CHAPTER THREE: DERIVATIVES

Introduction
This part deals with the techniques and applications of differential calculus. It deals with
concepts and techniques of mathematical economics, which is commonly used in comparative
statics analyses of economic variables. It mainly deals with the concept of instantaneous rate of
change-namely the derivative. In economics, we are interested in instantaneous rates of changes
of various economic variables. For instance, we deal with marginal utility, marginal product,
marginal revenue, value of marginal product, and other marginal values, which are the
instantaneous rate of change of their respective total functions.
The Concept of the Derivative

dy f ( x + Δx )−f ( x )
=ℓ im
dx Δx→0 Δx
f ( x+ Δx )−f ( x )
,
The term Δx is simply slope of the functions which is an equivalent expression to
Δy
,
Δx and it represents average rate of change of a function .But the derivative approximates the
rate of change of the positive function when Δx is infinitesimal i.e. slope of a function at a point
or instantaneous rate of change.
As you might remember from the previous discussion, the derivative is also the slope of the
tangent line to f (x) at a point.
Example:
dy
1. Given f ( x )=3 x +7 , find ?
dx
2 dy
2. Given f ( x )=x , find ?
dx
n dy
3. Given f ( x )=x , find
dx

Solution:

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 CHAPTER THREE: DERIVATIVES

1. For f(x)=3x+7
dy f ( x +∆ x )−f ( x ) [3 ( x +∆ x ) +7−(3 x +7)]
= lim = lim
dx ∆ X → 0 ∆x ∆ X→0 ∆x
3 x+ 3 ∆ x+7−3 x +7 3∆ x
lim =¿ lim =¿ 3 ¿ ¿
∆x ∆ X →0 ∆ x

2. For f ( x )=x 2
∆ X →0

2 2
dy f ( x +∆ x )−f ( x ) (x +∆ x ) −x 2 2
x +2 x ∆ x +∆ x −x
2
= lim = lim = lim
dx ∆ X → 0 ∆x ∆ X→0 ∆x ∆ X →0 ∆x
2 x ∆ x+∆ x
2
∆ x (2 x +∆ x)
lim = lim = lim 2 x + ∆ x =2 x
∆x ∆x
3. For f (x)=xn
∆ X →0 ∆ X →0 ∆X →0

n n
dy f ( x +∆ x )−f ( x ) ( x + ∆ x ) −x
= lim = lim
dx ∆ X → 0 ∆x ∆X →0 ∆x

lim
1() 2 ()3
n−3 3

n ()
x + n x ∆ x + n x ∆ x + n x ∆ x +…+ n x ∆ x −x
n n−1 n−2 2 n−n n n
()
∆ X →0 ∆x

lim
( 1)
n x n−1
() () ()
∆ x+ n x n−2 ∆ x 2 + n x n−3 ∆ x3 + …+ n x n−n ∆ x n
2 3 n
∆ X →0 ∆x

lim
[( ) ( )
1 2 3 ()
∆ x n x n−1 + n x n−2 ∆ x + n x n−3 ∆ x 2 +…+ ∆ x n−1
]
∆ X →0 ∆x

()
∆ X →0 1 2 () 3
n−3 2
()
lim n x + n x ∆ x + n x ∆ x +…+ ∆ x =n x
n−1 n−2 n−1 n−1

d n
Thus, ( x )=n x n−1
dx

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 CHAPTER THREE: DERIVATIVES

2. Geometric Interpretation of Derivatives: slope of a curve

Geometrical meaning of derivative. Consider a graph of a function y = f ( x ) :

From Fig.1 we see, that for any two points A and B of the function graph:

where - a slope angle of the secant AB.

Therefore, the difference quotient is equal to a secant slope. If to fix the point A and to move the
point B towards A, then will unboundedly decrease and approach 0, and the secant line AB
will approach to the tangent line AC. Hence, a limit of the difference quotient is equal to a slope
of a tangent at point A.

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 CHAPTER THREE: DERIVATIVES

The slope of the secant line that passes through point A(x0, f(x)) and point B(x+ΔX, f(x+Δx)) is
∆ y f ( xo+ ∆ x )−(x 0)
given by M = = …Average rate of change
∆x ∆X
Thus, the slope of the secant line is the average rate of change of y with respect to x.
As ∆ x tends to be 0, the secant line approaches to the tangent line. Thus, the slope of the tangent
line becomes:
f ( x 0 +∆ x ) −f ( x0 )
M= lim …instantaneous rate of change
∆ x→ 0 ∆x
Thus, the slope of tangent line is the instantaneous rate of change of y with respect to x.
Hence, it follows: a derivative of a function at a point is a slope of a tangent of this function
graph at this point.
Generally, the slope of the curve at a point can be found by the slope of a tangent line drawn at
that point.
f ( x 0 + ∆ x ) −f ( x 0)
Slope of a curve at x1, M = lim …derivative
∆ x →0 ∆x
f ( a+h )−f (a)
Slope of a curve at x=a , M =lim or
a→ 0 h
f ( x ) −f ( a)
M= lim
x →a x−a
Example: find the slope of f ( x)=x3 at x=-1, 0, 1.
dy lim ¿ f ( x+ h )−f (x )
Solution: = ⁡∆ y /∆ x=lim ¿
dx ∆ x → 0 h →0 h
¿ lim ¿ ¿ ¿
h→ 0

( x +h ) ( x 2 +2 xh+h2 )−x 3
¿ lim
h→ 0 h
¿ lim ¿ ¿ ¿
h→ 0

2 2 3
(3 x h+3 x h + h )
¿ lim
h→ 0 h
2 2
h (3 x +3 xh+h )
¿ lim =lim 3 x 2 +3 xh+h2=3 x 2
h→ 0 h h→0

The slope of the curve =3 x 2 is a function of x .it is not constant.

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 CHAPTER THREE: DERIVATIVES

dy 2
At X=−1, =3(−1) =3
dx
dy 2
At x=0 , =3 (0) =0
dx
dy 2
At x=1 , =3(1) =3
dx
Continuity and Differentiability of a Function
If the derivative of a function, say f ( x ) , exists at point ‘c’ then f ( x ) is said to be differentiable at
‘c’.
To say a function f ( x ) is differentiable at ‘c’ the following conditions should be fulfilled
1. f ( x ) should be continuous at ‘c’
2. f ( x ) should have a unique (only one) slope at ‘c’
The 1st condition requires the fulfillment of continuity conditions i.e. a given function is said to
be continuous over a given rage [at a point] if it is defined for all real numbers within that range
[at that point]. Graphically speaking, continuity occurs if we cannot draw graph of a function
without lifting our pen/pencil. Any function is said to be continuous at a point such as X=C if the
following conditions are satisfied. That is
ℓ im f ( x )∧ℓ im f ( x )
1. x →c+ x→ c− Should exist, i.e the limit L must be a finite number
ℓ im f ( x )=ℓ im f ( x )=ℓ im f ( x )
2. x →c+ x→ c− x→c

ℓ im f ( x ) =f ( c )
3. x →c and f(x) is defined at x = c i.e. f(c) exists
From this, we can understand that continuity does not necessarily mean differentiability.
The 2nd condition is sufficient condition for differentiability:
lim ¿
The left-hand derivative of f at X=c is given by h→0
f ( c +h) −f (c)
−¿
¿
, provided this limit exists. This
h

left-hand derivative is the slope of the line in the limiting position.

lim ¿
Similarly, the right –hand derivative of f at x=c is given by h→0
f ( c+h) − f (c)
+¿
¿
, provided this limit
h

exits. The left-hand derivative is the slope of the line in the limiting position.
Continuality rules out jumps and gaps at a point while differentiability condition requires
smoothness of the curve at the given point in addition to continuity conditions. In other words,

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 CHAPTER THREE: DERIVATIVES

differentiability rules out jumps, gaps, sharps & cusp corners, while continuity rules out only the
first two

Example show the function f ( x )=|x−2|is not differentiable at x = 2.

Steps 1 Testing continuity of the function
ℓ im|x−2|=0
1. x →2+
ℓ im |x−2|=0
2. x →2−

ℓ im f ( x )=f ( 2 )=0 . ,
3. x →±2 so, f ( x ) is continuous at x=2
Step 2 in this step we will see whether the limit of the difference quotient exist or not.

Since f ( x ) is an absolute value functions, it can be redefined as follows:

{
f ( x )= x−2 , for . x≥2
2− x , for . x <2
To see the existence of the limit of the difference quotient, we find its left & right side limits .i.e.
f ( x+ h )− f ( x ) ( ( x +h ) −2 )−( x−2 )
ℓ im = ℓ im =1
h→ 0+ h h →0
+ h

f ( x+ h )−f ( x ) ( ( 2−( x +h ) ) −( 2−x )

ℓ im =ℓ im =−1
h→ 0− h h →0− h

From the above result, we can see that the left & right side limits are not equal. Therefore the

limit of the difference quotient does not exist which intern means that the function f ( x)=|x−2|
is not differentiable at x=2.

Is f differentiable at x=1?
lim ¿
LHD=h → 0 f (1+ h)−f (1) ¿
−¿
h

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 CHAPTER THREE: DERIVATIVES

lim ¿
2
f (1+ 2h +h )−1−¿
h→0 = lim ¿¿
h −¿ 2h +h
2
h→ 0 = lim ¿¿¿
h h → 0 −¿ 2 +h = 2

lim ¿
f ( 1 +h) ¿−f (1)
RHD= h→0
+¿
h
= lim ¿
+¿ ( 4−3 (1 +h) )− (4 −3 (1) )
h →0 =¿ lim ¿ ¿¿
h h →0 +¿
( 4−3−3h)− 1
¿
h

lim ¿
+¿ ( 1−3 h) −1
h→0 =¿ lim ¿¿¿
h h →0
−3 h
+¿
=¿−3 ¿¿
h

Rules of Differentiation

In this section, we formally state the different rules of derivatives that are important in several
problems of getting the derivative. These are the constant rule, the simple power rule, the
coefficient rule, sum/difference rule, product rule, quotient rule, chain rule, and others.
Rule 1: The constant rule
If c is constant and the function is given by f(x) =c, then f’(x) =0
Proof of rule 1: we apply the definition of derivative to f (x)=c , the function whose outputs have
the constant value C. At every value of x, we find that:
f ( x+ ∆ x )−f (x) c−c
f ’ ( x )= lim = lim = lim 0=0
∆ x→ 0 ∆x ∆ x →0 ∆ x ∆ x →0

lim Δy lim 7−7

Δx→0 = =0
Example 1. If f(x) =7; Δx Δx→0 Δx

Rule 2: Power Function Rule

The derivative of the function y=f(x) = xn, where n is any real number (n ∈ R) is equal to nxn-1
dy
y=5 x 3 ,=f ' (x )= y '=3 (5 x 3−1 )=15 x 2
Example 1. ax
1 −6
6
, f ' ( x )=−6 x −6−1 =−6 x−7 = 7
1. f(x)= x x

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 CHAPTER THREE: DERIVATIVES

Note. A constant factor may be taken outside the derivative sign, i.e., if y=Cf (x ), where C
is a constant, then y ’=Cf ’ (x).

lim [(x +Δx )2 −( x )2 ]

Δx→0 =12 x
Example: f(x) = 6x2; f’(x) = 6 Δx
Rule 4: Sum/ Difference Rule
The derivative of the sum/difference of differentiable functions is equal to the corresponding
sum/difference of the derivatives of these functions.

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 CHAPTER THREE: DERIVATIVES

i.e. Let f(x) and g(x) are two differentiable functions, then
d df ( x ) dg ( x )
( f ( x )±g (x ))= ± =f ' (x )±g '( x ).
dx dx dx
Example 1) f(x) = 9x2 + 3x + 7

d(9x2+3x+7) d(9x2 ) d(3x) dx ¿

= + +d(7)¿ ¿
f’(x)= dx dx dx ¿
=18x +3 + 0 = 18x + 3
x −3 x
2

2) f(x) = 9
d (9 x 2−3 x ) d (9 x 2 ) d (3 x )
= − =18 x−3
f’(x) = dx dx dx

Rule 5: the product rule

The derivation of a product of two differentiable functions is equal to the product of the
derivative of the first function by the second function plus the product of the first function by the
derivative of the second function; i.e. given f(x) and g(x) are two differentiable functions, then
d
dx [f(x) . g(x)] =f’(x). g(x) + f(x) . g’(x)

3. Given AR = 25 –Q2, find MR?

The solution for the above problem can be found by using the relationship between the marginal, average
and total revenue functions
TR dTR dAR . Q
AR= ⇒TR= AR . Q MR= ⇒
Q , dQ dQ using the product rule of differentiation we
get

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 CHAPTER THREE: DERIVATIVES

dAR dQ
MR= Q + AR
dQ dQ
d ( 25−Q 2 ) Q
+ ( 25−Q )
2
=
dQ
¿−2Q 2 +25−Q 2
¿ 25−3Q 2

dy
4. Given, y=5x3(2x-5) find ?
dx

x , f’(x) =15x
3
⇒ Let f(x) =5 2

g(x)=2x-5,g’(x)=2
Y’=f’(x) g(x) +f(x).g’(x) =15 x2 (2x-5) +5 x3 (2) =30 x3-75 x2+10 x3
Corollary:-This rule can be extended for differentiating the product of any number of functions.
Thus, if we have a product of three functions
d
[f ( x ). g( x ), h( x )]=f '( x ), g ( x ), h( x )+f (x )g' ( x ). h( x )+f ( x ), g( x ), h' ( x )
dx
= 40x3-75x2
Rule 6: Quotient Rule
The derivative of a fraction (quotient) is equal to a fraction whose denominator is square of the
denominator of the given fraction, and the numerator is the difference between the product of the
denominator by the derivative of the numerator and the product of the numerator by the
derivative of the denominator;
i.e., if f(x) and g(x) are two functions, g(x)¿ 0, and h(x) is the quotient
d f (x) f ' ( x )−f ( x ). g' ( x )
h( x)=¿ ( )=
,then dx g( x ) [ g( x )]2
Example: differentiate with respect to x.

x
2
2 x .(1+ x )−x 2 ( 1 ) x 2 +2 x
f ( x )= ; f ' ( x )= 2
=
1+ x ( 1+ x ) ( 1+ x )2
Example
ax 2 +b
f ( x )= , '
1. Given cx find f ( x )?
2
Since f ( x ) is a quotient of two functions, let g( x )=ax +b , andh( x )=cx .

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 CHAPTER THREE: DERIVATIVES

g(x) g ' h−h ' g

⇒ f ( x )= ⇔ f ' ( x )= 2
h(x) h
g ' ( x )=2 ax , h' ( x )= c
2 ax . cx −c ( ax 2 +b )
⇒ f ' ( x )=
( cx )2
2
ax + b
¿ 2
cx

Rule 7: Composite Function/chain rule/

If a function Z =f(y) has a derivative at some point Y, such as Z y = f’(y), and the function y =

S ( x ) has a derivative at some point in x, such as y =S ' ( x )

x , then the composite function
Z=f [ S ( x ) ] at the given point x also has a derivative, which is equal to:

dz dz dy
= .
Z x =f y ( y )Sx( x ) Or dx dy dx

Thus, for instance, if y=f(x), where x = S (u) , and z= z (v) and v= x(t), then the derivative y’(t)
dy dy dx du dv
= . . .
is given by: y’(t)= f’(x) . S ’ (u) z’ (v) x’ (t) or dt dx du dv dt
Example: - 1) Differentiate the following composite functions.
i) if y = 5x2, z = 7y + 3,
dz dz dy
= . =7×10 x=70 x
:. dx dy dx
ii) x = 10p – p2, p = 0.7y -2
dx dp dx
= . =0 .7 (10−2 p )
:. dy dy dp
Corollary: If y = [f(x)] n, y’ = n [f(x)] n-1. f’(x)

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 CHAPTER THREE: DERIVATIVES

1 −1
2 dy 1 2 6 x+ 5
; = ( 3 x 2+5 x+7 ) . ( 6 x−5 )=
dx 2 2 √ 3 x +5 x+ 7
2
Example: y= (3x2 + 5x + 7)

4. The total physical output P of workers is a function of the

number of workers “x”. The function f(x) =p is called physical
productivity function and is given by P=10 ( 3 x +1 )3−[Link]
the marginal physical productivity.
5. Suppose the revenue function for a certain product is given by
−1
R ( x )=15 ( 2 x +1 ) +3 x−1 where x is in thousands units and R
is in thousands.
1. Find the MR when 200 units are sold
2. How is revenue changing when 2000 units are sold

Rule 8: Inverse Function

If a function y=f (x ) has a derivative f ’ (x 0)0 at the point x0, then it’s inverse
x=g( y) Also has derivative at the corresponding point y 0= f(x0), and then, ’ ( y 0 )=¿ , or g ’(y0)
1 dg 1
or =
f '( g( y 0 ) dy dy
( )
= dx
Example 1: Find the derivative of the inverse function for the following given function.
2
y−1 dy 1 1 1 ( y+ 1)
; = = = = dy −1 −1−x
y +1 dx dx ( y+1 )−( y−1) 2 2 , = , since y=
[ ] 2 dx x−1 x−1
dy ( y+ 1)2 ( y +1 )
a. x=

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 CHAPTER THREE: DERIVATIVES

dy 1 1 1 1
= = = =
dx dx 2 y 2 y 2 √x y= √ x
b. x=y2;
( )
dy 1 ,since
Rule 9: Implicit Function
So far we have said that an explicit function is one in which the dependent variable is to one side
of the equality sign (say to the let of) and the independent variable and parameters are to the
other (say to the right).
But, implicit function is one in which both variables are on the same side of the equality sign.
Therefore, it may sometimes be difficult to solve an equation explicitly for a dependent variable
in terms of independent variable(s). Hence, given the implicit function f(x, y) =0, we may
differentiate it term by term and then solve the equation for the derivative.
Suppose we have an implicit function given by F (x , y )=0
We have use two different approaches
1. Total derivative approach
2. Chain rule approaches (technical approach)
Total derivative approach
Then, totally differentiating the equation we get
f x dx+ f y dy =0
Rearrange terms and gives us:
f y dy=−f x dx

dy −f x
=
dx f y

Examples:
dy
1. Find dx by implicit differentiation.
A) 6x2 + y3 = 0 dy −4 x
= 2
dx y
12x dx + 3y2dy=0
3y2dy=12xdx dy 4x
=
dx (−6 x )2 /3

B) √ x+ √ y =√3
−1 −1
1 2 1 2
(
x ) dx+( y ) dy=0
 2 2

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 CHAPTER THREE: DERIVATIVES

1
−x 2
−√ y
dy =
−1
√x
dx = - y 2

C) 4x3 + x2y – 3xy2 – 5y3 = 9

 12x2dx + 2xydx + x2dy – 3y2dx – 6xydy – 15y2dy = 0
(12x2 + 2xy – 3y2) dx + (x2 – 6xy – 15y2) dy = 0
12 x2 +2 xy −3 y 2 dy
=
15 y 2 +6 xy −x 2 dx
2. Find dy /dx for the following implicit functions
a. 3 xy− y =2
b. 3 xy−x=2
Solutions a . 3 ( f x dx+ f y dy ) −(fxdx+ f y dy)=0
3 ydx +3 xdy−dy =0
3 ydx=dy−3 xdy
3 ydx=( (1−3 x ) ) dy
dy 3y 2
= , but y= ,then substitute
dx 1−3 x 3 x−1
2
3( )
dy 3 x−1
=
dx 1−3 x
dy −6
=
dx ¿ ¿
Solution b. 3 ( f x dx+ f y dy ) −(fydy+ f x dx )=0
3 ydx +3 xdy−dx=0
3 xdy=dx−3 ydx
3 xdy=dx(1−3 y)
dy 1−3 y x +2
= , but y= , then by substitution
dx 3x 3x

dy
=
1−3 (
x +2
3x
) ( )
dx 3x
1−x−2
dy x −2
= = 2
dx 3x 3x
Chain rule (technical approach)
1st. differentiate both sides with respect to x, and when you differentiate a y term with respect to
y multiply by dy/dx.

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 CHAPTER THREE: DERIVATIVES

2nd. solve for dy/dx.

A. 3 xy− y =2
Example

B. 3 xy−x=2
Solution (A)

d dy dy
(3 xy − y=2) 3 y +3 x −. =0
dx dx dx
d d dy
(3 xy − y)= 2 3 y+ (3 x−1)=0
dx dx dx
3¿ dy
( 3 x−1 )=−3 y
d d dy d dy dx
3( x . y+ x y . )− y . =0
dx dy dx dy dx dy −3 y
=
dy dy dx (3 x−1 )
3( y+ x )−. =0
dx dx −6
¿¿

A. A function, which is given by log e is equivalent to ln f (x) that its first order derivate can
Rule 10: Derivatives of logarithmic functions
f (x)

f '( x )
be specified as .

B. If the function is stated to any base than e, which is given by y=log b ,then the derivative
f (x )
f (x)

f ’(x)
of this function is specified as .
lnb f (x)
Examples:
Find dy /dx for each of the functions below
1. Y =x 3 +3 lnx 5. xlny=4 3
−x
2. Y =log 4 (x ¿¿ 3¿+1) ¿ ¿ 6. y=x e
3. y=ln x 4 7. y=x x
4. y=ln √ 3 x
2
8. y=e x ln3 x

Solutions:

dy 2 d 2 3
1. =3 x +3 ( lnx ) =3 x +
dx dx x

3 dy dy du 1 1 2
2. let u=x +1 ,⇒ y=log 4 u ,t h en = . = . .3 x
dx du dx ln 4 u
2
dy 1 1 2 3 x log 4 e
= . 3 .3 x = 3
dx ln 4 x +1 x +1

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 CHAPTER THREE: DERIVATIVES

3
4 dy dy du d ( ) d ( 4 ) 1 3 4x 4
3. let , u=x ,then = . = lnu . x = .4 x = 4 =
dx du dx dx dx u x x

1 1 −1
dy dy du ds 1 1
4. Let,u=√3 x=( 3 x ) 2 ,∧let s=3 x ⇒ u=( s )2 , then = . . = . ( s)
2
.3
dx du ds dx u 2
dy dy du ds 1 1 1 1 1 1 3 1
= . . = . . .3= . . .3= =
dx du ds dx u 2 1 1
2 1
6 x 2x
( S) 2 ( 3 x )2 (3 x) 2
Or
dy dy du 1 1 1 1 1 1
Let,u=√ 3 x=( 3 x ) 2 =√ 3 . x 2 , then dx du dx u √ 2 (x)1 /2
1 1 = . = . 3. . = . √ 3 . . 1/ 2
1
2 (x)
√3 ( x ) 2

dy 1
=
dx 2 x
5. Use the implicit function rule:

fydy+ fxdx=fxdx+ fydy 1 −4

. dy= 2 dx Divided by dx both sides
fydy+0=fxdx +0 y x
4/ x
fydy=fxdx dy −4 y −4 e 4/x
= 2 = 2
since y=e
dx x x
d
dy
(lny)dy =
d 4
dx x
dx ()
3
−x
6. y=x e taking the natural logarithm of both sides:
3

lny=e−x lnx, then taking the derivative of both sides using implicit function rule, we get

1
( 1 −x
)
. dy= −3 x e lnx+ ( e ) dx ,then , divided by dx∧multipliy by y
3 3
2 −x
y x
dy
( 1
= y −3 x 2 e−x lnx+ ( e−x ) )
3 3

dx x

dy 1
(
=x e −3 x 2 e− x lnx+ ( e− x ) )
3
−x 3 3

dx x
dy 1
=x e e− x −3 x2 e−x lnx+ ( e−x ) ( )
3
−x 3 3 3

dx x
x
7. y=x apply natural logarthim for both sides, then

lny=xlnx
lny−xlnx=0 use the implicit function rule

fydy+ fxdx=0

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 CHAPTER THREE: DERIVATIVES

d d d 0∧d
( lny−xlnx ) dy + ( lny−xlnx ) dx=0, since ( xlnx )= (lny )=0 , we left
dy dx dy dx
d d
( lny ) dy − ( xlnx ) dx=0 Apply product rule
dy dx
1
dy− (lnx +1 ) dx=0 Divided by dx and multiply by y, then
y
dy x
= y (lnx +1 )=x (lnx+1)
dx
2
8. y=e x ln3 x apply natural logarithm in both case
2 2
lny=x ln 3 x lne , but lne =1, so that we have lny=x ln 3 x .
2
lny−x ln 3 x=0 Apply implicit function rule
fydy+ fxdx
d
( lny−x 2 ln 3 x ) dy + d (lny−x 2 ln 3 x )dx =0…..use product rule only for x terms
dy dx

1 dy
dy + (−( 2 xln3 x + x ) dx ) =0 = y ( 2 xln3 x + x )
y dx
1 dy x ln 3 x
2

dy− ( 2 xln3 x + x ) dx=0 =e ( 2 xln3 x + x )

y dx
1
dy= ( 2 xln3 x + x ) dx
y

Rule 11: Derivative of exponential function

x dy
If y=a , a>0 , a ≠ 1 ,then c an be easily be found by changing it to the logarithmic
dx
function.
lny=xlna, then fydy=lnafxdx
1
dy=lnadx diveded by dx, and multiply by y
y
dy x
= ylna=a lna
dx

 In general, if the function Y =au (x) is given, using the chain rule, the derivative of this fuction
d u (x )
w.r.t to x is stated as: ( a )=u' ( x ) . lna . a x
dx
d x
 The exponential function e x is a unique function with special behaviour. That is. ( e ) =e x .
dx
However, in case we have e f (x) , we can use the chain rule to evaluate its derivative. That is left
f (x)=u and we will have e u.
If y=eu ∧u=f ( x ) :

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 CHAPTER THREE: DERIVATIVES

f (x) f (x)
dy dy
= .=e . u (x). thus d e =f ' ( x ) . lne. e f (x). But lne=1 imples that d e =f ' ( x ) . e f (x)
u '
dx du dx dx
Example: Find dy/dx in each of the functions given below
2
1. y=4 x 3. lny=x 5. y=10 x
x
4. y=ee
2 3
2. y=e3 x 6. y=e 4 x
2
7. y=e ln x
Solutions
dy ' x
1. =f ( x ) . ln 4. y =ln 4. 4
dx
dy ' 3x 3x 2 2

2. =f ( x ) . lne . y =6 x . lne . e =6 x . e
dx
x dy ' x
3. lny=x apply e∈both sides , the y=e . so =lne . f ( x ) . y =e
dx
dy ' x e e +xx x

4. =f ( x ) . lne . y =e .e =e
dx
dy dy du x 2

5. Let u=x2 ,so that y=10 u. then, = . =ln 10.2 x . 10

dx du dx

6. let , u=4 x 3, so that y=e , then

u dy dy du ' u 2 2 4x 3

= . =f ( x ) . lne . e .12 x =12 x . e

dx du dx
dy dy du dh u 1
7. Let, u=ln x 2 , h= x2 ,and y=eu , u=lnh, so that = . . =e . .2 x
dx du dh dx h
2

ln x
2
1 2 e ln x
¿e . 2 .2 x=
x x

Self-test exercise
1. check the differentiability of f ( x )= x +1 ,
for x≤2
ax−5 , for x >2 at x=2

2. Find the first order derivatives of the following functions

a).
y=x 2 log x3
(5 x+ 4 )
b). g ( x )=e
c). f ( x )=2 x 3 −15 x2 +36 x+4
3. Evaluate the 2nd order derivatives of the function g ( x )=4 √ x−x
Higher Order Derivatives

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 CHAPTER THREE: DERIVATIVES

The concept of a derivative of order n

The derivative of a function f(x) leads to another function f’(x). We call f’(x) the first order
derivative of the function f(x). The derivative of the derivative of a function is the second order
derivative (or the second derivative) of the function. The derivative of the second derivative is
the third-order derivative (or the third derivative) and so on. Starting with the second derivative;
the derivatives are called derivatives of higher orders and are denoted by y”, y”’, y (4), y (5)… y(n)

…(instead of y” and y”’ we sometimes write y(2) and y(3), or f '' ( x ) , f ''' ( x ) ,
(4 ) ( 5) (6 ) (n )
f ( x ) , f ( x) , f ( x ) , … , f ( x )

The derivative of order n (or the n

th

derivative) is the derivative of the derivative of order (n-1),

i.e. y (n) =(y (n-1))’.
The derivatives of higher orders have a variety of applications in Economics and other different
disciplines. For this, we will see in its roles in this chapter as well as in the next chapter.
Note: Higher order derivatives are found by applying the rules of differentiation to the derivative
of the previous order.
Examples 1) compute the derivative of the 1st, 2nd, 3nd and 4th order derivatives of the functions;
a. y=f (x )=8 x 3+ 12 x 2 +5 x+7
2
t order y ’=f ’ ( x )=24 x +24 x +5
nd order y ”=f ”(x )=48 x +24
d order y ”’=f ” ’( x)=48
horder y (4 )(x)=0
b ¿ Y =f (x )=x

y '=f ' ( x )= 2 ( x−1 )

−2

st
1 order

y ''=f '' ( x )= −4 ( x−1 )

−3

2nd order

y '''=f ''' ( x )= 12 ( x−1 )

−4

rd
3 order

f ( x ) = f ( x ) = −48 ( x−1 )
(4 ) (4 ) −5

4th order …etc.

Exercise:
Find the first five derivatives of the following functions

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 CHAPTER THREE: DERIVATIVES

1. y=2 x 4 −3 x 2 4. y=4 x 3 +5 x2 +3
2. y= √ 2 x−1 5. y=3 x 4 + 6 x 3 −3 x 2 +4
3. y=3 x 3−4 x 2+ 5
1
y= 2
x
Formulas for the nth derivatives of some functions
1. Let us generate the nth derivative of the power function:
m m−n
y=x , hence f (n)( x)=m(m−1)(m−2) …(m−n+ 1) x
i. If n = m; f(n)(x)=m(m−1)(m−2) ...(m−n+1) xm −n=m! ;// ∵ m=n
f(n+1)(x) =0
∴ f (n)(x¿=0 for all N >m .

2. For an exponential function: y=a x, where ,generate the nth derivative of this function.

a
x
f ' ( x )= ln a

f ''( x )=a ( ln a )
x 2

f ''' ( x )=a ( ln a )
x 3

f ( x ) = a ( ln a )
( n) x n

derivatives, f ( x ) = e .
( n) x

e
x

3. In particular, if y= , then we have for any n th

4. For the función which is given by, y=eax find the nth derivative.

Solution
e
ax
f ' ( x )=a …

ae
2 ax
f ''=
...

f ( x ) =a e
( n) n ax

The sign of the Derivative

What does the first order derivative says about graph? There is different importance of the sign
of first and second order derivatives.
1. Test for either a function is increasing /decreasing
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 CHAPTER THREE: DERIVATIVES

2. Test for a concavity or convexity of a function

3. Test for either a function is at maximum /minimum at a critical value
Increasing /decreasing function
It is possible to decide whether the given function is an increasing or decreasing by observing
the sign of the derivative of the given function.
To see how the derivative of a function can tell us where a function is increasing or decreasing,
look the following figure. Between point A and B, and point C and D, the tangent lines have
positive slope and so f ’ ( x )> 0.
Between point B and C, the tangent lines have negative slope and so f ’ (x )< 0. Thus, it appears
that f increases when f ’ ( x ) is positive and decreases when f ’ ( x ) is negative.

Conditions:-
A. First order derivative
If f(x) is a differentiable function at any point and/ or interval, then:
1. The function tends to increase or the function is an increasing function at a given point or an
interval, and the rate of change of f(x) with respect to x is positive, if f ’ ( x )> 0.
2. The function tends to decrease or the function is a decreasing function at a given point or an
interval, and the rate of change of f(x) with respect to x is negative, if f ’ ( x )< 0.
3. If f ’ (x)=0 for all x , f (x)has the value of extrema
Example:

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 CHAPTER THREE: DERIVATIVES

1. Given f ( x )=x 3−3 x−2

A. The ranges of x over which f(x) is decreasing and increasing
B. The point at which f(x) attains its relative extreme value
Solution
A . If f ( x ) is increasing , iff f ’ ( x )> 0, i.e 3 x 2−3>0 , x 2−1>0
( x−1 ) ( x+ 1 )> 0
( x−1 ) ( x−(−1 ) ) > 0imples that x> 1∨x ←1
If If f ( x ) isidecreasing , iff f ’ ( x ) <0 , i.e 3 x 2−3<0 , x 2−1<0
( x−1 ) ( x+ 1 )< 0
( x−1 ) ( x — 1 ) <0 imples that x <1∨x >−1
−1< x <1
Thus, the function f(x) is increasing for the value of x >1∨x ←1. It is decreasing in the
range −1< x <1.

Example 2: For the following functions identify whether they are increasing or decreasing at a
given points.

A. f(x) = x −6 x +17 ,at x=2∧x=4

2

f ’ ( x )=2 x −6
When x=2 f ’ (2)=2(2)−6=−2< 0 , The function is decreasing.
When x=4 f ’ (4 )−6=2>0 , the function is increasing.
B. f (x)=x2 + 4 x+ 5 , at x=−3∧x=−1 ,∧x=−2
f ’ ( x )=2 x + 4
When x=−3 f ’(x )=2(−3)+ 4=−2<0 , The function is decreasing.
When x=−1 f ’ (x)=2(−1)+ 4=2>0 , the function is increasing.
When x=−2 f ’ (x)=2(−2)+ 4=0 , the slope of the curve is horizontal and stationary.

Relative maximum or minimum

First-order derivative test for relative extremum
If f ’ (x o )=0, then the value of the function at x o, f ( x o ¿ will be:

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 CHAPTER THREE: DERIVATIVES

1. A relative maximum if f’(x) changes its sign from positive to negative from the immediate
left of the point x o to its immediate right.
2. A relative minimum if f’(x) changes its sign from negative to positive from the immediate
left of the point x o to its immediate right.
3. No extreme points if f’(x) has the same sign on some neighborhood
Example
Let f ( x )=27 x −x3

Is the function is at its relative maximum or minimum at a

critical point?
1st find the critical value of the function
f ( x )=27−3 x =0, then the critical points of f are x 1=3, and x 2=−3
' 2

Then, what will be the value of f’(x) at the critical points?

The value of f’(x) changes its sign from negative to positive value at x= -3
which means that the function changes from decreasing to an increasing,
and changes from positive to negative value at x=3, which means that the
function changes from increasing to decreasing. Therefore, it is a relative
minimum.
To find out relative minima or maxima:

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 CHAPTER THREE: DERIVATIVES

Solution
f ( ( x) )=x −2 x−3=0, then solve the value of x using quadratic formula
' 2
A.

−b ± √ b2−4 ac
x=
2a
−(−2) ± √ (−2)2 −4 ( 1 ) (−3)
x=
2(1)
2± √ 4 +12
x=
2
2±4
X= , then x=3∨x=−1
2

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 CHAPTER THREE: DERIVATIVES

f ( ( x) )=x −2 x−3=0, then solve the value of x using quadratic formula

' 2
B.

−b ± √ b2−4 ac
x=
2a
−(−12)± √(−12)2−4 ( 6 ) (6)
x=
2(6)
12± √ 0
x= =1
12
 F (1)=3
The only critical value is(1 , 3).

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 CHAPTER THREE: DERIVATIVES

B. Second order derivative test for relative maximum or minimum

Suppose f (x) is a function of x that is twice differentiable at a stationary point x 0 .
1. If f ’ ’ ( x 0 ) >0 , then f has a local /relative minimum at x 0
2. If f ’ ’ ( x 0 ) <0 , then f has a local /relative maximum at x 0
3. If f ’ (x 0)=0, test in conclusive (maximum, minimum or inflection.)
Example:

Solution

In Summary: Condition Relative max Relative min

First order necessary condition f ' ( x 0 )=0 f ' ( x 0 )=0
'' ''
Second order sufficient condition f ( x 0 )<0 f ( x 0 )>0
n
Note that: For f ( x 0 )≠0 , where n is higher derivative or order n;
n
1. If f ( x 0 )≠0 and n is even,
even, the point is an extremum point

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 CHAPTER THREE: DERIVATIVES

A relative maximum, if n is even and f ( x ) <0.

(n )

I. 0

A relative minimum, if n is even and f ( x ) >0.

(n )

II. 0

n
2. If f ( x 0 )≠0 and n is odd, the point is an inflection point
I. A point of inflection, if n is odd number
Concavity Test
I. If f ’ ’(x )>0 for all x in an interval, then the graph of f is concave upward (convex) on an
interval. The graph is bending up on an interval
II. If f ’ ’ ( x )< 0 for all x in an interval, then the graph of f is concave downward (concave)
on an interval. The graph is bending down in an interval.
III. If f ' ’ (x 0 )=0 , then the graph of the function changes from bending up to bending down
or vice versa is called the infliction point, and the value of the function is either maximum
or minimum value
Example:
1. Given f ( x )=x 3−3 x−2 find
A. The ranges of x over which f (x) is concave up and concave down
B. The point of inflection
Solution: concavity and convexity
 If f ( x ) is concaveup , f ”(x )> 0
6 x >0
For x >0 , f ( x ) is concave up .
 If f (x)is concave down , f ”(x)< 0
Solution: point of inflection
f (x)=
6 x=0 ⇒ x =0
2. For the following function identify whether they are concave, convex or has point of
inflection at its respective critical values.
a) f(x)=2x2-4x
f ’ (x )=4 x −4
f ”(x )=4>0 , then the curve is convex downward.
b. f (x)=x3 −3 x 2 + 4
2
f ”( x )=3 x −6 x
f ”(x )=6 x – 6 , Point of inflection is where f”(x) =0, hence it will be at x=1.
Exercise

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 CHAPTER THREE: DERIVATIVES

1. Identify whether the following function is either at relative maximum, minimum or inflection
point.
A. f (x)=x3 −6 x 2−9 x−8
B. f ( x)=x5
C. f (x)=x2 (x−1)
Economic Application of Derivatives

Here we will consider the application of derivatives on different Economic issues. Since the
relation between economic variables can be expressed by means of functions and curves, the
derivatives obtained from these functions give us the marginal in economics. Most economic
decision problems make use of the concept of marginal. Thus, this chapter will focus on the
application of derivatives on marginal and average values of economic issues.
Objectives
At the end of this chapter, you will be able to:
- Understand the marginal and average concepts of some economic variables.
- Calculate the elasticity of demand and supply.
- Calculate the marginal and average revenue and cost.
- Understand the price and income elasticity coefficients.
Demand, Supply and Market equilibrium
a) Point Elasticity of demand
From microeconomics I, we can remember that elasticity is the relative change in demand in
−ΔQ
Q
Δp
response to a relative change in price. Thus, price elasticity at a point is: ed = p .
If the changes are small and the demand function Q=f(p) is continuous at price P, we can express
elasticity of demand as:
−ΔQ
Q ∆ Q dQ
Δp dQ p = , as ∆ P→ 0
× ∆ P dP
ed = p = - dp Q . Since

p dQ
×
In fact, the ratio Q dp gives us the average elasticity of demand over the price range of p.
According to the law of demand, if price increases demand falls (the change is negative). Thus,
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 CHAPTER THREE: DERIVATIVES

p dQ p dQ dQ
|ed|
ed = (-) Q dp = Q dp . Observe that dp is the derivative of the given demand function
with respect to price. For each price, the expression will give the elasticity of demand.
Example: 1) Find e d if the demand function is Q=7-2p
i) At P=1 ii) At p=2
dQ p p −2 p
ed = dp . Q  -2 × 7−2 p = 7−2 p
−2(1) 2
i) At p=1, ed = 7−2(1 ) = - 5 , hence demand is inelastic at p = 1.
−2(2) −4
ii) At p=2, ed = 7−2(2 ) = 3 , demand is elastic at p = 2.
b) Point elasticity of supply
It is the relative change in supply in response to a relative change in price. If Q stands for supply
and the supply function is written as Q = g (p), then elasticity of supply when a price change by
infinitesimal value is given by: e s=.
Note:-The slop of the demand curve is negative and hence e d is negative. However,
conventionally we use the absolute value. Similarly, the slope of supply curve is generally
positive and hence es is positive.
Example: 1) Find e s , for the supply function Qs = 5+2p2
i) At p=2 ii) At p=3
dQ p 4× p
2
es = dp . Q  5+2 p
4 (2 ) 16
2
i) At p = 2, es = 5+2(2) = 13 , supply is elastic
4 (3 ) 36
2
ii) At p =3, es = 5+2(3) =23 , supply is elastic.
dQ p
Note: /ed/ = dp . Q , is a formula for Point price elasticity of demand.
a) If /ed/ >1, demand is said to be elastic
b) If 0< /ed/< 1, demand is said to be inelastic
c) If /ed/ = 1, demand is unitary elastic
d) If /ed/=0, demand is said to be perfectly inelastic
e) If /ed/=∞ , demand is said to be perfectly elastic

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 CHAPTER THREE: DERIVATIVES

c) The relationship between average revenue, marginal revenue and price elasticity
Given total revenue function. (TR)
R = P.Q = Price × quantity sold, and Q = f (p)
d (TR) d ( PQ)
Then, marginal revenue (MR) = dQ = dQ
dP dQ
. Q+ p
= dQ dQ
dp dp Q 1
. Q+ p= p( . +1)= p(− +1 )
= dQ dq p ed
1 1
MR = P (1- ed ) = AR (1- ed )

ed
Or AR= MR ( ed−1 )

Then, it follows that when:

ed = 1, TR remains constant with a fall in price, MR = 0( or TR constant, P , MR = 0)
ed > 1, MR > 0, TR rises, when Q  or P
ed < 1, MR< 0, TR falls when Q  or P
4.2 Price and income Elasticties
Given the Engle curve equation Q = f(y), where y-is income. Then the point income elasticity
dq y
.
can be expressed as ey = dy Q .From the above expression, we note that:
a) If ey > 1, then it is a luxury good.
b) If ey < 0, then it is an inferior good.
c) If 0 < ey < 1, then it is necessity good.
Example: 1) Find the income elasticity of demand, if the Engle curve equation is 40Q = 20+5y,
at y= 8000, what can you say about the nature of the good?
1 4
+ y
 The given function can be re-expressed as Q = 2 8 .
dQ y
.
ey = dy Q

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 CHAPTER THREE: DERIVATIVES

1 8000
+
8 1 y
( + )
= 2 8 , but y= 8000
1 8000
[ ]
8 1 8000 1000
( + )
= 2 8 = 1000 .5
 0 < ey < 1, hence it is necessity good.
4.3 Cost Functions
For producing a given level of output, there is a corresponding outlay of money expenditure,
called costs of production.
Let us now generalize the total cost function:
TC = f (Q) + K, (K is fixed cost); f (Q) is variable cost)
TC f (Q )+K
=
Then average total cost = ATC = Q Q ,
f (Q )
Average variable cost = AVC = Q
K
Average fixed cost = AFC = Q .
f (Q )+ K
Therefore, ATC = AVC + AFC = Q
d (TC )
Marginal Cost = MC = dQ
Relationship between AC and MC
d (TC ) d [ AC×Q ] d ( AC ) dQ
. Q+ AC× →
MC = dQ = dQ = dQ dQ Product rule.
MC=Q .+ AC , Thus,

The rate of change of AC with respect to Q (the slope of AC) is:

d ( AC ) 1
dQ = Q
[ MC− AC ] = 1
Q dQ [
d (TC ) TC
−
Q ]
Characteristics of the Slope of AC Curve:

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 CHAPTER THREE: DERIVATIVES

i. When AC curve slopes downward [ i.e., if the slope of AC is negative.],then

d ( AC ) 1
( MC− AC )
dQ = Q < 0.
 MC –AC< 0.
 MC < AC; (MC lies below the AC curve.)
ii. When AC curve is rising [i.e., if the slope of AC is positive.], then
d ( AC ) 1
= ( MC −AC )
dQ Q > 0.
 MC –AC > 0
 MC > AC (MC curve is above AC curve.)
iii. At the minimum point of AC curve, the slope is zero.
d ( AC ) 1
= ( MC −AC )
dQ Q =0
 MC = AC (MC crosses the AC curve at the minimum point of AC
curve.)
Example: - 1) If TC (Q) = 0.5Q3- 0.7Q2 -30Q + 300, find
i) AC and its slope
ii) MC and its slope
iii) The values for which MC = AVC

Q - 0 .7 Q
3 2

TC 0 .5 -30Q + 300
=
i) AC = Q Q

300
= 0.5Q2- 0.7Q -30+ Q
d ( AC ) 300
dQ = Q – 0.7 - Q2
d (TC )
ii) MC = dQ = 1.5Q2 – 1.4Q – 30
d ( MC )
dQ = 3Q – 1.4
iii) MC = AVC

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 CHAPTER THREE: DERIVATIVES

1.5Q2 – 1.4Q – 30 = 0.5Q2 – 0.7Q – 30

Q2 - 0.7Q = 0
Q (Q - 0.7) = 0
Q = 0 or Q = 0.7, hence if the production process is running, then Q = 0.7 units.
The profit equation
Profit (π) = Total revenue – Total cost.

Π (Q)=TR (Q) – TC (Q)

If the TR of a firm equals its TC; then we can say that the firm is at its breaks even point.
I.e. TR = TC  TR – TC = 0.
Marginal profit: It’s the incremental profit obtained when a unit of output is produced and sold.
d ( Π ) d (TR) d (TC )
− ⇒ MΠ =MR−MC
Hence Mπ = dQ = dQ dQ
Q3
+210 Q
Example: 1) A firm assumed a cost function C (Q) =10 , where Q is the monthly
output. And its revenue function is given by R (Q) = 1500Q -1.5Q2
1. If the firm decides to produce with a marginal cost of 330, find the level of output per month
and the cost to the firm?
2. Find the level of output that maximizes the firm’s profit.
3. Calculate MR and MC at profit maximizing level of output?
4. Calculate the profit or loss at optimum condition?
Q3
+210 Q
Solution: - Given TC =10 ; TR = 1500Q – 1.5 Q2; MC = 330
1. Required: The level of output (Q) and total cost TC at MC=330.
TC =?
Q3
d [ +210 Q]
d (TC ) 10 3
= = Q 2 +210
MC = dQ dQ 10 , but MC = 330
3Q 2
+ 210=330 ⇒Q=20 ,
 Thus, 10 therefore the level of output is 20 units per month.
Q3 (20 )3
+210 Q + 210(20 )=5000
And TC = 10 , but Q=20  Total cost = 10
2. Find the level of output that maximizes the firm’s profit.
Profit can be reaches at maximum when marginal profit (Mπ )=0
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 CHAPTER THREE: DERIVATIVES

Mπ = 0
But profit (π )=R(Q)– TC (Q)
Q3 Q3
+210 Q)
= (1500Q -1.5Q2) – (10 = 1290Q – 1.5 Q2 - 10
d(Π) 3
 Mπ = dQ = 1290 -3Q - 10 Q2
−3 Q3
 10 - 3Q + 1290 = 0
3Q2 + 30Q – 12900 = 0
Q2 + 10Q – 4300 = 0, using general quadratic formula
Q = -70.76 or Q = 60.76473
 Q ≈ 60.76473 unit
3. Calculate the MR and MC at this level of output (60.76) and comment on the result.
At Q = 60.76
3 2
Q + 210
MC = 10
3
(60 . 76473)2 +210
MC (60.76) = 10
= 1107.7057 + 210 = 1317.7057≈ 1317.71
MR (60.76) = 1500 – 3(60.76473)
= 1500 – 182.29419
= 1317.7059
≈ 1317.71
Since, R (Q) = 1500Q – 1.5 Q2 and MR = 1500 – 3Q.
 Therefore, MR = MC at the level of output that makes Mπ =0
4. Calculate profit or loss at optimum condition
Q3
π (Q)=¿ Q=60.76
1290Q – 1.5 Q2 - 10 , at
3
(60.76)
π (Q)=¿ 1290 (60.76) – 1.5 (60.76)2 –
10
π ( Q )=78380.4−5537.67−22431.24=50411.49

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 CHAPTER THREE: DERIVATIVES

Optimization Problems
Profit Maximization and Cost Minimization

Conditions for Profit Maximization

So far we have seen how to estimate an output level that maximizes total revenue from the

demand function irrespective of total cost function of the firm. Now in order to maximize profit,

a firm must choose the output level such that its MC = MR.

Let us see the above argument graphically using the total and marginal approaches.

 In the total approach, profit reaches at maximum when the difference /gap between TR and

TC reach at maximum

 In the marginal approach, profit reaches at maximum when the additional revenue that the

firm earns from producing and selling an extra unit of output is exactly equal to additional

cost that the firm incurred to produce additional unit of output.

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 CHAPTER THREE: DERIVATIVES

Mathematical illustration.
1. The necessary condition for profit (π) to be a maximum.
d
π ( Q )=0
dQ
Π (Q) = TR (Q) – TC (Q)  total profit function, then derive marginal function
dΠ d (TR) d (TC )
= − → mπ=0
dQ dQ dQ Marginal profit function, then
MΠ =MR – MC =0
 MR – MC = 0
MR = MC this is called the first order condition (necessary condition). Thus the first order
condition for profit maximization gives us the level of output where MR=MC .
2. The sufficient condition for profit (Π) to be maximum i.e., MC is rising.
d2 Π d 2 Π d 2 (TR ) d2 (TC )
−
dQ2 < 0, but dQ2 = dQ2 dQ 2 < 0
d ( MR) d( MC )
−
= dQ dQ <0
d ( MR) d ( MC )
 dQ < dQ

Slope of MR< slope of MC

 This is called the second order condition
(sufficient condition)
d 2 ( TR )
¿¿
That is dQ 2
( Q )3
2
Example 1: Given TR=24 Q−Q and π ( Q )=240 Q− −Q2−91
6
1. Maximize the total revenue and total profit function by:
a. Finding the critical value
b. Testing the second order condition
c. Calculate the maximum profit.
Solution:-
a) TR = 24Q – Q2

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 CHAPTER THREE: DERIVATIVES

d (TR)
dQ =0 ⇒ MR = 24-2Q = 0 Q = 12 is critical value.
Q3
b) π = 240Q - 6 -Q2 - 91
d(Π) Q2
dQ =0 ⇒ Mπ = 240 - 2 - 2Q = 0 (multiply by 2 and by (-)
 Q2 +4Q – 480 = 0 using general quadratic formula, we get Q = 20 or Q = -24
d 2 ( Π ) d ( MΠ )
= =−Q−2
dQ 2 dQ
At Q = 20  π “(20) = - (20) – 2 = -22 it is relative maximum. Hence, the maximum profit
(20 )3
is π = 240(20) - 6 - (20)2 – 91
8000
= 4800 - 6 - 400 – 91
= 20309 units
Example 2: A company determines that the cost of manufacturing Q units of a commodity may
be approximated by:
C (Q) = 100 + 6Q2 + Q3
How many units should be produced in order to minimize the cost?
d (C )
Solution: - I. dQ =0, 12Q + 3Q2=0
 12Q +3Q2 = 0  Q (Q – 4) = 0
Q = 4 is the critical value.
d 2 (C ) d ( MC )
2
= =12+6 Q
II. dQ dQ , but Q = 4
 12 +6 (4) = 12 + 24 = 36 > 0 is relative minimum.
Thus, the company should produce 4 units of a commodity in order to minimize the cost.
SELF CHECK EXERCISE
1. Calculate the price elasticity of demand of the equation Qp3 = 50
2. Given Qx = 50 – 0.2 Px + 0.1Py – 0.8Pz – 0.5I, calculate the cross elasticity between good
x and y at Px = 5, Py = 10, I = 40 and Pz = 20, what can you say about the two goods?
1 2
x +50 y−5
3. Given u(x,y) = 100x - 2 to 2x + 5y = 600

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 CHAPTER THREE: DERIVATIVES

i. Find the optimal choice?

ii. Find the max (profit)?
4. A factory determines that the cost of manufacturing Q units of a commodity may be

10 Q2
+ .
approximated by c(Q) = 100 - Q 100 How many units should be produced in order to
minimize the cost?
5. Find the elasticity of demand for the following function at P = 4, 8Q + 2P = 56.
6. Compute the income elasticity, own price elasticity and cross price Elasticties for the
following demand function on good X as given by Q x=20,000−9 P x −11 P y −0.4 I ,
where px is price of good x, py is price of good y and I is the consumer’s income. (Given:
Px= 400 Birr, Py =100 birr and I=10,000). Identify whether the demand is elastic or
inelastic, whether the two goods are related or unrelated, and whether good x is inferior
or normal good.
7. Suppose, there are two commodities in the market and their respective demand functions
are given as,Q 1=P 10.5 P 20.9 and Q 2=P 10.35 P 20.67 Find:
A. Direct price elasticity of demand for good Q1 and good Q2 (I; e∈Q 1∧∈Q 2 ¿?
B. Cross- partial price elasticity of demands (ϵ Q 1 Q 2∧ϵ Q 2Q 1 ¿, if the price of Q1 and Q2 are
Birr four and Birr five respectively?

AU FBE, DEPARTMENT OF ECONOMICS: TESFAYE G. page 38