Quantitative Techniques – Calculus 2020

Calculus
Optimization Technique
Management is by and large a science of choice. Any managerial decision will involve a number
of alternatives, one or more of which is likely to be more desirable than others. The essence of
optimization is to choose the best alternative(s) on the basis of a specified criterion. The common
criterion of choice among alternatives is maximization and minimization processes which are
categorized as optimization meaning search of the best.
Calculus is a branch of mathematics that includes differentiation and integration which are
useful tools in determining the best alternative on the basis of optimization criterion. In business,
calculus can be used to determine the quantities that would give the highest (maximum) returns
or be produced at the lowest (minimum) expenditure.

Differentiation or Differential Calculus

The process of differentiation establishes the slope of a function at a particular point. This can be
said to be establishing the rate of change of the dependent variable with respect to a small
change in the value of the independent variable. The derivative of a function measures its exact
dy
rate of change at a point. The derivative of y with respect to x is denoted as which is read as
dx

the derivative of `y with respect to x` or `dee y by dee x`.

Differentiation can be used to find the maximum or minimum points of business functions e.g.
cost, revenue and profit functions. That is, it can be used to determine the level of production that
gives maximum profit or the level that can be produced at minimum cost. Since it is used to
measure the `rate of change`, it is normally applied to cost and revenue functions to obtain
marginal cost or revenue.

Rules for finding Derivatives

(1) Power Rule/ basic rule

dy
 Given a function y = x n then = nx n-1 where n is any number.
dx

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Examples
dy
1) y = x 5 then = 5x 4
dx

dy 1 dy 1 -34
2) y = x -3 then = -3x -4 , y = x 4 then = x
dx dx 4

3) Note that any number to power zero is 1 i.e. x0  1 and x1  x so that when
dy
y = x then =1x1-1 =1x 0 =1
dx

dy
4) y=1 is the same as y=x 0 thus =0x 0-1 =0 i.e. the derivative of a constant is
dx

dy dy
zero or if y=c then =0 e.g. y =12 then =0
dx dx

dy dy 2
5) If y = kx n then = knx n-1 e.g. y = 6x 3 then = 6.3x 2 = 18x
dx dx

(2) Sum Rule

dy 1 dy
1) y = x m +x n then = mx m-1 + nx n-1 e.g. y= x 6 + 3x 5 then = 2x 5 +15x 4
dx 3 dx

dy dy
2) y = x n + c then = nx n-1 e.g. y = 6x 3 +10 then =18x 2
dx dx

dy
3) y=3x 3 +4x 2 -5x-10 then = 9x 2 +8x-5
dx
(3) Function is a product
Suppose that U and V are functions of x, so that U = g (x) and V = h(x) and that y = UV;
Then, d (UV) / d x = UdV/ dx + V dU/ dx

Example: Find derivative of y = (5x +7) (3x +5)

Solution
Let assume that U= (5x+7) and V = (3x2 +5)
Then dU/dx = 5 and dV/dx = 6x
Thus, dy/dx = (5x+7)6x + (3x2+5) 5
= 30x2 + 42x + 15x2 +25

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= 45x2 + 42x + 25

The Second Derivative

d2 y
The second derivative of any function y is written as and obtained by differentiating dy .
dx 2 dx

(i.e. the derivative of the first derivative)

dy d2 y
For example: if (i) y = 6x 3 +10 then =18x 2 and = 36x
dx dx 2

1 dy d2 y
(ii) y= x 6 + 3x 5 then = 2x 5 +15x 4 and 2
=10x 4 +60x 3
3 dx dx

Tuning points

One important practical use of differentiation is to determine precisely the position of any
turning points of the curve defined by a given function. The turning points i.e. points of local
minima and maxima, are of particular interests in many business applications because they
represent points of minimum cost or maximum points of revenue.
These points are points of zero slope or gradient. Certain functions have two or more turning
points so that it is necessary to test whether the calculated turning points is at a maximum or
minimum value. This is usually done by finding the second derivative. If the second derivative is
negative, the turning point is a maximum and if it is positive then the turning point is a
minimum.

Steps in identifying turning points

dy
Step1: Obtain for the given function
dx

dy
Step 2: Find the x-value for which =0
dx

d2 y
Step 3: Evaluate at each x-value found in Step 2 and use the following results:
dx 2

d2 y
(i) if is positive then we have a minimum
dx 2

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d2 y
(ii) if is negative then we have a maximum
dx 2

Stationary Points

maximum

point of
inflection
There are 3 types of stationary points:
maximum points, minimum points
and points of inflection.

minimum
Maximum Points

Consider what happens to the gradient at a

gradient zero
maximum point. It is positive just before
the maximum point, zero at the maximum
gradient negative
point, then negative just after the maximum gradient positive
point.

dy
The value of is decreasing so the rate of
dx
dy
change of with respect to x is negative
dx
d2 y
i.e. 2 is negative.
dx

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Minimum Points

Just before a minimum point the gradient is

negative, at the minimum the gradient is
zero and just after the minimum point it is gradient negative gradient positive
positive.

dy
The value of is increasing so the rate of gradient zero
dx
dy
change of with respect to x is positive
dx
d2 y
i.e. is positive.
dx 2

Points of Inflection gradient positive

dy d2 y
At some points = 0 and 2 = 0.
dx dx
gradient positive
gradient zero
Two such points are shown in the sketches.
They are called points of inflection.
gradient negative gradient zero
2
d y
Note that is also zero at some
dx 2 gradient negative
maximum and minimum points.
To find the type of stationary point,
consider the gradient at each side of it.

Example
Consider a function y=x 2 -8x+60 .

dy dy d2 y
(i) =2x-8 (ii)  0  2x  8  0  x  4 (a turning point) (iii) =2 which is positive
dx dx dx 2

hence x=4 defines a minimum.

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Exercise
Find the nature of the turning points on the curve represented by the following functions
(i) y = -4x 2 +24x+16 (ii) y = x3 -27x+35 (iii) y = x3 -7.5x 2 +18x+6

Economical Application of Calculus/ Business Functions

These involve expressing business processes such as Revenue, Cost and Profit in terms of the
quantities produced and sold.

Basic Definitions:
Let ‘x’ or ‘q’ be the number of units or items produced or sold ‘p’ be the price per item or
demand. If p = a + bx then this is called demand function.

R be the total revenue from selling x units ie Total Revenue is the product of the number of
items and the price per unit ie R = quantity x demand. If p = a+bx then
R=x.p = x(a+bx) which is called Revenue function.
C be the total cost of producing x units. The Cost Function involves:
a) Fixed Costs: costs that need to be borne before production can begin and thus independent
of the number of items to be produced.
b) Variable Costs: costs associated with the supply of the raw materials and overheads for
manufacturing each product and hence dependent on number of items produced.
c) Special Costs: optional costs relating to storage, maintenance or deterioration and hence
dependent on number of items produced.
The general form of a cost function is therefore
C  a  bx  cx2

where x is the quantity demanded

a is the fixed cost
b is the variable cost per item
c is the special cost factor
C
is the average cost per unit
x

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π be the profit from selling x units, then π = R – C

At break-even point R=C and hence profit is zero.

Example
1. A company produces x items at a fixed cost of shs 24 and variable cost of shs 4 per unit. If the
items are sold at shs 8 per unit, find the
(i) Revenue function
(ii) Cost function
(iii) Break even quantity
2. A jua kali entrepreneur sells charcoal jikos at Kshs. 100 per jiko. It costs khs. 60 to make one
jiko and the fixed cost is kshs. 5000. Determine the break even quantity and hence the break
even cost.

Integration
Integration can be regarded as the reverse of differentiation. Integration is the procedure for
finding the area under the curve of a function. Integration can be used to identify specific
revenue and cost functions given their marginal functions.

Notation and Rule for integration (Indefinite Integral)

The integral of a function x n is given by
x n+1
 x n dx =
n+1
+ c where c is the constant of integration.

x 
m x m+1 x n+1
Also + x n dx = + +c
m+1 n+1

 k dx  kx  c
Examples
x 41 x5 5 x3
1)  x4 dx  c c 2)  5 x 2 dx  c
4 1 5 3

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 x  x6 x 4
3) 5
 x3 dx   c 4)  5 dx  5x  c
6 4

 18x 
5
5) Evaluate +16 x 4 -24x3 +12x 2 -x+3 dx

Definite integrals
This is when we require numerical results between two activity levels say, a and b, and is
denoted by
b


a
y dx

Also defined as the area under the curve between the point a and the point b.

EXAMPLES
2
 x 3   23 03  8
2

0

1. x 2 dx        
 3  0  3 3  3
3
 6x 3 2x 2   6(33 ) 2(32 )   6(13 ) 2(12 ) 
3


2. (6x  2x) dx            64
2

 3 2  3 2   3 2 
1 1 

3. You are given the following marginal revenue function

MR  a  a1q
Find the corresponding total revenue function

Solution
Total revenue   MR.dq    a  a1q dq

 aq  12 a1q 2  c

4. A firm has the following marginal cost function

MC  a  a1q  a2q 2

Find its total cost function.

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Solution
The total cost C is given by
C = ʃMC.dq
= ʃ(a + a1q + a2q2).dq
 aq  q2  q3  c
a1 a2
2 3

Note: Exams focus: Note the difference between marginal function and total function. You
differentiate total function to attain marginal function, this is common in exams,
total profit = total revenue – total cost.

5. Your company manufacturers large scale units. It has been shown that the marginal (or variable)
cost, which is the gradient of the total cost curve, is (92 – 2x) Shs. thousands, where x is the
number of units of output per annum. The fixed costs are Shs. 800,000 per annum. It has also
been shown that the marginal revenue which is the gradient of the total revenue is (112 – 2x)
Shs. thousands.

Required
i. Establish by integration the equation of the total cost curve
ii. Establish by integration the equation of the total revenue curve
iii. Establish the break even situation for your company
iv. Determine the number of units of output that would
a) Maximize the total revenue and
b) Maximize the total costs, together with the maximum total revenue and total costs
Solution
i. First find the indefinite integral limit points of the marginal cost as the first step to
obtaining the total cost curve
Thus ʃ(92 – 2x) dx = 92x – x2 + c
Where c is constant
Since the total costs are the sum of variable costs and fixed costs, the constant term in the integral
represents the fixed costs, thus if Tc are the total costs then,

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Tc = 92x – x2 + 800
or Tc = 800 + 92x - x2
ii. As in the above case, the first step in determining the total revenue is to form the
indefinite integral of the marginal revenue
Thus ʃ(112 - 2x) dx = 112x – x2 + c
Where c is a constant
The total revenue is zero if no items are sold, thus the constant is zero and if Tr represents the total
revenue, then
Tr = 112x – x2
iii. At break even the total revenue is equal to the total costs
Thus 112x – x2 = 800 + 92x - x2
20x = 800
x = 40 units per annum
iv.
a) Tr = 112x – x2
d Tr 
 112 x  2 x
dx
d 2 Tr 
 2
dx 2
at the maximum point
d 2 Tr 
0 that is 112  2 x  0
dx 2
x = 56 units per annum
d 2 Tr 
Since  2 this confirms the maximum
dx 2

The maximum total revenue is Shs. (112 x 56 – 56 x 56) x 1000

= Shs. 3,136,000

ii. Tc = 800 + 92 x – x2

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d Tc 
 92  2 x
dx
d 2 Tc 
 2 x
dx 2
At this maximum point
d Tc 
0
dx
92 – 2x = 0
92 = 2x
x = 46 units per annum
since
d 2 Tc 
 2 x this confirms the maximum
dx 2
the maximum costs are Shs. (800 + 92 x 46 - 46 x 46) x 1000
= Shs. 2,916,000

EXERCISE:
5
1. Evaluate  (10x 3  4x-1) dx
2

2. A cost function is: Ksh.(c) = Q2 – 30Q + 200

Where Q = quantity of units produced
Find the point of minimum cost.
3. The weekly revenue Ksh.R of a small company is given by:
R = 14 + 81x – x3 where x is the number of units produced
12
Required:
a) Determine the number of units that maximize the revenue.
b) Determine the maximum revenue.
c) Determine the price per unit that will maximize the revenue

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4. A furniture firm has two operating departments; Production and sales. The firms’s
operating costs are split between these two departments with the resultant period of fixed
costs of Shs.20,000 and Shs.6,000 respectively. The production department has a basic
variable cost per unit of Shs.6 plus additional variable cost per unit of Shs.0.0002 which
relates to all the manufactured items during the period. The sales department has a variable
cost per unit of Shs.2. The sales department receives the finished goods from the
production department and pay the basic variable cost per unit plus 80% of the same.

NB: Demand Q is given by the following function:

Q = 40,000 – 2,000P, where P is the selling price of the sales department.

Required:
a) Calculate the quantity that maximizes the profits of the production department.
b) Calculate the selling price that maximizes the profits of the sales department.
c) Determine the firm’s profit as a result of adopting the quantity and selling prices
in i and ii.
d) Determine the quantity and selling price that maximize the ship’s profit. What is the amount
of this profit?

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