1: The variable is a symbol of the values on a
certain set of numbers.
Def 2.2: Let two X and Y be subsets of ℝ. A function f
from set X to set Y is a rule that assigns an unique
element y in Y to each element 𝒙𝒙 ∈ 𝑿𝑿
Denote: 𝒚𝒚 = 𝒇𝒇(𝒙𝒙)
In this notation, the symbol f represents the
function, the letter x is the independent variable
representing the input value of f, and y is the
dependent variable or output value of f at x.
Some basic concepts for functions
TC = a + b⋅Q
QD = a – b⋅P; QS = - c + d⋅P (a, b, c, d >0)
𝐓𝐓𝐓𝐓
𝐀𝐀𝐀𝐀 =
𝐐𝐐
Revenue(Q) = p Q;
Find the break–even point for a firm with the following revenue
and cost functions:
R(Q) = 20Q; TC(Q) = 5Q+1500
We have profit function of firm is 𝝅𝝅 = 𝑻𝑻𝑻𝑻 − 𝑻𝑻𝑻𝑻 = 𝟏𝟏𝟏𝟏𝟏𝟏 − 𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
Thus, the break–even point for a firm is Q = 100.
Basic Terminologies
Variable
Function of one variable
Domain
Range
Linear function and Non-linear function
Increasing function
Decreasing function
Revenue function, Total cost function
LESSON 2.2: LIMITS AND CONTINUITY
Theorem 2.1
As x approaches the 𝒙𝒙𝟎𝟎 , the limit of 𝒇𝒇 𝒙𝒙 is L if the limit
from the left exists and the limit from the right exists and
both limits are equal 𝑳𝑳. That is, 𝐥𝐥𝐥𝐥𝐥𝐥+ 𝒇𝒇(𝒙𝒙) = 𝐥𝐥𝐥𝐥𝐥𝐥− 𝒇𝒇(𝒙𝒙) = 𝑳𝑳
𝒙𝒙→𝒂𝒂 𝒙𝒙→𝒂𝒂
Example:
Limits of function one variable
Example:
2. Limit Properties (Page 110)
II. Continuity of function one variable
Limits
Left limit and right limit
Limits at Infinity
Infinite Limits
Continuity
Limits and Continuity
Exercises:
I. Definitions
Def 3.1: Let the function 𝑦𝑦 = 𝑓𝑓(𝑥𝑥). The average rate
of change of y with respect to x, as x change from
𝑥𝑥1 to 𝑥𝑥2 is the ratio of the change in output to the
change of input:
𝑦𝑦2 −𝑦𝑦1 𝑓𝑓 𝑥𝑥2 −𝑓𝑓 𝑥𝑥1
= , where 𝑥𝑥1 ≠ 𝑥𝑥2 .
𝑥𝑥2 −𝑥𝑥1 𝑥𝑥2 −𝑥𝑥1
Example: Let a function y = f 𝑥𝑥 = 𝑥𝑥 3 . Find the
average of change as
a) 𝑥𝑥 changes from 1 to 3.
b) 𝑥𝑥 changes from 2 to 3.
=> want some measure to indicate the rate of
change at a point
Instantaneous rate of change
Given a function f(x), the following value:
f ( x0 + ∆x) − f ( x0 )
lim
∆x →0 ∆x
f ( x0 + ∆x) − f ( x0 )
lim = f '( x0 )
∆x → 0 ∆x
If 𝑓𝑓′(𝑥𝑥0 ) exists, then we say that 𝑓𝑓 is differentiable at
point 𝑥𝑥0.
Def 3.3: We say that the function 𝑓𝑓 is differentiable
over (𝑎𝑎, 𝑏𝑏) if it is differentiable at each point 𝑥𝑥0 in (𝑎𝑎, 𝑏𝑏).
The derivative calculation Rules: The power rule, the
Sum-Difference rules, The Product rule, Quotient rule,
chain rule.
II. Higher-order Derivatives
Consider the function given by
y = f ( x) = x 6 − 3x 4 + 2 x3 − 5 x + 7
Its derivative 𝑓𝑓𝑓 is given by:
y ' = f '( x) = 6 x5 − 12 x3 + 6 x 2 − 5.
The derivative function 𝑓𝑓′ can also be differentiated. We can
think of the derivative of 𝑓𝑓𝑓 as the rate of change the slope of
the tangent lines of 𝑓𝑓. It can also be regarded as the rate at
which 𝑓𝑓𝑓(𝑥𝑥) is changing. We use the notation 𝑓𝑓𝑓𝑓 for the
derivative (𝑓𝑓𝑓)’. That is, 𝑓𝑓𝑓𝑓(𝑥𝑥) = (𝑓𝑓𝑓(𝑥𝑥))’.
We call 𝑓𝑓𝑓𝑓 is second derivative of 𝑓𝑓.
Continuing in this manner, we have
f '''( x) = ( f ''( x))' (The third derivative of f)
( )
'
f ( ) ( x) f(
n n −1)
= ( x) (for all n ≥ 4) (The nth derivative of f)
EXERCISES
2.4.3
2 Using derivatives to find absolute maximum
and minimum values.ật lí 10
2.4.5
2 Marginality and Elasticityậ lí 10
I. MAXIMIUM/ MINIMUM PROBLEMs
Profit maximizing
Cost minimizing/ risk minimizing/ efficient
portfolios
Optimal inventory
Key formulas:
Profit = Revenue – Cost
Revenue = price. Sales
Price is given if the product is under
competitive market
Price may vary with sales if the firm has some
monopoly power
2.4.1. DEFINITIONS
Def 4.1: A critical value of a function 𝑓𝑓 is any number
𝑐𝑐, in the domain of function, for which the tangent
line at (𝑐𝑐, 𝑓𝑓(𝑐𝑐)) is horizontal or for which the
derivative does not exist. That is, c is a critical value
if 𝑓𝑓(𝑐𝑐) exists and 𝑓𝑓𝑓(𝑐𝑐) = 0 or 𝑓𝑓𝑓(𝑐𝑐) does not exist.
Def 4.2: Let 𝐷𝐷 be the domain of 𝑓𝑓.
𝑓𝑓(𝑐𝑐) is a relative minimum if there exists within 𝐷𝐷
an open interval 𝐷𝐷1 = (𝑐𝑐 − 𝛿𝛿, 𝑐𝑐 + 𝛿𝛿) such that
𝑓𝑓(𝑐𝑐) < 𝑓𝑓(𝑥𝑥), for all 𝑥𝑥 in 𝐷𝐷1 \{𝑐𝑐}.
𝑓𝑓(𝑐𝑐) is a relative maximum if there exists within 𝐷𝐷
an open interval 𝐷𝐷1 = (𝑐𝑐 − 𝛿𝛿, 𝑐𝑐 + 𝛿𝛿) such that
𝑓𝑓(𝑐𝑐) > 𝑓𝑓(𝑥𝑥), for all 𝑥𝑥 in 𝐷𝐷1 \{𝑐𝑐}.
Relative maximum or minimum values,
collectively referred to as relative extrema
(singular: extremum).
Example:
a) f(x) = 2+3x on [10,20]?
b) b) f(x) = 2x2 – 5x +3 on [2.5, 10]?
c) f(x) = 2x2 – 5x +3 on [0, 2.5]?
f (ax1 + (1 − a ) x2 ) ≥ af ( x1 ) + (1 − a ) f ( x2 )
0 ≤ a ≤ 1, ∀x1 , x2 ∈ I .
CONCAVE DOWN: SLOPE DECREASING
Example 2:
FINDING ABSOLUTE MAXIMUM AND MINIMUM
VALUES OVER OTHER INTERVALS
1 3 1 2
a) f ( x) = x − x − 2x + 1
3 2
1 3
b) g ( x) =
− x + 6 x 2 − 11x − 50 ; over (0, 3).
3
III. SOME MAXIMUM-MINIMUM PROBLEMS IN
BUSINESS AND ECONOMICS
R=( x) 100 x − x 2 ,
1 3
C ( x) = x − 6 x 2 + 89 x + 100;
3
MAXIMUM-MINIMUM PROBLEMS, BUSINESS AND
ECONOMICS APPLICATIONS
Percentage change
in Quantity Demanded
Price Elasticity of Demand =
Percentage change
in Quantity Price
ELASTICITY
8 − 10
× 100 20 percent
10 %=
− −2 ( % )
%=
2.20 − 2.00 10 percent
× 100
2.00
ELASTICITY- CALCULATION
Let an economic function: Y = F(X)
∆X
We have: × 100 = % change in X
X
∆Y ( X )
×100 =% change in Y
Y
Hence:
% change inY ∆Y X
EY=
,X = ⋅
% change in X ∆X Y
ELASTICITY- CALCULATION
Back to D1:
How does price elasticity of demand vary
with P?
It increases with P in absolute value
|E| <1: Inelastic
|E| = 1: Unit elasticity
|E| > 1: Elastic
EXERCISES
2 Logarithmic Functions
4 Applications: Decay
y a x (0 < a ≠ 1)
Consider a exponential function: =
If 0 < a < 1 then the given function is decreasing
function.
If a > 1 then the given function is increasing
function.
2.3.2: Logarithmic Functions
Def 3.3: A logarithm is defined as follows:
=
Consider a logarithmic function: y log a x (0 < a ≠ 1)
If 0 < a < 1 then the given function is decreasing
function.
If a > 1 then the given function is increasing
function.
Graph of logarithmic functions
a>1
logax
0<a<1
Basic properties of logarithms
Theorem 3.1: Properties of logarithms
For any positive numbers 𝑀𝑀, 𝑁𝑁, 𝑎𝑎 and 𝑏𝑏, with 𝑎𝑎, 𝑏𝑏 ≠ 1
and any real number k:
P1: log a=
( MN ) log a M + log a N
M
P2: log
= a log a M − log a N
N
P3: log a ( M k )= k ⋅ log a M
P4: log a a = 1
P5: log a 1 = 0
log b M
P6: log a M = (The change-of-base formula)
log b a
2.3.3: Derivatives of exponential
and logarithmic functions
The derivatives of exponential functions:
( a ) =a
x ' x
⋅ ln a; ( e ) =e ; ( a ) =a
x ' x u ' u( x)
⋅ ln a ⋅ u '( x)
The derivatives of logarithmic functions:
1 1 f '( x)
( log a x ) ; ( ln x ) ; ( log a f ( x) )
' ' '
= =
x ⋅ ln a x f ( x) ⋅ ln a
2.3.4: GROWTH RATE AND
DECAY MODEL
From 11 to 54 P319.
From 89 to 100 P321
From 92 to 105 P336
From 18 to 38 P369
CHAPTER III: INTEGRATION
Examples:
Want to find the area
of a block of land
CONSUMER SURPLUS
PRODUCER SURPLUS
THE AREA UNDER A CURVE
Imagine that we want to
calculate the area under a
curve which can be defined as
a function f(x) where x є [a,b]
Divide the interval into n equal
subintervals, ∆x
Riemann sum:
R= [f(x1)+...+f(xn)]∆x
R is an approximation of the
area
when n -> infinity, R-> exact
the value of the area
when h small =>
A(x0+h) – A(x0) A(x0+h)-A(x0)~hf(x0)
x0+h
~ hf(x0)
x0 x0+h
A(x): area up to x
THE AREA AND THE DIFFERENTIATION
Thus:
A(x 0 + h) − A(x 0 )
− > f (x 0 ) as h − > 0
h
I. DEFINITIONS:
Def 3.1: An antiderivative of a function f(x) is a
function F(x) whose derivative satisfies F’(x)=f(x).
Remark:
+) If F(x) is an antiderivative of a function f(x) then
F(x) + C (where C is a constant) is also
antiderivative of a function f(x).
+) If two functions F and G have the same derivative
over an interval, then F(x)=G(x)+C.
INDEFINITE INTEGRALS
∫ ( 2 x − 3) dx = x
2
− 3x + C because ( x − 3x ) ' = 2 x − 3
2
II. BASIC INTEGRATION FORMULAS
1. ∫ kdx
= kx + C (k is a constant)
r +1
x
2. ∫ x =
r
dx + C , provided r ≠ −1
r +1
1
3. ∫ = dx ln x + C
x
b ax
4. ∫ be =
ax
dx e +C
a
RULES AND SOME PROPERTIES OF
INTEGRATION
Basic rules:
2. ∫ [ f ( x) ± g ( x)]dx =
∫ f ( x)dx ± ∫ g ( x)dx
3. If ∫ f ( x)dx =
F ( x) + C , then ∫ f (u )du = F (u ) + C , where u =
g ( x).
( ∫ f ( x)dx ) = f ( x)
'
4.
5. ∫ f '( x=
)dx f ( x) + C
EXAMPLE
∫ (4 )
2
3. 3
x − x dx
III. INTEGRATION TECHNIQUES:
SUBSTITUTION
du
1. ∫ = u +C
2 u
r +1
u
2. ∫ u r=
du + C , provided r ≠ −1
r +1
1
3. ∫ = du ln u + C
u
b u
4. ∫ be =
a⋅u
du e +C
a
du 1
5. ∫ 2 =− + C
u u
INTEGRATION BY PARTS
Integration by parts:
∫ udv= uv − ∫ vdu
( + 3 x ) dx
2
∫
−2 x
1. e
2. ∫ x e dx
2 3x
3x + 2
3. ∫ 2x −1 + 1
dx
INTEGRATION BY PARTS
Antiderivative, Antidifferentiation
Indefinite integral
Substitution
Integration by parts
EXERCISES
∫ f ( x)dx − ∫ g ( x)dx =∫ ( f ( x) − g ( x) ) dx
a a a
b a
3) ∫ f ( x)dx = − ∫ f ( x)dx
a b
𝑏𝑏 𝑏𝑏
4) ∫𝑎𝑎 𝑘𝑘𝑘𝑘 𝑥𝑥 𝑑𝑑𝑑𝑑 = 𝑘𝑘 ∫𝑎𝑎 𝑓𝑓 𝑥𝑥 𝑑𝑑𝑑𝑑
III. Integration Techniques
1) Substitution
2) Integration by parts
IV. AN APPLICATION OF DEFINITE INTEGRALS
Consumer surplus:
The additional benefits enjoyed by consumers
who pay less than they are willing and able to
pay for a good.
Producer surplus:
The additional benefits enjoyed by producers who
were able to sell for a price higher than they
would have been willing to sell for a good.
IV. AN APPLICATION OF DEFINITE INTEGRALS
DEFINITIONS
Def 3.2: Suppose that p = D(Q) describes the
demand function for a commodity. Then the
consumer surplus is defined for the equilibrium
point (𝑄𝑄0 , 𝑃𝑃0 ) as Q
0
=CS ∫ D(Q)dQ − Q P .
0
0 0
PS Q0 P0 − ∫ S (Q)dQ.
=
0
EXAMPLE
Given D( x) = ( x − 5 ) and S ( x ) = x 2 + x + 3, find each of
2
the following.
a) The equilibrium point
b) The consumer surplus at the equilibrium point
c) The producer surplus at the equilibrium point
EXAMPLE
Example: Given
− Q + 4.5 Q −5.5
=D(Q) e=
, S (Q) e
Find each of the following:
a) The equilibrium point
b) The consumer surplus at the equilibrium
point.
c) The producer surplus at the equilibrium point.
Basic Terminologies
Definite integral
The area
Substitution
Integration by parts
Consumer surplus
Producer surplus
EXERCISES
⇒ improper Integral
𝑎𝑎 +∞ +∞
∫−∞ 𝑓𝑓 𝑥𝑥 𝑑𝑑𝑑𝑑; ∫𝑎𝑎 𝑓𝑓 𝑥𝑥 𝑑𝑑𝑑𝑑; ∫−∞ 𝑓𝑓 𝑥𝑥 𝑑𝑑𝑑𝑑
IMPROPER INTEGRAL
I. DEFINITIONS: +∞ b
Definition 3.1: ∫
a
f ( x)dx = lim ∫ f ( x)dx
b→+∞
a
∫
−∞
f ( x)dx = lim
a →−∞ ∫ f ( x)dx
a
∞ c ∞
∫=
f ( x)dx ∫
−∞ −∞
f ( x)dx + ∫ f ( x)dx,
c
where c can be any real number.
+∞
In order ∫−∞ 𝑓𝑓 𝑥𝑥 𝑑𝑑𝑑𝑑 to converge, both integrals on
the right in the second part of the definition must
converge.
Applications of Improper Integrals (Yourself study
P495).
II. Examples
4.1.1 Some
Phân basic concepts
tích nội of multivariate
dung khoa học kiến
2 thTthtPhân tích nội dung khoa học
functions
2
4.1.2 Partial derivativesí 10
4.1.3
2 Hessian matrix/ concavity
Thiết kế và sử dụng E-book chương:“Động lực học chất điểm”-Vật lí 10
2
4.1.4 Total differentials
4.1.1 SOME BASIC CONCEPTS OF
MULTIVARIATE FUNCTIONS
Definition 4.1: A function of two variables is a rule
assigns to each input ordered pair, (𝑥𝑥, 𝑦𝑦), exactly
one output number, 𝑓𝑓(𝑥𝑥, 𝑦𝑦).
Example: Let a profit function 𝑃𝑃(𝑥𝑥, 𝑦𝑦) = 4𝑥𝑥 + 6𝑦𝑦.
Find 𝑃𝑃(25,10).
Solution: 𝑃𝑃(25,10) is defined to be the value of the
function found by substituting 25 for 𝑥𝑥 and 10 for 𝑦𝑦:
𝑃𝑃(25,10) = 4 𝑥𝑥 25 + 6 𝑥𝑥 10 = 160.
This result means that by selling 25 units of the
first product and 10 of the second, the two-
product firm will make a profit of $160.
FUNCTION OF SEVERAL VARIABLES
Example:
𝑦𝑦 = 𝑓𝑓(𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜, 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙, 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒, . . )
𝑌𝑌 = 𝐴𝐴𝐾𝐾 𝛼𝛼 𝐿𝐿1−𝛼𝛼
𝑈𝑈 = 𝑈𝑈( 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓, 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐, 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙, . . )
Function of several variables (or multivariable
function):
=> 𝑦𝑦 = 𝑓𝑓(𝑥𝑥1, . . , 𝑥𝑥𝑥𝑥) is a function of variables.
𝑥𝑥1, . . , 𝑥𝑥𝑛𝑛: independent variables/ arguments
𝑦𝑦: dependent variable
4.1.2 PARTIAL DERIVATIVES
Finding partial derivatives:
Consider the function f is given by
2 3 2
z= f ( x, y )= x y + xy + 4 y + 1.
Suppose for the moment that we fix y at 3. Then
2 3 2 2
=z f ( x,3)
= x (3) + x ⋅ 3 + 4(3) +=
1 27 x + 3 x + 37.
Note that, now we have a function of only one
variable. Taking the first derivative with respect
to 𝑥𝑥, we have 54𝑥𝑥 + 3.
In general, without replacing 𝑦𝑦 with a specific
number, we can consider 𝑦𝑦 is fixed.
4.1.2 PARTIAL DERIVATIVES
Then 𝑓𝑓 becomes a function of 𝑥𝑥 alone, and we
can calculate its derivative with respect to 𝑥𝑥.
This derivative is called the partial derivative of 𝑓𝑓
with respect to 𝑥𝑥 . Notation for this partial
derivative is:
𝜕𝜕𝑧𝑧 𝜕𝜕𝑓𝑓
𝑧𝑧𝑥𝑥′ or or
𝜕𝜕𝜕𝜕 𝜕𝜕𝜕𝜕
When we fix 𝑦𝑦 and treat it as a constant. The
expressions 𝑦𝑦 3 , 𝑦𝑦 and 𝑦𝑦 2 are then also treated
𝜕𝜕𝜕𝜕 𝜕𝜕𝑧𝑧
as constants. We have: 𝑧𝑧𝑥𝑥 = = = 2𝑥𝑥𝑦𝑦 3 + 𝑦𝑦
′
𝜕𝜕𝜕𝜕 𝜕𝜕𝜕𝜕
4.1.2 PARTIAL DERIVATIVES
𝜕𝜕𝑓𝑓 𝜕𝜕𝑧𝑧
Similarly, we find 𝑧𝑧𝑦𝑦′ or or by fixing 𝑥𝑥 (treating
𝜕𝜕𝑦𝑦 𝜕𝜕𝑦𝑦
𝑥𝑥 as a constant) and calculating the derivative with
respect to 𝑦𝑦.
We obtain: ∂f ∂z
'
z =
y = = 3x 2 y 2 + x + 8 y
∂y ∂y
4.1.2 PARTIAL DERIVATIVES
( 310,000 −0.25
6250.25 ) ⋅ ( 20 ⋅10 ⋅ 0.1−1 ) + (10,0000.75625−0.75 ) ⋅ (12 ⋅10 ) =
3,960.
4.1.3. HIGHER-ORDER PARTIAL
DERIVATIVES
Remark: Consider the function 𝑧𝑧 = 𝑓𝑓(𝑥𝑥, 𝑦𝑦), as you
𝜕𝜕𝜕𝜕 𝜕𝜕𝑓𝑓
known and are functions of two variables.
𝜕𝜕𝜕𝜕 𝜕𝜕𝑦𝑦
𝜕𝜕𝜕𝜕
We continue find the first partial derivatives of
𝜕𝜕𝜕𝜕
𝜕𝜕𝜕𝜕
and with respect to 𝑥𝑥 and 𝑦𝑦 . Then will be
𝜕𝜕𝜕𝜕
second-order partial derivatives of the original
function 𝑧𝑧 = 𝑓𝑓(𝑥𝑥, 𝑦𝑦). Its notations are as follows:
∂2 f ∂2 f ∂2 f ∂2 f
2
, , and
∂x ∂x∂y ∂y∂x ∂y 2
SECOND-ORDER PARTIAL DERIVATIVES
Definition 4.3: Second-order partial derivatives
∂2 f ∂ ∂f
1)
= 2
= f xx'' , Take the partial with respect to x,
∂x ∂x ∂x
and then with respect to x again.
∂2 f ∂ ∂f
2)
= = f xy'' Take the partial with respect to x,
∂y∂x ∂y ∂x
and then with respect to y.
∂2 f ∂ ∂f
3)
= = f yx'' Take the partial with respect to y,
∂x∂y ∂x ∂y
and then with respect to x.
∂2 f ∂ ∂f
4)
= 2
= f yy'' Take the partial with respect to y,
∂y ∂y ∂y
and then with respect to y again.
4.1.4 HESSIAN MATRIX AND CONCATIVITY
f (x, y)
∂ 2
∂ 2f (x, y)
∂x∂x ∂y∂x
∂ 2f (x, y) ∂ f (x, y)
2
∂x∂y ∂y∂y
Theorem 4.2:
A function 𝑓𝑓(𝑥𝑥, 𝑦𝑦) is concave down in (𝑥𝑥, 𝑦𝑦) if its
Hessian matrix is negative definite
A function 𝑓𝑓(𝑥𝑥, 𝑦𝑦) is concave up in (𝑥𝑥, 𝑦𝑦) if its
Hessian matrix is positive definite.
4.1.5 TOTAL DIFFERENTIAL
Assume that the function 𝑦𝑦 = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 , … , 𝑥𝑥𝑛𝑛 ) has
partial derivatives and all its partial derivatives are
continuous. Then
Definition 3.4: The first-order total differential for the
function 𝑦𝑦 = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 , … , 𝑥𝑥𝑛𝑛 ) is defined by
dy = f x'1 ⋅ dx1 + f x'2 ⋅ dx2 + ... + f x'n ⋅ dxn .
Example: Let a production function
= y f= ( x1 , x2 , x3 ) Ax1α x2β x3γ , α , β , γ > 0
Total differential of the production function is given by
A ⋅ α ⋅ x1α −1 x2β x3γ ⋅ dx1 + A ⋅ β ⋅ x1α x2β −1 x3γ ⋅ dx2 + A ⋅ γ ⋅ x1α x2β x3γ −1 ⋅ dx3 .
dy =
TOTAL DIFFERENTIAL CONTINUE
Definition 4.5: The second-order total differential for
function 𝑦𝑦 = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 ) is
𝑑𝑑 2 𝑦𝑦 = 𝑓𝑓𝑥𝑥′′1 𝑥𝑥1 ⋅ 𝑑𝑑𝑥𝑥12 + 2𝑓𝑓𝑥𝑥′′1 𝑥𝑥2 ⋅ 𝑑𝑑𝑥𝑥1 𝑑𝑑𝑥𝑥2 + 𝑓𝑓𝑥𝑥′′2 𝑥𝑥2 ⋅ 𝑑𝑑𝑥𝑥22
Theorem 4.3: If the function y = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 ) defined on
ℝ2 is twice continuously differentiable and 𝑑𝑑 2 𝑦𝑦 > 0
whenever at least one of 𝑑𝑑𝑥𝑥1 or 𝑑𝑑𝑥𝑥2 is nonzero, then
y = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 ) is strictly convex function.
Theorem 4.4: If the function y = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 ) defined on is
twice continuously differentiable and 𝑑𝑑 2 𝑦𝑦 > 0 whenever
at least one of 𝑑𝑑𝑥𝑥1 or 𝑑𝑑𝑥𝑥2 is nonzero, then y = 𝑓𝑓(𝑥𝑥1 , 𝑥𝑥2 )
is strictly concave function.
Basic Terminologies
Relative maximum
Relative minimum
Critical points
Saddle points
LESSON 4.3 CONSTRAINED OPTIMIZATION
PROBLEMS
We begin by discussing some important economics
examples of constrained optimization problems.
Example 1: (Utility Maximization Problem)
The consumer wants to 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑈𝑈 𝑥𝑥1 , 𝑥𝑥2 , … , 𝑥𝑥𝑛𝑛
𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑡𝑡𝑡𝑡 𝑝𝑝1 𝑥𝑥1 + 𝑝𝑝2 𝑥𝑥2 + ⋯ + p𝑛𝑛 𝑥𝑥𝑛𝑛 ≤ 𝐼𝐼,
𝑥𝑥1 ≥ 0 , 𝑥𝑥2 ≥ 0, … , 𝑥𝑥𝑛𝑛 ≥ 0.
𝑥𝑥𝑖𝑖 represents the amount of commodity 𝑖𝑖.
𝑈𝑈(𝑥𝑥1 , 𝑥𝑥2 , … , 𝑥𝑥𝑛𝑛 ): measures the individual’s level of
utility or satisfaction.
𝑝𝑝1 , 𝑝𝑝2 , … , 𝑝𝑝𝑛𝑛 denote the prices of commodities and I
denote the individual’s income.
LESSON 4.3 CONSTRAINED OPTIMIZATION PROBLEMS
Example 2: (Profit Maximization of a Competitive Firm)
Suppose that a firm in a competitive industry uses n inputs to
manufacture its product.
Let y denote the amount of its output,
x1 , x2 ,..., xn denote the amount of its input
y = f ( x1 , x2 ,..., xn ) denote the firm's production function
p : the unit price of output
w i : denote the cost of input i
The firm’s goals is to choose (𝑥𝑥1 , 𝑥𝑥2 , … , 𝑥𝑥𝑛𝑛 ) to maximize its profit:
n
) pf ( x1 , x2 ,..., xn ) − ∑ w i xi
Π ( x1 , x2 ,..., xn=
i =1
LESSON 4.3 CONSTRAINED OPTIMIZATION PROBLEMS
g1 ( x) ≤ b1 ,..., g k ( x) ≤ bk
x1 ≥ 0,..., xn ≥ 0 where x =
( x1 , x2 ,..., xn ).
LESSON 4.3 CONSTRAINED OPTIMIZATION PROBLEMS
Now we discuss the simplest constrained maximization
problem, that of maximizing a function 𝑧𝑧 = 𝑓𝑓(𝑥𝑥, 𝑦𝑦) of two
variables subject to a single equality constraint 𝑔𝑔 𝑥𝑥, 𝑦𝑦 = 𝑏𝑏.
The Method of Lagrange Multipliers
To find a maximum or minimum values of a function 𝑧𝑧 = 𝑓𝑓(𝑥𝑥, 𝑦𝑦)
subject to the constraint 𝑔𝑔 𝑥𝑥, 𝑦𝑦 = 𝑏𝑏 (∗) .
1. Form a new function (Lagrange function)
𝐿𝐿 = 𝑓𝑓 𝑥𝑥, 𝑦𝑦 + 𝜆𝜆[𝑏𝑏 − 𝑔𝑔(𝑥𝑥, 𝑦𝑦)],
the variable 𝜆𝜆 is called a Lagrange multiplier.
2. The necessary condition:
+ Find the first partial derivatives
𝐿𝐿′𝑥𝑥 = 𝑓𝑓𝑥𝑥′ − 𝜆𝜆𝑔𝑔𝑥𝑥′ ; 𝐿𝐿′𝑥𝑥 = 𝑓𝑓𝑦𝑦′ − 𝜆𝜆𝑔𝑔𝑦𝑦′ ; 𝐿𝐿′𝜆𝜆 = 𝑏𝑏 − 𝑔𝑔(𝑥𝑥, 𝑦𝑦);
LESSON 4.3 CONSTRAINED OPTIMIZATION PROBLEMS
L''λλ ==
0; L''λ x L''xλ =
− g x' ; L''λ y =
L''yλ =
− g 'y ; L''xx ; L''xy ; L''yx ; L''yy ;
LESSON 4.3 CONSTRAINED OPTIMIZATION PROBLEMS
+ Form Hessian matrix
0 − g x' − g 'y
H = − g x' L''xx L''xy
− g 'y L''yx L''yy
Constrained optimization
Constraint
Lagrange Multiplier
Lagrange Function
Constrained optimization problems