OPTIMIZATION

PROBLEMS

The Concept of Growth

AND ITS APPLICATIONS
Prepared by Ledi Trialdi
OUTLINE
 Derivatives of Natural
Logarithmic and Exponential
Functions (NLEF)
 Growth and Elasticity
 Compound Interest Rate
 Optimal Timing
DERIVATIVES of NLEF
 Natural logarithmic and
exponential function
 DERIVATIVES of NLEF
 Remember “Chain Rule” to
solve the following :
The Concept of Derivative - Limit
GROWTH-ELASTICITY
 Growth
GROWTH-ELASTICITY
 Growth

If y=u(t).v(t)

If y=u(t)/v(t)
GROWTH-ELASTICITY
 Elasticity Solve Exc.8.1: 5ab

If y=u(x).v(x)

If y=u(x)/v(x)
COMPOUND INTEREST RATE
 Discrete Growth
Suppose: ‘A’ is our principal, and ‘i’ is
interest rate
If ‘i’ is disbursed every year, after t period
(i.e, t = nth year), our saving grows as of
followings:
0 1 2 t
A A+Ai = A(1+i)(1+i) A(1+i)t
A(1+i) = A(1+i)2
If ‘i’ is disbursed m times per year, after t
period (i.e, t = nth year), our saving grows as
of followings:
0 1 2 t
A
COMPOUND INTEREST RATE
 From discrete to continuous
growth
Discrete growth:
it grows only at a certain point of
time
Continuous growth:
it grows continuously
COMPOUND INTEREST RATE
 From discrete to continuous
growth
The compound-interest rate formula
(discrete case):
COMPOUND INTEREST RATE
 From discrete to continuous
growth

As m  ∞, we have w  ∞
Since
(refer to Eq. 10.5 and 10.6)
the generalized continuous-
compounding process is
COMPOUND INTEREST RATE
 From discrete to continuous
growth

i (or r discrete) = r continuous,

when m  ∞
r can be reinterpreted as the
instantaneous rate of growth of the
function Aert
COMPOUND INTEREST RATE
 From discrete to continuous
growth
If m is not close to ∞, then
the discrete-compounding process is:

while the continuous-compounding

process is:
ir
V (m) = V if
COMPOUND INTEREST RATE
 Discounting: Present vs.
Future Value
Discrete case
V  A(1  i)t Discount Factor
Present Value A  V (1  i) t
Future Value Discount Rate

Continuous case:
V  Aert
Discount Factor
 rt
Present Value A  Ve
Future Value Discount Rate
OPTIMAL TIMING
 One of the optimization
with single variable cases
What’s the objective function?
What’s the choice variable?

Satisfy the 1st-order condition

Check the 2nd-order condition

 Discuss 10.6 and its exercise