Chapter 9: Optimization

1 Optimization of One Variable

1.1 Critical Points
A critical point occurs whenever the first derivative of a function is equal to zero, namely

If y = f (x)
dy
Then = f 0 (x) = 0 is a critical point
dx

A critical point is a “stationary” value of the function (flat spot). A critical point can be:
(a) some maximum point;
(b) some minimum point;
(c) an inflection point, which is neither a max or a min.

1.2 Relative versus Global Points

1.3 The First Derivative Test for a Relative Extremum

f 0 (x) = 0 is a necessary, but not a sufficient condition to establish an extremum.
Test: if, x = x0 , f 0 (x) = 0, then the value of f (x) will be:
(a) Relative Maximum

If f 0 (x) > 0 for x < x0

and f 0 (x) < 0 for x > x0

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 (b) Relative Minimum

If f 0 (x) < 0 for x < x0

and f 0 (x) > 0 for x > x0

(c) Inflection Point

if f 0 (x) has the same sign for x > x0 and x < x0

To find the relative maximum or minimum of a given function, the procedure should be first
to find the stationary values of the function where the condition f 0 (x) = 0 is satisfied, and then
to apply the first-derivative test to determine whether each of the stationary values is a relative
maximum, a relative minimum, or either.
Example: Total Revenue

Let T R = 10q − q 2
dT R
Then M R = = 10 − 2q where M R = 0 at q = 5
dq
AR = T R/q
AR = (10q − q 2 )/q = 10 − q

1.4 Second and Higher Derivatives

Given y = f (x) is a function of x

dy
Then = f 0 (x) is also a function of x
dx
dy
d( dx ) d2 y
We can find the derivative of f 0 (x) : dx = dx2
= f 00 (x) is the second derivative of y = f 00 (x).

1.5 Interpretation of the Second Derivative

For a function y = (x)
f 0 (x) measures the rate of change of the function; f 00 (x) measures the rate of change of the
rate of change of the function.
Evaluated at x = x0
f 0 (x0 ) > 0 means that the value of the function increases;
f 0 (x0 ) < 0 means that the value of the function decreases;
whereas:
f 00 (x0 ) > 0 means that the slope of the curve increases;

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 f 00 (x0 ) < 0 means that the slope of the curve decreases;
Example: t = time

if Distance = f (t)
then Velocity = f 0 (t)
and Acceleration = f 00 (t)

1.5.1 Concavity and Convexity

f 00 < 0 ⇔ Slope of the function always decreases;

f 00 > 0 ⇔ Slope of the function always increases;

1.6 Second Derivative Test

Test:

Given y = f (x) and x = x0

If f 0 (x0 ) = 0

Then: f (x0 ) will be:

(a) a relative maximum if f 00 (x0 ) < 0

(b) a relative minimum if f 00 (x0 ) > 0
(c) either a maximum, or a minimum, or an inflection point if f 00 (x0 ) = 0

If (c) then uses either the first derivative test or some other test.
In economics, the second derivative is sufficient 99% of the time.

1.6.1 Profit Maximization

Suppose a certain producer is a monopolist

Let : R = R(Q) be his total revenue function

and let : C = C(Q) be his total cost function
Therefore, profits (π) are : π(Q) = R(Q) − C(Q)

Necessary condition for profit maximization

dπ
= R0 (Q) − C 0 (Q) = 0
dQ
or R0 (Q) = C 0 (Q) M R = M C (Min or Max)

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Sufficient condition for profit maximization

d2 π
= R00 (Q) − C 00 (Q) < 0
dQ2
or R00 < C 00

The necessary and sufficient check that ensures profit maximization (the steps to obtain profit-
maximizing outcome):
First derivative test (necessary)

π = π(Q) = R(Q) − C(Q)

dπ
= π 0 = R0 (Q) − C 0 (Q) = 0
dQ
or R0 (Q) = C 0 (Q) MR=MC

Second derivative test

d2 π
= R00 (Q) − C 00 (Q) < 0
dQ2
or R00 (Q) < C 00 (Q)

Example 1

R(Q) = 1200Q − Q2
C(Q) = Q3 − 61.25Q2 + 1528.5Q + 2000
π(Q) = R(Q) − C(Q)
= −Q3 + 59.25Q2 − 328.5Q − 2000
dπ
necessary condition: = −3Q2 + 118.5Q − 328.5 = 0
dQ
2 solutions Q = 3, 36.5
Second derivative test:
(
d2 π >0 Q=3 (relative minimum)
= −6Q + 118 =
dQ2 < 0 Q = 36.5 (relative maximum)

1.7 Nth Derivative Test

Suppose at x = x0 , f 0 (x0 ) = 0 and at x = x0 , f 00 (x0 ) = 0. How to determine the maxi-
mum/minimum for this function?
Test: Keep differentiating until you come to the first NONZERO derivative. This derivative
will be the Nth derivative of f (x0 ). Then f (x0 ) will be

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 (a) a relative maximum if N is even and f N (x0 ) < 0;
(b) a relative minimum if N is even and f N (x0 ) > 0;
(c) an inflection point if N is odd.
Example Evaluate y = (7 − x)4 at x = 7

⇒f 0 (x) = −4(7 − x)3 ⇒ f 0 (7) = 0

⇒f 00 (x) = 12(7 − x)2 ⇒ f 00 (7) = 0
⇒f 3 (x) = −24(7 − x) ⇒ f 3 (7) = 0
⇒f 4 (x) ⇒ f 4 (7) = 24

Since N = 4 is even and f 4 (7) = 24 > 0, then f (7) is a relative minimum.

1.8 Taylor Series

Consider the function
f (x) = a + bx + cx2 + dx3 + ex4

Evaluate f (x) and its derivatives at the point x = 0.

f (x) = a + bx + cx2 + dx3 + ex4 ⇒ f (0) = a

f 0 (x) = b + 2cx + 3dx2 + 4ex3 ⇒ f 0 (0) = b
f 00 (x) = 2c + 6dx + 12ex2 ⇒ f 00 (0) = 2c
f 3 (x) = 6d + 24ex ⇒ f 3 (0) = 6d
f 4 (x) = 24e ⇒ f 4 (0) = 24e

f 00 (0) f 3 (0) f 4 (0)

or a = f (0), b = f 0 (0), c = 2 , d= 6 , e= 24
Now substitute into f (x) the values of a, b, c, d, e

f (x) = a + bx + cx2 + dx3 + ex4

f 00 (0) 2 f 3 (0) 3 f 4 (0) 4
f (x) = f (0) + f 0 (0)x + x + x + x
2 6 24

Recall factorials:

n! = n × (n − 1) × (n − 2) × . . . × 3 × 2 × 1
2! = 2 × 1 = 2
3! = 3 × 2 × 1 = 6
4! = 4 × 3 × 2 × 1 = 24
etc.

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Therefore
f 00 (0) 2 f 3 (0) 3 f 4 (0) 4
f (x) = f (0) + f 0 (0)x + x + x + x
2! 3! 4!
Taylor Series Expansion
1. In the neighborhood of x = x0 , we can approximate some function g(x) with a polynomial
function f (x);
2. At point x = x0 , the approximation should have certain properties that are common to g(x),
specifically at

x = x0
f (x0 ) = g(x0 )
f 0 (x0 ) = g 0 (x0 )
f 00 (x0 ) = g 00 (x0 )
f 3 (x0 ) = g 3 (x0 )
···
f n (x0 ) = g n (x0 )

3. Even though we do not know the exact form of g(x), if we know the properties of g(x) at x = x0 ,
then we can approximate g(x) with a polynomial.

1.8.1 Polynomial Approximation of g(x) around x = x0

g(x0 ) ≈ f (x) = a + bx + cx2 + dx3 + . . .

The full approximation
c d
a b z }| { z }| {
g 00 (x0 ) g 3 (x0 )
z }| { z }| { 
0 2
f (x) = (g(x0 )) + (g (x0 ))(x − x0 ) + (x − x0 ) + (x − x0 )3 + . . .
2! 3!

If x = x0 , then
g 00 (x0 )
 
0
f (x0 ) = g(x0 ) + g (x0 )(0) + (0) + . . .
2!
Then, to evaluate f 0 (x), treat g, g 0 , g 00 , g 3 etc. as constants

2g 00 (x0 ) g 3 (x0 )
   
0 0
f (x0 ) = g (x0 ) + (x − x0 ) + 3 (x − x0 )2 + . . .
2! 3!

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To evaluate f 0 (x) at x = x0

f 0 (x0 ) = g 0 (x0 ), and the higher order terms are dropped out

Then, to evaluate f 00 (x):

g 3 (x0 )
 
00 00
f (x) = g (x0 ) + 6 (x − x0 )
3!

To evaluate f 00 (x) at x = x0

f 00 (x0 ) = g 00 (x0 ), and the higher order terms are dropped out