Table 3-2: Milk Cow Feed Example

X Q r p
Feed Milk MP MVP Feed Price profit
0 0 K180 -K400 Milk Price = K18/100kg
1 800 800 K144 K180 -K436 or p = K0.18/kg
2 1,700 900 K162 K180 -K454 Feed Price = K180 for 1,000
3 3,000 1300 K234 K180 -K400 kgs
4 5,000 2000 K360 K180 -K220
5 8,500 3500 K630 K180 K230 Fixed Cost = K400/yr
6 11,700 3200 K576 K180 K626
Price Ratio r/p =
7 14,600 2900 K522 K180 K968
8 17,200 2600 K468 K180 K1,256 K180/K0.18 = 1,000
9 19,400 2200 K396 K180 K1,472 MVP = r at Feed = 11
10 21,000 1600 K288 K180 K1,580
11 22,000 1000 K180 K180 K1,580 Optimal Feed = 11
12 22,600 600 K108 K180 K1,508 MP = r/p = 1,000
13 22,800 200 K36 K180 K1,364
14 22,900 100 K18 K180 K1,202
Table 3-3 Marginal Value Product, Marginal Input Cost and the Optimum Input Level
Input level Total physical Marginal Total value Marginal Marginal
product(TPP) physical product value input cost
product (MPP) (TVP)K product (MIC) K
(MVP)K
0 0 12
1 12 12
2 30 12
3 44 12
4 54 12
5 62 12
6 68 12
7 72 12
8 74 12
9 72 12
10 68 12

input price = K12; output price = K2 3

 Calculus-Based Approach to Optimal Input Use
• Find X to Maximize profit p(X) = pf(X) – rX – K
• Calculus: Set first derivative of p with respect to X equal to 0 and solve
for X, the “First Order Condition” (FOC)
• FOC: pf’(X) – r = 0 p x MP – r = 0
• Rearrange:pf’(X) = r p x MP = r
• p x MP is the “Value of the Marginal Product” (VMP), what would get if
sold the MP
• FOC means to increase use of the input X until p x MP = r, or until the
MVP = r, the input price
Calculus of Optimization
• Problem: Choose X to Maximize some function g(X)
• First Order Condition (FOC): Set g’(X) = 0 and solve for X
• May be more than one X (not in this class)
• Call these potential solutions X*
• Identifying X values where the slope of the objective function is zero
(satisfies the FOC)
• Use SOC to see if at maximum or minimum
Calculus of Optimization: Intuition
• FOC: finding the X values where the objective function's slope is zero,
candidates for minimum/maximum
• SOC: checks curvature at each candidate solution identified by setting
FOC equal to zero
• Maximum is curved down (2nd derivative negative)
• Minimum is curved up (2nd derivative positive)
Example
• Choose X to maximize g(X) = – 5 + 6X – X2
• FOC: g’(X) = 6 – 2X = 0
• FOC satisfied when X = 3
• Is this a maximum or a minimum or an inflection point? How do
you know?
• Check the SOC: g’’(X) = – 2 < 0
• Negative, satisfies SOC for a maximum
• Positive, satisfies SOC for a minimum
• Zer0= inflection point
• The value of g(X) at X = 3: g(3) = – 5 + 6(3) – 32 = 4
Example 2
Wheat yield as a function of nitrogen fertilizer is Y = 35 + 2N – 0.02𝑁 2 ,
where yield Y is 50kg-bag/ha and the nitrogen rate N is kg/ha. The
price of wheat is K10.00/bag and the price of nitrogen K0.60/kg.