4.

6 Optimization
In this section, our goal is to be able to do the following:

1. Relate the concept of Absolute Extrema to Optimization

2. Use Absolute Extrema in the procedure of solving optimization problems

3. Deduce the function to be optimized given an optimization problem

4. Solve optimization problems of different types:

(a) Maximizing area, perimeter, or similar problems

(b) Maximizing revenue or profit

Day 2: Problems involving Revenue or Profit

We now move on from problems involving area and begin to tackle business-related problems.
The next few problems will tackle trying to optimize (maximize) revenue or profit given a
price-demand equation.

Before continuing on with the lesson, now might be a good time to review Marginal Analysis in
Business and Economics as the next few problems will bring back concepts from that section.

Example 3: Maximizing Revenue (P. 307)

An office supply company sells x permanent markers per year at $p per

marker. The price-demand equation for these markers is p = 10 − 0.001x.
What price should the company charge for the markers to maximize rev-
enue? What is the maximum revenue?

Again, try this problem out first before moving on. You should get the following. The company
will realize a maximum revenue of $25,000 when 5,000 markers are manufactured annually and
sold for $5 each.
Recall from Marginal Analysis in Business and Economics that we can get revenue from the
equation: Revenue = (Quantity)(Price) or R = xp. We are also given the price-demand
equation: p = 10 − 0.001x.

In this problem, since we want to optimize revenue, our function to be optimized is the revenue
function and our constraint is the price-demand equation:

Revenue = xp, and Price = 10 − 0.001x

This gives us the optimization problem:

Max R = xp, subject to p = 10 − 0.001x

As with the previous problems, we want to transform the function to be optimized into a
function of only one variable. We can easily substitute p = 10 − 0.001x:

Max R(x) = x(10 − 0.001x) = 10x − 0.001x2

Next, we must find the domain of the function R(x). Recall from Marginal Analysis that
demand (or quantity) can’t be negative and price can’t be negative as well, so we have x ≥ 0
and p ≥ 0. From p ≥ 0, we can get x ≤ 10, 000:

p = 10 − 0.001x ≥ 0 ⇒ 0.001x ≤ 10 ⇒ x ≤ 10, 000

This gives us the final domain of x ∈ [0, 10000] or 0 ≤ x ≤ 10, 000. Next, we want to find
the critical numbers, and we can get this by getting the zeroes of the derivative of the revenue
function R(x):

R0 (x) = 10 − 0.002x = 0 ⇒ x = 5000

Thus, our singular critical number is x = 5000. Finally, we want to evaluate R(x) on the critical
number x = 5000 and the endpoints of the domain: x = 0 and x = 10, 000.

Substituting the critical numbers and end points:

x R(x)
0 0
5000 25000
10000 0

Here, we see that the highest value of revenue is when x = 5000, which gives a total revenue of
$25000. Since p = 10 − 0.001x, substituting x = 5000 gives us p = 10 − 0.001(5000) = 5.

Thus, the maximum revenue of $25000 can be achieved by selling each marker at $5 per marker,
which would generate a demand of 5000 markers per year.
Next, we extend the previous example by adding a cost function in order to be able to optimize
a profit function.

Example 4: Maximizing Profit (P. 308)

Refer to Example 3. The total annual cost of manufacturing x permanent

markers for the office supply company in Example 3 is

C(x) = 5000 + 2x

What is the company’s maximum profit? What should the company charge
for each marker, and how many markers should be produced?

Try this problem out first before moving on. You should get the following. The company will
realize a maximum profit of $11,000 when 4,000 markers are manufactured annually and sold
for $6 each.

Now, we extend Example 3 by adding the Cost Function C(x) = 5000 + 2x. We will reuse the
following from Example 3: R(x) = 10x − 0.001x2 and p = 10 − 0.001x. Recall from Marginal
Analysis that Profit = Revenue − Cost or P (x) = R(x) − C(x):

P (x) = R(x) − C(x) = 10x − 0.001x2 − (5000 + 2x) = 8x − 0.001x2 − 5000

This gives us the optimization problem:

Max P (x) = 8x − 0.001x2 − 5000

Since our function to be optimized is already a function of just one variable, we can move on.

Since we’re adopting the same price-demand equation from Example 3, we have the same
domain here in Example 4. This gives us the final domain of x ∈ [0, 10000] or 0 ≤ x ≤ 10, 000.
Next, we want to find the critical numbers, and we can get this by getting the zeroes of the
derivative of the profit function P (x):

P 0 (x) = 8 − 0.002x = 0 ⇒ x = 4000

Thus, our singular critical number is x = 4000. Finally, we want to evaluate P (x) on the critical
number x = 4000 and the endpoints of the domain: x = 0 and x = 10, 000.
Substituting the critical numbers and end points:

x P (x)
0 −5000
4000 11000
10000 −25000

Here, we see that the highest value of profit is when x = 4000, which gives a total profit of
$11000. Since p = 10 − 0.001x, substituting x = 4000 gives us p = 10 − 0.001(4000) = 6.

Thus, the maximum profit of $11000 can be achieved by selling each marker at $6 per marker,
which would generate a demand of 4000 markers per year.

From here on, no more solutions will be given, just the final answers. The next example modifies
the cost function of the company in Examples 3 and 4 by introducing a government tax on each
marker produced.

Example 5: Maximizing Profit (P. 309)

Refer to Examples 3 and 4. The government decides to tax the company

in Example 4 $2 for each marker produced. Taking into account this addi-
tional cost, how many markers should the company manufacture annually
to maximize its profit? What is the maximum profit? How much should
the company charge for the markers to realize the maximum profit?

You should get the following. The company will realize a maximum profit of $4,000 when 3,000
markers are manufactured annually and sold for $7 each.

Remark: Examples 3-5

Even though the tax caused the company’s cost to increase by $2 per marker,
the price that the company should charge to maximize its profit increases
only by $1. The company must absorb the other $1, with a resulting de-
crease of $7,000 in maximum profit.

This decrease in the overall welfare of both the producer and the consumer
is called a ”Deadweight Loss” in Economics. This concept should be ex-
pounded upon in your Introduction to Economics course.
For more examples and explanations on optimization, the following video series by Khan
Academy is suggested.

https://tinyurl.com/KhanAcademyCalcOptimization