CH 9

PART 4 OPTIMIZATION PROBLEMS 16 00
5h30
SPECIAL
CHAPTER G OPTIMIZATION A
VARIETY OF EQUILIBRIUM ANALYSIS
Wehave made the distinction between nongoal and goal equilibrium when we first discuss theidea
of equilibrium in Ch 3 In the former case we've only studied how he equilibrium position changes
is we vary the parameters of the model We are not essentially interested why these changes occur
and rather what the impacts on the equilibrium are
Inthis part of his boon we now want to consider goal eavilibrium in whish theeduilibrium state
is defined as the optimum position for agiven economic unit in which they are striving to obtain
andrewstudynotes.com
said equilibrium We'll apply the classical techniques of obtaining said position using differential calculus
More modern developmentknown as mathematical programming will be discussed in Ch 13
Gl Optimum Values and Extreme Values

Economitally we might want to maximise or minimise something whim fall into the general
heading a optimisation However from a meth Pou minimisation or maximisation dontreally have the
connotation a optimality mus themath term for max and min are extremum meaning extreme value
To tackle an optimization nroblem we first need to create an objective function in which the DVrepresents
the object a maximin and which he let a Ius indicates the objects that we can tweak with
the goal of optimisation These Ivs will be referred to as the choice variables or decision orpoling
The essence a optimisation problem is to find the set of values a the choice variables that will
lead us to me desired extremum or the objective unction For example a business may want to
maximise Proeit Tv i e revenue R cost C andsince an are a unction or Q
Tucal RCQI C QI
This constitutes the relevant objective unction with tu es me object a maximization and a
as he choice variableThe issue is then finding Q that maximise Tu
To make me model into a more general corm for firmer discussion consider
7 51 7
and we want a procedure of finding a level of that will optimise 7 We'll also assume that f is
continuously differentiable
9.2 Relative Maximum and Minimum First Derivative Test

Sinle Y fix is in a general form theres no restrition on whether its linear nonlinear monotonic
contains how decreasing and increasing parts We've selected 3 cases that are compatible with the many
Possible types of functions in Sec g 1 these are depicted in fig g 1 which will give a valuableinsight
to the optimization Problem of Y fax
Relative versus Absolute Extremum
If he function is a constant as in Fig g la all values of x will result in the same value
for Y so he optimum Point could be anywhere theres no point in tweaking X to optimise 7
In fig g lb the function is swishy increasing and heres no finite max ie me domain is the setae
all positive numbers Although we can say that theintercept is the global min or the anition
Eand F the otherhand are

on fig g Is on examples of relative I told extremum in the sensemat its
an extremum around that neighborhood onlyThey might betheglobal extrema but in not guaranteed A
hnition may have several relative extrema
In most economic problems we shall mainly is not only deal with extreme values rather than end
Point valves where the domain is restritted to nonnegative values as otherwise we're not really
interested in negative values
Most of his hnitions will be a variation a fig G Ic to our discussion will be primarily in finding
relative extrema such as E and F We'll still need to find a way to eind the global maxima as the
onlyway to find it is to know all the relative maxima or at an end point Unlessindicated otherwise
the extreme values considered willbe relative or local ones
First Derivative Test

For terminology we'll refer to the derivative or a unction alternatively as in first derivative
Given 7 51 1 the first derivative f ex plays a major rule in finding its extreme values This is because
if a reactive extremum or the function occurs at x exo then
I F'exo doesnt exist

W f exo O
The first is illustrated in fig 2 gcc where A and B depict relative extrema or y but no derivative
is defined at these points Butwe'llonly discuss where 7 51 7 is continuous and Possess a continuous
derivative so we wont talk about sharp points
For smooth functions relative extremes oiler
only when he first derivative has a zero

value illustrated bypoints C and D Thus we
cansay that flex7 0 is a necessary
condition for a relative extremum
It important to note not in not suecisient to establish a relative extremum we'll present the case
where a ler stone isnt associated with an extra mum will bepresented 1117122
11322
17 34 09 17
first derivative test for relative extremum

If the first derivative co c anition fix at xoxo is f excl 0 then the value co me an iron at
Xo Jaxon will be
a A relative maximum ie f ext changes its sign from positive to negative from the immediate leet
or the point Xo to its immediate right

b A relative minimum ie like a changes from negative to positive
C Neither a relative minimaxie he sign doesnt change
We can call to a critical value or x ie f exo o and refer to fixol as a stationary valve
or y the anition f The point with coordinates f excl and Xo can be called a stationary point
as this occurs when the slope is zero a standstill position
Note still hot we havent discussed a third possibility so we cant regard f ex o as a surricient
condition for relative extremom But now we can see that is the necessary f ex o is satiseied
then the thange a sign Provisio can serve as a luecisient condition for a relative minimax
Lets discuss the third Possibility In Fig g 3 we have 5 sit o but thesign doesnt change from
one side or x i to the other mus according to the first derivative test the point is neither a
minimax Whitt is ionairmed by the graph co me anction Rather its known as the inflection Point
The characteristin feature a he inflection

Point is that the derivative reaches an
extreme value There are two types a
inflection point as it can be a min max
In Tig g sa we've plotted me derivative

f ex and we see that in zero when x j
but its positive on both sides or J which
manes it a min point a f ext
The omer type a ineleition Point is

Portrayed in trig g 3b where the slope
of his unction gext increases until k and decrease afterwards Conseauently the derivative g'ext will
look like fig G 3b where point k gives a max valve a g ex
To sum up a relative extremum must be a stationary value but a stationary value may be
a relative extremum ingestion PointTo find the relative extremum first find tix 7 0 and use
the first derivative test to determine whether each of the stationary valve is a relative minimax
or neither
Éigietrective
extrema a
7 fix X 127 36 78
First find me first derivative
7
f ex 3 24 736
Tofind the critical values we set it to zero toget me Quadratic equation
3 1 24 36 0
By restoring or using the Quadratic formula we can get

XY G F 161 0 and FC67 8
X 2 f 77 0 and t 14 40
and f 77 0 are thecritical values we desire
Its easy to verify that in the neighborhood or x 6 we have six co for Xs G and
S txt o for x 6 his value a 5 61 8 is a min point Similarly for fan is a mat point
This function is illustrated in Fig G 4 which can be used to verify the results
Éingmmetreative
extremum a
AC Seal Q2 50 8
Setting f 197 24 5 0 we have a single root
2.5 which is the 9
only critical valve
To apply the first derivative test ten set 9 2 4 and 9 2.6 Setting 22.47 0.1 and
f C 67 0.1 we ten conclude her f 7.57 1.75 represent a relative minimum
Thegraph or me function is a U shaped curve so he relative min would be the

usually
Eoluteas well
9.3 Second and Higher Derivatives
We'll introduce the idea a the second derivative and or higher ordersThese will help us to develop
alternative triteria for locating the relative extreme co a function
Derivative co a Derivative
Sinie f'ext is a unction a x it tooshould be differentiable with respect to x provided in continuous and
smooth he result of his differentiation is known as the second derivative co he anition f is denoted
f CX where he double prime indicates hat in differentiated twine while ext indicates
that he second derivative is again a function a x
or
8 this is based on the notation GT
k e txt exists for all x valves in the domain men fix is said to be twice differentiable If its
continuous then fat is also twice continuously differentiable We can also use the same notation as
f ec or f e c to indicate that f is continuously diceerentiable
FEC or SEC
The secondderivative ian men be direerentiated again to become a thirdderivative which itself can
be differentiated and so on as long as the differentiability condition can be met These are symbolised as
5 x f ex f CX
dYdxa d ldxn
or d'Yldys
It can also be written as dinY where It acts as an operator Almost all me specific unctions
We'll work have continuous derivatives up desire When a general unction is used
to any order we
evil as text we always assume it has derivatives up to theorder we need
Édh first mrough rieth derivatives or

1
Y fix 4x4 X 717 3 1
f n 56 3 Tx't34 3
f x 1684 6 34
f x 336 6
f x 336
f x 0
We can see hat the successive derivative function emerges as lower order polynomials until a point where
i.e F
inductive d c constant xp o
ÉinghFirst
4 derivatives a me rational function
Y Sext x 11
We can use the chain rule or alter rewriting it as Y X Cl txt using me product wie
gext Hx
2 City's
g x
g x Getty
t
gkx 24 111 7
Note hat all successive derivations are all functions a x so we can always plug c value co x
into any derivatives we want
Interpretation a the Second Derivative

The derivative flex measures the rate of change or the original function f while f measures the
rate of change of the first derivative t Given an infinitesimal increase in me to x at a point x xo
5 40170 means that he value or me anition tends to
increase
f exo co detrease
whereas
5 exo 0 means that he slope a the curve tends to in trease

de trease
f Cxol CO
Thus a positive t'm coupled with a positive f ext at x xo implies met her slope is positive and
increasing i e he value or the auction is increasing or an increasing rate
A Positive 5 ex win a negative flick indicates that the slope is positive but decreasing the value a
huanction is increasing at a decreasing rate
Thecase or a negative flexi can be interpreted analogously but a caution is in order when
f exo co and f exo 70 the slope is negative and increasing meaning that theslope changes
from C lol to c gl instead of c lo to c it The negative slope must be less steep as x increases
ashy when thx c o and 5 ext co the slope must be negative and decreasing referring to
the negative slope mats steeper as x increases
We can illustrate all these graphically

gig g sa illustrates he anition win 5 Cx co
throughout Since the slope must steadily decrease
as x increases on the graph we will when

we move from left to right Pass through A
with a positive store B withhero and Cwik
negative It may happen her f x co
may
be characterised with F'Cx 70 everywhere
and mus plots only as the rising part of an
inverse U shaped curve or with f'ex co everywhere he declining portion of that curve
The opposite case of f ext throughout is illustrated in Fig g 5 b
From fig g 5 its evident her the second derivative f txt relates to my curvature co me graph it
determines how he curve tends to bend itself We can refer to Fig 5 sa as strictly concave while
Fig G sb as strictly convex Similarly a function can be a smithy convex concave unction as well
The Precise geometric characterisation of a swishy concave function is as follows If we pith any
pair of Points M and N on the curve and join them by a straight line he line segment M and N
must lie entirely below the curve except for M and N For convex anation replace below win above
If MN is allowed to lie either below or along he curve men in a concave unction romer has
swishy con cue similarly with ion vex anction
Note that a swishy con rave convex function can never contain a linear segment anywhere
while nonstrict concave convex function may contain a linear segment
We may now inter mat it f x is negative for all x men in a strictly ion love unction while
its smithy convex it f ex so for all x Although we cant say hat is sext is swishy con cue men
f X is negative for all x Similarly with a strictly convex fax
This is because we have thestationary point f co7 0 but beside from his men c strictly concave
convex auction should adhere to thesingle expected sign
Forother types of functions x may be positive negative In Fig g 3 a and b for example both
text and got undergo a sign change in their second
derivative at their inflection Points J and K
According to fig G Ja 5 Cx Changes from negative to
Positive at X j vice versa with Fig 5 Jb
An Application
The two curves in Fig g 5 exempting the graphs co Quadratic antlions which may be expressed
generally
Y ax t bite
From our disiussion we can now easily determine whether a Quadratic is a concave convex Since
d
dy la mus is he coeer a is positive hen is a convex co shaped while it in negativethen it
has a concave linverted U shape The relative extremum will also be in absolute as a Quadratic only
has a single valley pean
Attitudes toward Rish

We'll consider his application on a betting game Consider you have to pay a fixed sum for the
game he cost you can throw a die and collect 10 is its odd and do it in even Mathematically
by expeited value of Payoee is
EV 0.5 810 t o t x 20 15
The game is deemed a fair game is he lost to play is 15 Because he risk involved risk averse
person wont play while c risk loving people would which can be found with dickering utility anction
People Possess
Assume that someone has a swishy con rave
utility function U Vex depicted in Fig9.69
where x denotes Payoor with U 07 0
U x 0 positive MU or income Payore
and u Cx so diminishing MO for an x
The economic decision involves two courses of action first by not playing he person saves 15 and his
enjoy me utility level US 151 measured by the height of Point A on the curve Second heres
a to to thane of getting 10 M or 70 N The expected utility from Playing is mus
EU O 5 X U 6 10 t 0.5 X UC 707
Which is basilally hu midpoint between line 14N i.e Point B
Since
by definition of the concave function thestraight line MN mush be below me are MN
so point B must be below it So he expected utility from Playing will always be below me
expelted utility a winning
Theconverse is me with a convex risk loving person as in Fig g Gb
9.4 Second Derivative Test
We can add the following criterion for a relative extremum
Second derivative test for reactive extremum
te t ex O then the valve or he anction Ct Xo tool will be

a Areactive max is 5 exo co
b A reactive min it 5 Xo so
This is more convenient man the first derivative test although the drawback is that when f exo o
the result will be inconclusive as the stationary valve can be a relative minimax or even an
inflectional valve
When we encounter 5 ex7 0 we must return to me first derivative test or use another test
that will be developed in Sec g 6 which involves third or higher order derivatives But most
problems in elonomics the second order derivative will Suraie
Éithertarive
extremum a
2
Y F1 7 4 X
The tirst and second derivatives are
f11 8 1 and f x 8
Setting f'sx o we found that the only initial value is x to whith yield the stationary
value fC'lol 1116 Because f ext is positive then the extremum is a minimum Since it Plotted
its theabsolute minimum

CUshare also
Éingitretative
extrema a
7
Y g txt X 3 2
The derivatives are

2 6
g ex 3 2
g ex 6 6
and
Solving g'sx o end using Quadratic magic yoda gada we get x 2 and xz o giving
2 a mi n because guang
g 2 o
2
gco a max because
g lol co
Necessary versus Sureilient Conditions

The zero store t's 7 is a necessary condition for me second derivative test since its based
0
on the first order derivative its also known as the first order condition
Once we find her the Foc is satisfied at x xo me sign a 5 exo is surricient to establish
whether the stationary valve is a minimax this is the second order condition
Its important to repeat some important Points
The Foc is a necessary but not furcilient for relative minimax because a inflectionpoint
The SoC is ruerilient to establish a min max but not necessary because 5 1 7 0
We're not saying that we cant use the Soc to state the necessary conditions for relative extrema
they can but one must keep in mind that a relative extremum can occur when f ex o as well
Conseauently the second order necessary conditions must have weak inequalities for the stationary
value fool to be a relative
mm its necessary man 5 exo o
The preseeding discussion can be summarised in he following table All theeavations and
inequalities are in the nature of conditions to be met
Condition Max Min

First order necessary 567 0 5 Cx7 0
Second order necessary 5 x so 5 5 720
Second order sueeicient f ex co 5 x so
only when the first order necessary has been met

Applicable
Table g 1 Conditions for a Relative Extremum Y 5 x

Conditions for Prosit Maximilation
We'll now introduce an economic example of extreme value problems i e optimization
revenue
total
We'll show how to prove prosit max Mc MR We have R real and É coly
boma which
are anstions or Q From these we have
Toeat RCA Ca 19.17
d
To find the profit Max level we must satisfy me first order necessary condition or da o Len
then differentiate g I win respect to Q
dildo I Tu Cal R'cat C Cal O
ire R Q C Q 19.2
Thus the optimum output at is the one that satisfies R at C 67 or MR MC
However we need to check the SoC as the Foc may lead to a minimax whith we can get as
d tolda
e tu ca R Cal C Q
so ire R Cal E Cia

This last inequality is his second order necessary condition cor maximization
These conditions are illustrated in Fig 9.7 In Fig g la we've
drawn a TC and a TR curve while intersect hire or Qr and
Qu In the open interval Caz a ul R c so Tu is positive
But in o.az and Cau 655 9 fan've This

tact is
reflected in Fig g 7h The profit curve obtained by plotting me
vertilal distance between the R and C curves is only positive

between Az and 94
Because we're smart and want to find a peak point we

d
set da o With his hough point K and M are valid
so we need the Soc to find which extremum we want
The FOC condition d da o is equivalent to R'cat C ca

In Fig g a boh a and as satisfy his requirement
9.7
The SoC comesinto play when we consider tu sat At point k we can see hat tu Cail co
while at MTV CQ 70 meaning hat he Proeit max point must be k The SoC can be alternatively
stated as R CQ C Cal
From fig gie in obvious that 03 satiscies his since the slope or MR is negative while the stone
co MC is positive at his point Q meanwhile violates his because MC and MR have both negative
slopes andmet MR is smaller than MC at point N implying mat R Tai C Cail instead
Thus Qi violates the SoCnecessary for a max but latiscie he min condition
REQ 12000 29
CQ 93 61.2592 t 1528 5 Q t 2000
Theprosit function is
TUCal 03 59.2542 328.59 2000
We have two critical values 0 3 and 0 36.5
d andrewstudynotes.com5
dQ 39 t 118.59 328.5 0 when Q 38
Since he second derivative is
d 70 when a 3
dat fat pig's so when a 36.5
So 9 1 36.5 is he profit max output while at 3 is he profitmin output We can substitute Q 36.5
into the profit function which will yield a Procit or 16.318.44
As an alternative approach we ran equate Mc MC i.e heir intersection
R Q 1.200 UQ
CQ 392 127 59 t11528.5
which should yield the Quadratic earation identical with d da o
Coefficients a a CubicTotal lost hnition

Traditionally a TC anation contains two wiggles that form a tonsave segment decreasing Mcl
and c convex segment inireasing Mc Cubic unctions have his property which why its often
used to represent a TC auction
But theres an issue is we take a yonder at Fig g y A cubic function tan Produce a downward
sloping curve whereas a TC action to economically manes sense

should be upward sloping everywhere larger output highercost
So iz we wish to use a lubis function such as

C C a a G t be t ca t d 19.31
we need to put restrictions so met the C lurve wont ever benddownwards
Anequivalent way of stating his is that the MC function should be upwards throughout and his
tan only be ensured see the absolute min of me MC anction is positive We can obtain
MC Jaa t 2bate
19.41
which as a Quadratic plots as a parabola For the MC curve to stay positive it has to be
a U shared curve If its an inverted U curve then it will extend itself to the second
Quadrant eventually
Thus we need to restri it a o but this isnt sufficient because the min value or me MC
Menin may still occur below thehorizontal axis Therelative extremum of a parabolic is also in
global Thus we need to find Mcmin and impose the necessary parameters restrictions
The min a MC ours when

Mda MC GaQt2b O
The Qt that satisfies the Foc is
so this will always bepositive
21 344
McLaisassuredly
Thisminimises Mc because Ma Positive as a o We must infer the
sign of me toeff b first which can never be positive so we need to impose bro
Now wejust substitute he MC minimizing output Q into g y

Mcmin 39
if t 2b
if c 395
Thus to guarantee that Mcminn is positive we also need to add therestriction be sac which
also implies hot c o because a o and it eco then it would be negative
The parameter d doesnt have anything to do with keeping her Mcpositive but because its he
fixed lost we can appropriately in the Sr at least restrict it to doo
1117122 1217122
18 06 10 03
To summarise 7h07
8h30
a Cid 70 boo bro sac g5
Upward Storing Marginal Revenue Curve

Traditionally me MR curve is downward sloping car firms under imperfect competition But its possible
that it may be partially or wholly upwardsloping
Given AR Fcat fue MR anction can beexpressed by

MR Fca tQfCQl Carom 7.7
Theslope of the MR curve ion mus be given as
dido MR f Cal tf cat Qf Q
If Q t QS CQ
As long as he AR curve is downward sloping the term 25 cat is assuredly negative But he
Qf Cal term ion be either negative postive or zero depending on me sign co me second derivative
or the ARanction
IF he ARcurve is shiny convex in in entirety or along a speciein segment then the positive
Qf TQ term
maydominate me negative 25 ca term thus causing the Mr curve to be wholly
or Partially upward sloping
Example 4
We have
AR f Q 8000 239 t t.la O 01893
This will have a downward slopingPutte as its appropriate car an imperceet competition firm since
MR F QI t Af Q 8000 469 3.392 0.07293
The slope co ha MR is
d
do MR 46 1 6 GQ 0.216 Q
Since the loser co my Quadratic is negative then d da MR must plot as an inverse U shared
curve against Q le a segment of his curve lies above the horizontal axis the slope of the MR
will take Positive values
Setting this to hero and applying theQuadratic formula we have Q 10.76 and a 15.7g This
Q in the open interval d da
means hat for the valves or Qi art the MR curve does lie
above the horizontal axis Thus its indeed positively stored for a between Q1 Q2
Theimplication or a Positively sloped MR iurve is hot here could be multiple intersections with
the MC curve satisfying the SoC Cuerilient for prosit max While all such intersections constitute coal
optima only one is the global that he cirm is serving
95 Maclaurin and Taylor Series

We now will develop a test for relative extreme hat can apply even when the second derivativeis zero
at me stationary point To dothat we need to discuss expansion of a function 7 5 7 into what are
known as a Maclaurin series expansion around thepoint x o 1 and Taylor series any point x xd
In the present Contex to expand a function 7 sax around a point xo meansthat to transform that
unctioninto a polynomial form in whith the colors are expressed in terms or the derivative values
Cx 5 CX eft all evaluated around the point Xo
In the Mallaurin Series his will be at to Mus f'co f Col etc The result of his expansion is a
Power series because being a polynomial it consists a sum a Power unctions
Maclaurin Series co a Polynomial Tuition

Consider an expansion of a Polynomial of the nthdegree
fat do tax tax t as x faux's t tanxh 1g 6
into an equivalent n m degree polynomial where he loetes are expressed in terms of
the derivative valves f co 5 so etc

Since the power series alter expansion will involve the derivatives or the function f ten first rind
these By successive dieverentiation or g o we can get thefollowing derivatives
flax a t Zazx t 3 as x t 4aux t thanx

f x Zaz t 322793 x t 4 3 aux t then Dan x
f x 3cm as f 4231cal aux t then 17 n 2 an xn 3
F x 4137C1 ay t 564763747asx t t ne n n Cn ni Cn 3 an xn 4
f x nCn 1 Cn 27 n 3 3157711 an
Each successive differentiation reduces the number of terms by one until in the nm derivative we're
leet with a constantThese can be evaluated at any valves or x here we'll do 0 which will
eliminate all terms with x We then have
f Col a f o 202 f CO 3Chaz F 110 4 37 12793

f nCol n ch 1 Cn 2 In 37 3 2 17 an g 71
Adopting n
n nah il ch 1 537571 Ct n a position integer
so hat for example
2 2 1 2 31 3 2 1 G with O 1 then we can write g 7 as
t
ti
a S au f
as an
Ego
ar
Substituting these into g 6 and using the fast that fco Go we can now express he
given hnition fat as a new but equivalent same degree polynomial in which the coeers are
expressed in terms of derivatives evaluated at x 0
fax
ft
t 54 x t
41 x t x
t t
fY Xn Maclaurin's formula 9.07
This is called the Maclaurin series or the polynomial function fix
Édmh
Maclaurin series or me anation
fax 274 3 7
19.9
The function has the derivatives
flax 4 Gx so that fico y
f ex G f CO 6
Thus he Maclaurin series is
fax fco tf co x t Yz x
2 tux f 3 2
Taylor Series or a Polynomial function

More generally the polynomial function
g6 can be expanded around any point to We'll explain
this with a specific function
g g and generalise the result later
Forthe purpose of expansion around a specific Point xo we may first interpret any given value
x as a deviation from xo More specificity we can say x Xo tf with this he given function S g
and the derivatives now become
fix 2 4 C Xo tf t 3 Got 87
F'x 41 66 01 8 19.107
5 21 6
Because xo is a fixed term the
only variable is her f Consequently then text is a function of
f say got
GCS 26 4 Got 8 t 3 Go SI CE fax
with derivatives
g'd 4t 6 xo S I feel
g f 6 f in
We already know how to expand g f around zero which according to g d produces the
Maclaurin series
90 t 9 07111 S t
gas 9 co 2 f 19.111
Since we let x Xo tf it 8 0 then x exo hence because gcf I text we can write in the care
a 8 0
geo fool G'Col f exo g co f Xo
Substituting these into g it we find the result to be the result to represent the expansion of fat
around the point xo because now the derivatives are evaluated at x xo
II fist
fax tf s
ages t ex xo ex to 9.127
As we're analysing gg we have
fexol 2 40t3 0 F'exo 4 6 0 5 exo 6
theTaylor polynomial g it becomes
fax 2 4 0 3 8 t 4 6 0 x Xo t 612 x x ol
2 4 3 2
The generalised formula is

f
faxon t
EY ex xo t ex xos
t t
femft ex xo Taylor's Formula 9 13
The only discerenie win the Maclaurin formula is that we've repeated the point of expansion
co o win Xo and replacing twin ex xol What g 13 tells us is that given an n m degree
Polynomial fax if we let x 7 in the terms on the right of 5.13 select an arbitrary Xo then
evaluate and add these terms we'll end up with 84 the value of fat at x
Io
ETIW.mn
as me point a expansion we can rewrite g 6 eavivalenny as

f 1 th
fax 5 3 tf's ox 37 t 2 x 312 t t Yn x 3 n
Expansion or an Arbitrary function

We've shown how an n m degree polynomial function can be expressed in an equivalent n m
degree Polynomial room Its also possible to express any arbitrary unction ofext mob not necessarily
Polynomial in a polynomial form similar to g B Provided that 0 ext has a finite continuous
derivatives up to the desired order at the expansion point to
Aisording to Taylor's theorem given an arbitrary unction dcx7 ie we know the valve or me
hnition at exo and the valves or the derivatives at Xo then his action can be expanded
around the point Xo as follows
xp
doo o t d's ex xo t
9 exo z x xol t t O exolln ex xan
Rn
I PutRn Taylor's formula with remainder 15.14
where Pn represents the bracketed nth degree polynomial and Rn denotes remainder which will be
explained later Rn is what distinguishes
g ly from g 13 which is why g 14 is termed Taylor's formula
with remainder
The form of Pr and the size of Rn will depend on n We can identify n as the order of the
highest derivative in Pn
Rn is here because d cant always exactly transformed into the polynomial shown in
g 13 i e it
can only be approximated The remainder mus serves to supplement the discrepancy between dex
and Pn Thus Pnis the Polynomial approx A dex while Rn isthe error le we have n t
Osx doo t O'exo x xo tri Pit R
Where Pi ionsists of htt L terms and constitutes a linear approximation to tax If we choose
n 2 a second Power term will appear so that
day acxo t O'exo ex xo t

0191 x ol t Re Pat Re
Where R consisting of ntl 3 terms is a Quadratic approximation h Osx and so torn
The fact that we can create polynomial approximations to any arbitrary unction Provided that it has a
finite continuous derivatives is very useful Polynomials are easy to work win and if theycan
practically
serve as good approximations to some difficult functions it will make life easier
Notethat Taylor's formula in g 19 is perfectly general So is dex encompasses an n m degree

polynomial and we expand it into an another nthdegree polynomial we'll just have Rn to But if
the expansion is a a lesser degree we'll still need me Rn term
YÉd me nonpolynomial
0 x Atx
around 9 1 with n We shall need the first 4 derivatives a 01 7
n
2
O'ex City 4 all Cy ly
3 3 44
x z city i 2227
4 318
O x GCit x g i 6227
5 5 315
01411 7 24City 0 d 24 127
Setting xo l in g ly and utilising the obtained derivatives
12 ly ex 17 t lax 11 1 16 ex 113 7 1 32 x 174 t
ex Ry
112 13116 12 2 3 16 3 t 32 4
try
If we set xo o the expansion then would be a Maclaurin series win remainder
IÉÉ me aucductic
x ft ext x
around to l and nil Because d is a second degree polynomial and we're killed with net we're
essentially estimating a Quadratin with a linear so Oct should be seen as an arbitrary action for the
Purpose of theTaylor expression
To do his we only need the first derivative O x ext x and evaluated at Xo I

cxo 091 8 O exo O c17 4
Thus Taylor's formula with remainder andrewstudynotes.com
gives us
d x 4exo t d exo ex xo f R
Of 4 ex 1 Ri 4 tax FR
where he 4 tax term is the linear approximation and R represents the error of approx
In fig gd dext plots as a parabola and in linear approx as a straightline tangent to me a ex

curve at the point 1.87 The tangency at Xi is a direct consequence that we set the expansion Poin
at that Particular valve or x
This suggests that when doxy is approximated by a
polyntitiaiithe latter will
give the exact value or Osx
at only he Point a expansion with Rico
Elsewhere R is strictly nonzero and shows a larger

errors co approx as we try to approximate 01 7 for X
valves farmer and farmeraway from the Point or expansion

Xo
8
Thus when attempting to approximate dex by a polynomial and we're interested to obtain the most
accurate approx or a special value of x say Xo then we ought to choose to as the point of expansion
Fig g 8 is similar with fig 8 I especially as boh concern approximation but heres a diecerence in me
scope In fig 8.1 we attempt to approx Ay by dywiththe help of thetangent line drawn at xo a given
starting valve in X
In Fig g d meanwhile we want to broadly approx theentire curve by a particular straight line ie
to approx the height of the curve at any value of x say xi by the corresponding height of the
straight line at Xs
Note thatin both cases the error of approximation varies with x In fig 8 the error he diererence
between d4 and Ay is smaller as Axgets smaller or as x gets closer to xo In fig g 8 the error
Che vertical discrepancy between the straight line and the curve get smaller as x xo my point
orexponsion
Lagrange Form a the Remainder
We'll commentfurther on Rn According to the Lagrange room or the remainder we can express
Rn as
Rn ex xoin g151
Entity
where P is somenumber between x Che point we want to evaluate 07 and Xo c where we expand 01
is his
This is similar to g ly but here is evaluated at
what
P instead of Xo Because P isnt specified
this formula doesnt really allow us to calculate Rn but it still has great analytical significance
Lets illustrate its meaning graphically although we'll only do it with n o
When n o no derivatives will appear in the polynomial Po so g 14 reduces to

x PotRo 0exo t O Cp Cx Xo
or 047 O Xo OCP x Xo
This is a simpleversion of me mean valve theorem which States that the difference between me
valve or the unction of at Xo and any other value x can be expressed as the product of the
difference ex xo and the derivative of evaluated at P a point somewhere between x and Xo
Consider Fig g g where text is shown as a continuous curve differentiable at all points
Let to be the expansion point and x be any
Point on the horizontal axis
If we try to approx OCx xB by xo xo A it
will involve the error ofex GCXo CB
What the mean valve theorem is saying is that

the error CB Ro can be expressed as
CP ex xol where P is a point between xandXo
First we locate between AB a point D such that the tangent line D is parallel to AB D must
exist since he lure passes from A to B in a continuous and smooth manner
The remainder will be

CB
Ro CB Ac AC Slope or AB AC
slope or tangent at D J AC
slope or he lure at X P o AC
O CP ex Xo
9.15 doesnt really eliminate Rn as a source of discrepancy between Dex and Pn butmerely
identifies it However if we increase n che degree of the polynomial indefinitely we rind
Rn so as n y so mat Pn 7 447 as n o
then he Taylorseries is said to be convergent to dex at the point of expansion and the Taylor
series can be written as a lonvergent infinite series as follows
ax t
991 ex xo t
Ey ex xo t 9.16
172 1317122
We'll discuss his former in Sel 10.2 12 18
1lung
shag
9 6 Nh Derivative Test For Relative Extremum or a function a One Variable
Taylor Expansion and Relative Extremom
Before we begin lets rederine a relative extremum as follows
a relative maximin at xo ie six six is
We
Iff
negative 1Positive valves a x in theimmediate neighborhood co xo both to ib
can illustrate his win Tig g 10 where Xi is the valve to the left or to and x2 is to me
right or xo In Fig g Ioa f exo

exceeds both fix it and taxi
Sr that Saxo fax and 5exo
final are negative Thereverse is
true for min valves for big g to b
10
Assuming fax to have finite continuous derivatives up to the desired order at xoxo text can be
expanded around to as a Taylorseries Based on g ly using the Lagrange corm co the remainder we have
01 2 ex
fax Sexo e f exo ex xo t xo t
t t exo n fat P x Xo
x xo t anti g 17
le me sign or the expression of six Sexo can be determined then we can conclude whether
fixo is an extremum and is so whether its a minimax
To do hi we'll need to investigate the rhs or the expression whim would depend on the value of
n By Properly choosing a valve co n we can always make sure that theresonly one single term
on therhs which would simplify the problem a lot
Some Species Cases
This can be made clearer through some speciein illustrations
Casf f exo O
le t lx is nonzero we can choose n o so heres only htt I term on the rhs meaning that
only the remainder Ro will be here i e we have
fax Fexo F'CP Cx Xo

5,41 ex Xo
where P is some number between Xo and a value of x in the immediate neighborhood co xo

Note that Pmust calordingly be veryvery close to Xo
Now he sign a the expression on the right Because of the containing of the derivative 5 exo will have
the same sign with flap since P is very close to xo Inthe present case f er is a specific nonzero
positive negative number
With the ex Xo part when we go from the leet or to to its right x shirts from a magnitude
xic Xo to a magnitude x2 Xo Conseauently ex xo must hun from negative to positive and
f x Fexo flip ex xo must also change its sign from the left of Xo to its right
However his violates our new definition co c relative extremum accordingly we cant have a
relative extremum at fexo when f exo to
Casf t exo o f Cxol to

In his case choose n t so matremaindrwillbeinmsecond degree Theninitially mere will
be nt1 2 terms on the rhs But one of these will vanish as f exo o so we'll onlyhave to evaluate one
C
fax Sexo F'exo ex Xo t 2 ex Xor
Iz f CP ex Xor
5 Cpl will have the same sign as f exo where lx xo7 will always be positive Thus the expression
sext 5507 will be the same win f exo and according to me earlier definition a relative extremum
A relative max or fat ie f exo co

A relative min or fax ie f cxol 70
Which is the same win the second derivative test from earlier
Casey f exo 5 exo 0 but f exo to

We now encounter where the second derivative test cant handle where f exo o but now with
the Taylor series we canhandle this easily
lets choose there are initially three terms but two will drop out because f exo
n 2 f exo o
so theres only one term

fix Fexo f Xo Cx Xo t 42 F exo x Xo72 t 13 f spy ex xo
165 CP X Xo
Again he sign of f er is identical win f exo But he sign of ex Xo will vary Seesiritally
sinie H Xo will be negative to the left or x so will be ex xo vile versa with the right or xo
Thus theres a change a

sign or text fixol as we pass through to violating the definition or a
relative extremum However we know that xo is a critical value as f's xo o so it must give an
inflection Point even though it doesnt give a relative extremum
CN n
Cash 5 exo t Xo f exo 0 but f xo to
This is a very general case and we can thus derive a general result enm it Note hat the
derivatives are an zero until we arrive at the Nm one
Analogously to me proceeding cares The Taylor series will reduce to

fol Sexo IN f CP X Xo N
Again f Mep takes the samesign as f exo But now the sign of Cx Xo will
very ie N is odd Cases I and 3 hereby violating therelative extremum definition
but will give an inflection Point instead
remain is Nis even and thus will establish a minimax depending on the sign
W f N exo
Ntn Derivative Test
We now may state the following general test

N m Derivative test for relative extremum or a function co one variable
If f exo o and ie me cirst nonzero derivative value at Xo encountered in successive derivation
is that a he Nm derivative Fc exo 0 then the stationary valve fool will be

a A relative max ie N is even and FM exo so
b A relative min ie N is even and t exo o
1 Aninflection point it N is odd
The test could only work in fax is capable of yielding a nonzero derivative value at
the critical valve to There are several nations that wont Satish his but most will thus it
should be useful in most instances
EII.cz x cor its relative extremum Since F'ex 427 x1 is zero when x
We tour x as the critical value for testing with 4 0 as the stationary value of the unction
By successive derivation until we encounter a nonzero derivative value at x

f CX 1207 x f 77 0
f Cx 2467 x 5 C77 0
fancy 24 fancy 24
Since 4 is even and 4107 is positive we can conclude that 7,0 represents a relative
minimum
1317122
14 51
2h10
7643g

CH 9

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CH 9

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PART 4 OPTIMIZATION PROBLEMS 16 00

More modern developmentknown as mathematical programming will be discussed in Ch 13

Gl Optimum Values and Extreme Values

9.2 Relative Maximum and Minimum First Derivative Test

to the optimization Problem of Y fax

Relative versus Absolute Extremum

Eand F the otherhand are

First Derivative Test

I F'exo doesnt exist

For smooth functions relative extremes oiler

only when he first derivative has a zero

condition for a relative extremum

first derivative test for relative extremum

or the point Xo to its immediate right

as this occurs when the slope is zero a standstill position

The characteristin feature a he inflection

inflection point as it can be a min max

In Tig g sa we've plotted me derivative

The omer type a ineleition Point is

By restoring or using the Quadratic formula we can get

Thegraph or me function is a U shaped curve so he relative min would be the

9.3 Second and Higher Derivatives

evil as text we always assume it has derivatives up to theorder we need

Édh first mrough rieth derivatives or

into any derivatives we want

Interpretation a the Second Derivative

5 exo 0 means that he slope a the curve tends to in trease

We can illustrate all these graphically

as x increases on the graph we will when

and mus plots only as the rising part of an

The opposite case of f ext throughout is illustrated in Fig g 5 b

swishy con cue similarly with ion vex anction

f X is negative for all x Similarly with a strictly convex fax

convex auction should adhere to thesingle expected sign

According to fig G Ja 5 Cx Changes from negative to

Positive at X j vice versa with Fig 5 Jb

Attitudes toward Rish

and u Cx so diminishing MO for an x

expelted utility a winning

9.4 Second Derivative Test

We can add the following criterion for a relative extremum

Second derivative test for reactive extremum

te t ex O then the valve or he anction Ct Xo tool will be

The tirst and second derivatives are

its theabsolute minimum

The derivatives are

Necessary versus Sureilient Conditions

Its important to repeat some important Points

mm its necessary man 5 exo o

Condition Max Min

only when the first order necessary has been met

Table g 1 Conditions for a Relative Extremum Y 5 x

so ire R Cal E Cia

But in o.az and Cau 655 9 fan've This

vertilal distance between the R and C curves is only positive

Because we're smart and want to find a peak point we

so we need the Soc to find which extremum we want

The FOC condition d da o is equivalent to R'cat C ca

As an alternative approach we ran equate Mc MC i.e heir intersection

Coefficients a a CubicTotal lost hnition

sloping curve whereas a TC action to economically manes sense

So iz we wish to use a lubis function such as