QUANTITATIVE METHODS FOR ECONOMISTS (I)

(ECON-301)

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 Table of content

Chapter 1_________________________________________________________5
Review of Basic concepts________________________________________________5
Introduction__________________________________________________________5
Objectives____________________________________________________________5
1.1 Functions__________________________________________________________5
1.2. Definition and significance of calculus_________________________________9
1.3 Applications of Functions in Economics________________________________9
1.3.1 Demand Functions______________________________________________________9
1.3.2 Supply Function_______________________________________________________10
1.3.3. Demand and Supply functions and their analysis_____________________________10
Self Test Exercises_________________________________________________________10
Chapter 2________________________________________________________11
The Limit of a Function________________________________________________11
2.1 The concept of limit________________________________________________11
2.2 The limit theorems_________________________________________________13
2.3 Continuous function________________________________________________15
2.4 Economic Applications on Limit_________________________________20
SELF CHECK EXERCISE_____________________________________________22
Chapter 3________________________________________________________23
The Derivative________________________________________________________23
3.1 The Concept of First Order Derivation________________________________23
3.2 Geometric interpretation of the derivative_____________________________25
3.3 Continuity and differentiability of a function___________________________27
3.4 Rules of Differentiation_____________________________________________28
3.5 Derivatives of logarithmic and exponential functions_____________________35
3.6 Higher Order Derivatives___________________________________________39
3.6.1 The concept of a derivative of order n______________________________________39
3.6.2 Formulas for the nth derivatives of some functions____________________________40
3.7 The sign of the Derivative________________________________________42
3.7.1 Maximization and Minimization____________________________________45
3.7. 2 Retrain for the nth Derivative test__________________________________46
SELF CHECK EXERCISE_____________________________________________47
CHAPTER 4_____________________________________________________49
Economic application of Derivatives_____________________________________49

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 4.1 Demand, Supply and Market equilibrium______________________________49
4.2 Price and income elasticties__________________________________________52
4.3 Cost Functions____________________________________________________52
4.4 Optimization Problems_____________________________________________56
SELF CHECK EXERCISE_____________________________________________61
CHAPTER 5_____________________________________________________62
Differential Calculus of Functions of Several Variables______________________62
5.1 Partial derivatives__________________________________________________62
5.1.1 First –order partial derivatives____________________________________________63
5.1.2 Higher order partial derivatives___________________________________________64
5.1.3 Applications of partial derivatives_________________________________________66
5.2 Definition and total derivatives_______________________________________70
5.2.1 Differentials__________________________________________________________70
5.2.2 Total differentials______________________________________________________73
5.2.3 Total Derivatives______________________________________________________77
5.3 Implicit and inverse function rules____________________________________79
5.4 Maximization and minimization of multivariable________________________81
5. 5. Unconstrained and constrained functions_____________________________84
5.6. Constrained: the method of lagrange for any equality constraint__________86
SELF CHECK EXERCISE_____________________________________________89
Chapter 6________________________________________________________91
Integral calculus______________________________________________________91
6.1 The concept of integration___________________________________________91
6.2 Properties and Rules of Integration___________________________________93
6.3 Some techniques of integration_______________________________________95
6.4 The definite integral________________________________________________97
6.4.1 Properties of definite integrals____________________________________________98
6.4.2 Improper integrals_____________________________________________________98
6.5 Economic applications of integrals____________________________________99
6.5.1 Applications of indefinite integrals________________________________________99
6.5.2 Applications of definite integrals_________________________________________100
Self – check exercise__________________________________________________105
Chapter 7_______________________________________________________106
Linear differential and difference equations______________________________106
7.1 Definition and concepts____________________________________________106
7.1.1 First order linear differential Equations____________________________________109
7.1.2 First order linear Difference equations_____________________________________112
7.1.3 First order linear difference equations_____________________________________114
7.2. Economic applications____________________________________________114
7.2.1. Uses of differential equations in economics________________________________114

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 7.2.2 Uses of Difference Equations in Economics________________________________117
Self – check exercise__________________________________________________117
ANSWER KEY TO SELF CHECK EXERCISE_____________________________119

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Course Introduction
Any theory has the aim of clarifying what course a certain phenomenon evented
and its possible effect/ consequence on the surrounding /environment. The
economic theory has same.
The cause and effect relationship is known when we undertake different
operational tools. One of the possible techniques is mathematical that signifies in
providing this techniques of analysis .Solutions to the economic problems/issues
may investigate, if we are well familiarized with mathematical techniques and
tools .Therefore, it is advisable that you need to be mastered with the knowledge
of mathematics.
Hence, this course contains the differentiation concepts of various functions
which involve uni- and multi- variables. It also includes optimization problems of
economic variables, and emphasizes the integration and difference equations
concepts.

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Chapter 1
Review of Basic concepts

Introduction
In this section you will be learned with some basic review concepts about
calculus. Here you will be introduced how calculus is applied to economic
problems.
Economic problems can be solved using mathematical tools based on economic
theories. There fore, you will mention what economic theory is and the difference
between economic theory and economic model, and the concept of equations, and
functions.

Objectives
At the end of this chapter you will be able to:
 Differentiate types of functions
 Understand the purpose of equations
 Compute/ solve economic problems using the appropriate function

What is a function?
What are the criteria of a function?

1.1 Functions
In the study of economic phenomena and the solution of mathematical problems,
one finds it necessary to consider the variation of one quantity as dependent on
the variation of another. For instance, in studies of analysis of demand, the
amount of quantity demanded of a given goods is regarded as a variable which
varies with the price level of that goods. Let us formulate a definition of the
concept of function.

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Definition 1. If for each value of the variable X (within a certain range) there
corresponds one or several values of another variable Y, then Y is a
function of X or , in functional notation, y = f(x).
The variable x is called the independent or the explanatory variable or argument.
The variable y is a dependent variable or the value of the function.
But if, a given value of X corresponds to more than one values of antoher variable
Y, then Y is not a function of X, but it is simply called relation. Hence, a function
is a special type of relation, but a relation is not necessarily to be a function.
Criteria to be y=f(x)
1. For each value of X there exists one and only one corresponding value of
Y value.
2. For each value of Y there can correspond with several value of X (more
than one X value can be associated with Y value)
3. For each value of X need not exist several value of Y.

Types of functions
The basic elementary functions are the following analytically represented
functions.
I. Constant Function
It is a function and its value of the function is fixed. The value of the
constant function does not change as the value of the independent
variable changes. The constant function can be denoted as follows:
y=C, where y is dependent variables C is constant number. Fixed cost
function can be given as an example.
II. Explicit and Implicit Functions
a) Explicit function
If a function which can be expressed in a form of y=f(x),
I.e. if we are able to solve the given function for the dependent variable
interms of any value assigned to independent variable directly, then we

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 2
say that y is an explicit function of x. Thus y= x 2+1; y= , etc are an
x
example of explicit function
b) Implicit function
It is designated in a form: f( x , y ) = 0
e.g. 4xy + x + 2y + 7=0
III. Algebraic functions
Algebraic functions include elementary function of the following kind.
a. The rational integral function or polynomial (explicit function). This type of
function can be expressed as follows:
n
f(x) = bo + b1x1+b2x2+ b3x3+…+bnxn=  bi
i

i 0
x (i=1,2,3,…,n )

Where b1,b2, b3,…,bn b1,b2,..,bn are coefficients of the independent variable,

bo is constant term, and n is non negative integer called the degree of the
polynomial.
Its degree is named by the highest power of the function. I.e., for example:
For i = 0, f(x) = box0=b  constant function (explicit function)
i= 1, f(x) = bo+b1x  liner function (explicate function)
i= 2, f(x) = bo+b1x+b2x2  quadratic function (explicit function)
i= 3, f(x) = bo+b1x+b2x2+b3x3  cubic function (explicit function)
n
i=n, (f) =  bix
i o
i
 polynomial function

b) Fractional rational function (implicit function)

It is given in the form; f (x , y) =0, of which the particular form may be: 4xy +
x + 2y + 7= 0 , when we solve for y in terms of x gives:
x7
y=-( ) and hence now y becomes an explicit function of x. Or if we
4x  2
want to solve the above explication function for x in terms of y gives:
2y  7
x = - ( 4 y  1 ) and thus x becomes an explicit function of y.

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 c
Another example of explicit rational function could be y , Where y-
x
average fixed cost , c-fixed cost and x- out put.

IV. Composite Functions

If a function z=q(x) with a set of values z is defined on an interval x, and a
function y=f(z) is defined on a set of values z ,then the function y = f [q(x)] is a
composite function of x and the variable z is an intermediate variable of the
composite function. Example, the function y= Ln x 2 is a composite function
defined throughout the number line since y= f(z) = Ln z and z=q(x) = x2
V. Inverse Function
We have seen that the function form (II. b) or (III) is said to be an implicit
function and it could be changed and expressed in a form of explicit function
in terms of either y or x (see III). In such cases each of the two functions is
called the inverse function of the other. In general, if y=f(x), defines y
explicitly as a function of x also defines x implicitly as a function of y, the
two functions thus defined by one equation are called inverse function to each
other. Usually the symbol of the inverse function for the function y= f(x) is

f  y .
1
expressed as

VI. Non- algebraic function

a) Exponential function  y  b x (b  0, b  1)
b) Logarithmic function  y  log b x (b  0, b  1)
c) Trigonometric function e.g. y=sin x.

Functions of two or more independent variables

A function denoted by the form y= f( x , z) has two in decedent variables, and a
function denoted by the form y= f(w, x, z) has three independent variables.In
general a function having k number of independent variables can be designated as
y=f(x1, x2, …,xk). An example for this type of function could be a production

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function of the form Q=f(L, k); Q=f(L ,L d, k) ; Q = f(l, Ld, k, En) or a utility
function of several goods.

1.2. Definition and significance of calculus

Calculus, which is the mathematics of change, motion and growth. It is a greatest
advancement in exact thinking and has applications in practically economic
activities. In this area the basic operations of calculus are dealing with static
economic model analysis and dynamic economic model analysis which focuses
on the differentiation concepts of several functions that evolves uni-variable and
multivariable optimization problems of economic variables are regarded as static
model. And whereas dealing with integration and difference equations are directly
associated with dynamic models.
Hence calculus is a mathematical tool which gives a paramount significance by
providing means of operation for economic diagnoses.

1.3 Applications of Functions in Economics

In this section we will discuss some important functional relation- ships and
analyses in economics.

1.3.1 Demand Functions

We know that demand curve for a normal good is negatively sloped. I.e. using
theory of economics, the fundamental law of demand states that the demand curve
has downward sloping. Transforming this idea to mathematical form demand is a
negative function of price. And in general a down ward sloping straight line

demand function can be expressed as Q d

 a  bP , were p- is price for a given

goods; Q d
is quantity demanded for that good. And a and b are coefficients

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1.3.2 Supply Function
Supply carves for normal goods are positively sloped. And it can be denoted as

Q s
 c  dP , where c and d are positive coefficients. It is then supply is a

positive function of price.

1.3.3. Demand and Supply functions and their analysis

When an equilibrium condition takes place in the market, quantity demanded
equals to quantity supplied. In this case, it is possible to equate the supply and
demand function in order to determine the equilibrium price and quantity.
I.e. Qs=Qd
Example: compute the equilibrium price and quantity for the following market
functions:
Qd =28-5p
Qs=20+3p
Equilibrium condition: Qd = Qs
28 – 5p = 20+3p
8 = 8p
1=p
Qs- 20 + 3p = 20 + 3(1) = 23 = Qd

Self Test Exercises

Chapter One
1. Whate is a function ?
2. Identify the difference between function and relation?
3. Given the following set of functions for similar markets, find the
equilibrium price and Quantity.
Qd = 85 – 3p
Qs=-5+15p
4. For the following set of functions, find the equilibrium price and
quantity.
2
Q  3Q  P  20
d d

10
  3Q  5 
2
10Q s s
p

Chapter 2
The Limit of a Function

Objectives
At the end of this chapter you will be able to:
 understand the concept limit
 recall the definition of limit
 compute limit problems
 differentiate continuous and discontinuous functions

2.1 The concept of limit

It is useful in developing some mathematical tools/ techniques and also in
analyzing various problems in economics using the limit method. Hence in this
section we shall consider certain cases of variation of a function when the
independent variable x approaches certain limit K or infinity.
Definition1. Let the function y= f(x) be defined in a certain neighborhood of the
point K or at a certain point of this neighborhood. The function y=f(x) approaches
the limit L (y  L) as x approaches K (x  K), if for every positive number 
,no matter how small, it is possible to indicate a positive number  such that for
all x ,different from K and satisfying the inequality, / x  k /   ,

We have the inequality / f ( x)  L /   , if L is the limit of the function f(x) as x

 K, we write lim
xk f ( x)  L . Or f(x)  L as x  K.
If f(x)  L as x  k, this is illustrated on the graph of the function y= f(x) as
follows.

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 Y y=f(x)

L+E

L 2E

L-E

 
X
K-  K K+ 

Example 1) A function may attain a finite value of L as x tends to a value k, then

we write this:
1
lim 1
a) lim
x2 ( x 3  3)  11 b) x
x   0


5x  1 1 5x  1 1 14 5
c) lim
x  
lim
x   lim
x  (5  )
3x  9 3 x3 3 x3 3
Example.2. A function f(x) may become infinite as x tends to a value K, then we

write this lim

x k f ( x)  

1 1
a)
lim
x   lim
x 1 
(1  x ) 2 (1  x)(1  x)

Left and Right –hand Side limits

lim
i) For a number k and L 1, x k  f(x) = L1, if and only if for all values of x
sufficiently close to k from the right of x = k, but not necessarily equal to k, the
corresponding values of f(x) become arbitrarily close to the number L1.
In this case L1 is called the limit of the function.

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  x 2 , for x  2


Example f(x) = 
 x  3, for x  2
, find the limit of the given
2


function as x  2  (when x is close to 2 form the right but not equal to 2 on

both sides.)
 lim
x2
f ( x)  4

ii) For a number k and L 2,

lim
xk 
f ( x)  L2 , if and only if for all values of x

sufficiently close to k from the left of x = k, but not necessarily equal to k, the
corresponding values of f(x) become arbitrarily close to the number L2 .
 x 2 , forx  2

Example f(x) = 
 x

2
 3, forx  2 , find the limit of the given function as x
 2- (when x is close to 2 from the left but not equal to 2 on both sides.)
 lim
x 2
f ( x)  3

iii) The limit of a function f(x) exists if and only if, both the right side and the
left- side limit exists and are identical.

I.e. lim
xk  f ( x )  L1 , and lim
xk  f ( x)  L2 , and L1=L2=L

or lim
xk  f ( x)  lim
x  k  f ( x)  L

Example 1) f(x) =x+1  lim

x  2  ( x  1)  x  2  ( x  1)  2
lim

2) f(x)=3  x 1  x 1  3

lim 3 lim

2.2 The limit theorems

If f(x) and g(x) are a functions, lim
x k f(x) = L and lim
x k g ( x )  m, and if C is any

constant, then

Theorem 1) Limit of a constant

lim
xk cc

,example lim
x2 88

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Theorem 2 . Limit of constant rule theorem
lim
xk cf ( x)  c xlim
 k f ( x )  kL

Example: lim
x 2 4 x 2  4 lim
x  2 x  4  ( 2)  16
2 2

Corollary, If f(x) = a x  b, is function with a and b are constants, then

lim
xk f ( x)  lim
x  k ( ax  b)  a x  k x  k  k b  ak  b
lim lim

Examples: 1) lim
x 4 (3 x  2)  3 lim
x  4 x    4  3  4  2  14
lim 2

2) lim
x4 (3x  2)  3 lim
x  4 x  x  4 2  3  4  2  10
lim

Theorem .3 Limit of Sum/difference rule

If f(x) and g(x) are functions, and lim
xk f ( x)  L and lim
xk g ( x)  m then
lim
x k [ f ( x)  g ( x)]  lim
x k f ( x)  x k g ( x)  L  M
lim

Example, f(x) = x -2 x 2 +4, then lim

x 2 f ( x) will be
lim
x2 ( x  2 x 2  4)  lim
x 2 x  x 2 2 x  x  2 4 
lim 2 lim

x2 x  4
= 2-2 lim 2

= 2-8 + 4 = -2
Theorem 4 .Limit of product rule
x  k f ( x )  L, x  k g ( x )  M
If f(x) and g(x) are functions and lim lim

x  k [ f ( x ).g ( x )]  x  k f ( x ). x  k g ( x )  L.M
then, lim lim lim

Example f(x) = (4+x) and g(x) = (x-6), then find

lim
x 3 f ( x).g ( x)  lim
x  3 ( 4  x )( x  6)

 lim
x 3 ( 4  x)( x  6)  x 3 ( 4  x) x 3 ( x  6)
lim lim

x 3 4  x 3 x )( x 3 x  3 6)
= ( lim lim lim lim

= (4+3) (3-6) = -21

Theorem 5) Limit of Quotient rule
The limit of a quotient of two functions is equal to the quotient of the limits of
these functions if the limit of the denominator is not zero.

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 f ( x) l xlim f ( x) L
i.e.
lim
xk  lim k  ;m  0
g ( x ) x  k g ( x) M

lim f ( x)
example: Given f(x) = (x+1) ; g(x) = (x+3) then find, x1 ,
g ( x)

x 1 lim
x 1 ( x  1) 2
 lim
x 1  
x3 lim
x 1 ( x  3) 4

Theorem 6) Limit of power

If [f(x)]n is a function and n is a positive integer then
lim
x k [ f ( x)] n   lim
xk f ( x)  n
 Ln ; L  0

Example: find lim

x2 (3  x ) 5

 lim
x  2 (3  x )  [ x  2 (3  x )]  5  3125
5 lim 5 5

1
lim n
f ( x)  [ lim f ( x)] n
n L
Corollaries 1 .
xk
xk
n n
x L
lim
2. xk

Theorem 7 .Limit of a polynomial function

n
  bi x
2 3 4 n i
If f(x) = bo  b1 x  b2 x  b3 x  b4 x  ...  bn x i 0

(i=0,12,…,n)
n n

x  k (b0  b1 x  b2 x ,..., bn x )   x  k bix  x  k ( bix )

f ( x)  lim
lim 2 n lim i lim i
then x k
i 0 i 0

which should take the property of sum limit theorem.

2.3 Continuous function

Let the function y=f(x) be defined for some value K 0 and in some neighborhood
with center at K0. Let y0 = f(K0).

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If x receives some positive or negative increment K and assumes the value of x
= K0 + K , then the function y too will receive an increment y . The new

increased value of the function will be y 0

+ y = f(K0 + K ).

Y
M

M0 N

Y0

K
0 K0 K0+  K X

Definition 1. The function y = f(x) is called continuous for the value x=k o or at
the point ko, if it is defined in some neighborhood of the point ko and if
lim
k  0 y  0 or which is the same thing,

lim
k  0 [ f (ko  k )  f (k 0)]  0
In short, a function f(x) is said to be continuous at a point k, if the following three
conditions are full filled.
i. f (k) is defined [exists and is finite,]
lim
ii. x k f ( x) exists, and

iii. lim
xk f ( x)  f ( k )

Hence continuous function is one which has no gaps or Jumps at x=k in its curve.
The major and the only condition for continuous functions is that it can be drawn
with out lifting the pencil form the paper.
But if the above three conditions are not satisfied for any value of x, f(x) is said to
be discontinuous for that value of x.
1 x
Example: 1) show that f(x) = is continuous at x = 1
x2 1

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Soln : according to the above three conditions:
i. f(k) exists of finite
11 2
 f (1)    1 This is defined
(1)  1 2
2

lim
ii. x k f ( x) exists

1 x lim
x 1 (1  x) 2
 lim
x 1 [ 2 ]   1, exists
x 1 lim
x 1 ( x 2  1) 2

iii. lim
xk f ( x)  f ( k )

 Since lim
x 1 f ( x)  f (1)  1 , the function is said to be continuous.
2
2) Show whether the function =
1 x is a continuous at x=-1.
1 x
Solution: - According to the above conditions we have:
i. f(k)  exists and is defined.
1  ( 1) 2
f (-1) =  is not defined
1  ( 1)

ii. lim
xk f ( x)  exists

1  x 2 lim (1  x)(1  x) lim

 lim
x  1 [ ]  x [  x 1 (1  x)  2
1 x (1  x)

iii. lim
xk ( f ( x)  f (k )

 Since lim
x  1 f ( x )  f ( 1), then the function is discontinuous ( not

continuous at x = -1)

Continuity in and Interval

Definition 2 . If the function y = f(x) is continuous at each point of a certain
interval (a, b) where a<b, then it is said that the function is continuous in this

interval. Thus if the function is also defined for x= a, and lim

x a 0 f ( x)  f (a ), it

is said that f(x) at the point x = a, is continuous on the right. And if,
lim
x b  o f ( x)  f (b), it is said that the function f(x) is continuous on the left of the

point x = b.

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Corollary If the function f(x) is continuous at each point of the interval (a, b) and
is continuous at the end points of the interval, on the right and left, respectively, it
is said that the function f(x) is continuous over the closed interval [a, b]
2
Examples: 1) determine whether the function y  x continuous in the interval
(1, 4) .According to the definition – 2 and corollary, we have
lim
x 1 0 x 2  1  f (1); lim
x  4  0 x  16  f ( 4),
2
hence the function is continuous over
the closed interval [1,4]
1
2) Determine whether the function y= is continuous in the interval or at the
x

1
point. Using definition 2 and corollary, we have the function y = is continuous
x

1
over the intervals (- ,0)and (0,) and the function y = is discontinuous at
x
x = 0, ended the function is not defined at x = 0 and its limit at x  0 does not
exist

Theorems as continuous function

The sum, difference, product and quotient of any finite number of functions that
are continuous in the given domain are continuous respectively.
1. Every polynomial function is continuous in its domain.

x  k f ( x)  f ( k )
i.e, for a point k in the domain, continuous in its domain, lim
2. if the function f(x) and g(x) are continuous, then
i. f(x)  g (x ) is continuous
ii. f(x) .g(x) is continuous
f ( x)
iii. g ( x) is continuous, provided that g(x)  0
1
3. if(x) is continuous function at x = k and f (k )  0 ,then is also
f ( x)

continuous at x = k.
i.e , the inverse of a continuous function is also continuous.

18
4. if f(x) is a continuous function at x = k then, /f(x)/ is also continuous at x = k.
5. if(g) is a continuous function at k, and the function f is continuous at g(x), then
the composite function fog(x) is continuous at k.
 lim
x  k fog ( x )  x   f ( g ( x ))  x  k f ( g ( k ))
lim lim

( x  1)( x  2) 2 ( x  20) 3 lim 1 2 20

Example: 1) lim
x  6
 x  [(1  )(1  )2(1  ) 3 ] 
x x x x
1 lim 2 20
= lim
x (1  ) x  (1  )2 lom
x   (1  )3  1.1.1  1
x x x
2

2.
lim
x 1
x 1  lim
x 1
( x  1)( x  1)
 lim
x 1
x 1

lim( x 1)
x 1

2
x 1
3
( x  1)(1  x  x2) 1 x  x2 lim
z 1(1 x  x 2 )
3

1
1
x 1 x 1
3)
lim
x  ( x 2  x  1  x )  lim
x   lim
x  
x  x 1  x
2
1 1 2
1  2 1
x x

Important limits
x n  k n lim ( x  k )( x n 1  kx n  2  k 2 x n 3  ...  K n 1 )
a)
lim
xk  xk  nk n 1 , K  0.
xn (x  k)

1 x
b) lim
x   (1  ) e :. By the definition of the number e.
x
lim 1
c) x 0 (1+x) x =e

n
d) lim
x   (1+ ) x  e n
x

lim ax 1
e) x 0 ( ) =loge  =lna
x

lim ex 1
f) x 0 ( ) =logee = 1
x
log a (1 x)
=logae(a>0, a  1)
lim
g) x 0
x
ln(1  x )
h) lim
x 0 1
x
Examples:

19
 1 x  5 lim 1 1 5
1) lim
x (1  )  x  (1  ) x .lim
x   (1  )  e.(1  0) 5  e
x x x
x
8 x 8 1
2) lim
x  (1 )  Lety  8  x  y  x  8 y
x
8

1
 1  y
= lim
y  (1  ) 8 y  lim
y
y  1    e 8

 y  
2
x
3) lim (1  1 ) x  y  lim
1
. ln 1 x  x

x 
y k x
x 
y k
e 1
y
x
e

2.4 Economic Applications on Limit

1. The cost equation for metal factory in manufacturing spade is C(x) = 50000 +
50x, where x is the number of space produced, the average cost per spade is

c( x)
c( x )  , if 50 spades were manufactured, what is the average cost per
x

50000  50 x
spade? .We know, that AC= c( x)  .
x
c ( x) lim 50000  50 x 4750
lim
x 50  x 50 
x x 5
2. A metal factory producing a construction materials and has established that on
the average, a new employee can produce f(x) construction materials per day

1000 x
after x days of on the job training, as given by f(x) = , find
x9

lim 1000 x
x 
x9
1000 x lim 9000
Soln: lim
x   x  (1000  )  1000  0  1000
x9 x9
3. if 1000000 is invested at 10% of compounded in n times per year, then the
amount in the account A(n) at the end of one year is given by:

20
 n

A(n)  1000000 1

 0.1 
  1000000e .
 n 
n

1000000 1
 0.1 
Find lim
n .
 n 
n
 0.1 
1000000 1
Solun. lim
n   1000000e
 n 
4. The Bahirdar textile factory was found to be contaminating the Blue Nile river
with toxic chemicals which extracted as a byproduct.
A water quality agency ordered the factory to take immediate corrective action
and to contribute to a momentary pool for testing and clean up of the
contamination. Suppose the required monetary pool for the testing and clean – up

5x
is estimated by; p(x) = ,
2x
Were x is the percentage of the total contaminate removed. Find
lim
i. x 0.5 p( x)

ii. What happens to the required monetary pool as the desired percentage of
contaminant removed approaches 100% (x approaches 1 to the left)?
5x
soln: i. lim
x  0.5  1.6667
2 x
5x 5
ii. lim
x 100%  5
2 x 1
5. A student in qualitative learning theory, proposed the function f(x)=

A( x  c)
, to describe the number of successful acts per unit contact time
( x  c)  b

that a person could accomplish after x sessions, suppose for a particular

100( x  1 _)
person enrolling in economics department f(x)= , where f(x) is the
x5

21
 number of sub-topics per contact hr that the person is able to successfully
under stood after x contact hrs of lessons.
Find:- i. f(30)
100(30  1) 100(31)
  88.57
Soln: f(30)= 30  5 35

ii lim
x 30 f ( x ) ,

100( x  1) 100( x  1) 100 lim ( x  1) 100(31)

lim
x 30 = lim
x  30  limx 30   88.57
x5 x5 x  30 ( x  5) 35

SELF CHECK EXERCISE

Chapter Two
I. Find the limit.

lim
1. x 2 x2

lim x 2  4x  3
2. x 1
x 2  2x  3
1 x  1 x
3. lim
x0
x

lim p3  8
4. p2
p2

II Find the limits of the following expressions, if they exist.

lim x2
1. x 1
x 1

lim 3x  7
2. x 2
x2  4

lim x2  x
3. x 1
x 1
lim 5
4. x 0
x

5. lim
x x[ x 2  3  x]

22
 lim 2 x  3 x 1
6. x  ( )
2x  1

lim 12  2 2  3 3  ...  n 2
7. n 
n3

23


The Derivative
Understanding and application of derivation is very use full in business and
economics which is concerned with changes like length, growth,
liquidity/bankruptcy, increasing and decreasing returns, costs, profits, etc.
Some of the economic decisions depends on the result to the following questions:
I.e. whether the particular economic activity action would relatively increase to
some body’s benefit than the effort spent for pursuing it.

A consumer or a producer (a decision making agents) may raise the above

question, which is crucial for undertaking final decision that may give a solution
of such economic problem. A wide range application of such concept in
economics is the filed of marginal analysis and optimization. i.e., the marginal
rate of change is a change over a particular small change of a related variable.
Hence, the derivative is expressed as measure of a change in the dependent
variable due to a very small change in the dependent variables.

Objectives
At the end of this topic the student will be able to:
 State the definition of derivatives
 Understand to drive given orders of functions.
 Differentiate the necessary and sufficient condition of derivation.
 Use different rules of differentiation in solving the given problems.

3.1 The Concept of First Order Derivatives

1. Definition of the derivative:-
Let the function y=f(x) be defined on an interval (a, b). We take an arbitrary point

x   a, b , and assigned an arbitrary increment ∆x to the argument x at the point

0

x 0
, the increment being such that the point x 0+  x also belong to (a, b). The

function gets an increment y  f ( x0  x)  f ( x0 )

24
 y y1  y 0
Here the change in y per unit change in x can be expressed as:  =
x x1  x0

f ( x0  x)  f ( x0 )
which is called the difference quotient. And thus it measures
x
the average rate of change of y.
Example y=f(x) = 2x 2 -1
2 2
f(x0)= 2 x0  1  2 x0  1
2
f ( x0  x)  2( x0  x) 2  1  2 x 0  4 x 0 x  2(x) 2  1
2
y f ( x0  x)  f ( x 0 ) [2 x0 2  4 x 0 x  2(4 x) 2  1]  [2 x 0  1]
 
x x x
4 x 0 x  2( x) 2
=  4 x0  2( x)
x
Let x0=3 and x  5, then the average rate of change of y will be

y
 4 3  2 5  12  10  22.
x
Definition . The derivative of the function y= f(x) at the point xo is the limit of
the rate of the increment of the function at this point to the increment of the
argument as x  0 (provided that this limit exists).
df d [ f ( x )] dy
The symbol y’(x0), f’(x0), f’, , orD x [ f ( x 0 )]; are used to denote the
dx dx dx
derivative of the function y= f(x) at the point x0. Thus by definition:
y lim f ( x 0  x)  f ( x 0 )
f’(x0) = lim
x  0  x 0 (provided such limit exists)
x x
Example;
1. Given f(x) = 3x2+5x+2; then f’(x) will be
2
f( x  x )  f ( x = lim
) 3( x 0  x) 2  5( x0  x)  2  (3 x 0  5 x 0  2)
f’(x)= lim
x  0
0 0

x x 0
x

= lim
2
 
3x 0  6 x 0 x  3 x  5 x 0  5x  2  3x 0  5 x 0  2
2 2
=
x  0
x

25
 = lim
6 x 0 x  3  x 2
 5x
= lim
x 0
6 x 0 x  3x  5
 6 x0  5
x  0
x x

2. If f(x) = x , then f’(x) will be;

f ( x 0  x)  f ( x0) x 0  x  x 0
 lim
lim
f’(x) = x  0
x 0
,
x x
Rationalizing the numerator we have:

x 0  x  x 0 x 0  x  x 0 x 0  x  x 0
lim
x  0 .( )= lim
x  0

x x 0  x   x 0 x( x 0  x )  x 0

x 1 1
=
lim
x  0  lim
x 0 
x( x0  x  x 0 ) x0  x  x 0 2 x 0

3.2 Geometric interpretation of the derivative

Let the function y=f(x) is defined on the point in the interval (a, b) and the point Q
on the graph of the function corresponds to the value of the argument xo and the
point k to the value x 0  x. We draw a straight line through the points M and K
and call it a secant. Then we denote the angle between the secant and the x-axis

by   x  . The angle   x  depends on x . If there is a limit lim

x  0   x    0 ,

then the straight line with the slope M= tan  0

,

Y y=f(x)
F(x0+  x) Secant line
K Tangent line

y y
F(x0) Q
x

0  0 (  x)
0 a x0 b x
X0+  x

26
Which passes through the point Q(x0, f(xo)), is called the limiting position of the
secant Qp as x  0( or as p  Q) ,and it is called the slope of the tangent to the
graph of the function y= f(x) at the point Q(x0, f(xo)).

Example 1. Given a linear function f(x)=2+3x, find f’(x).

f ( x0  x)  f ( x0) 3( x 0  x)  2  (3x 0  2)

f’(x) = lim
xo 0  lim
x 0 
x x
3x
= lim
x 0 3
x

5- f(x) = 2+3x
4- y
3-
2– x
1–
, , , , , , x
-3 -2 -1 1 2 3

27
Note: Derivative of a linear function is equal to the slope of the curve.

3.3 Continuity and differentiability of a function

To understand the relationship between the concept of differentiability and
continuity, first examine the given (original) function y=f(x) whether it is

continuous or not at a given point C. i.e. if lim

x c f ( x)  f (c) then satisfies the

continuity condition.
Second evaluate the limit of the difference quotient to know whether the

f ( x 0  x)  f ( x 0 )
derivative of the given function exists. I.e. f ' ( x)  lim
x  0
x
exists, then it satisfies the differentiability condition. Thus, we can conclude that
continuity is a necessary but not a sufficient condition for differentiability.
Note: All differentiable functions are continuous, but all continuous functions are
not necessarily differentiable. To understand more let us see the following
examples:
I) continuity requirement :
i) Let y= /x/, and at a point x = 0, f(0)=0
ii) Right – hand limit
lim
x 0  f ( x)  lim
x 0 x  0

Left hand limit:

lim
x 0  f ( x )  lim
x 0 
x 0

 The limit on both sides exists and is equal and finite. Hence, the function is
continuous at x = 0

28
 Y

6- f(x) =/x/
5-
4-
3-
2-
1-
‘ ‘ ‘ ‘ ‘ ‘ ‘ ‘ x
-4 -3 -2 -1 0 1 2 3 4
-1 -
-2 -

II. Differentiability requirement:

Let f(x) = x and x  0, then to be differentiable,

lim
( x 0  x)  f ( x0)
x  0 
=f’(x) shall be exist and finite.
x
i.e right hand limit:

( x0  x)  ( x0) x
lim
x  0   lim
x  0  1
x x
Left hand limit:

 ( x0  x)  [( x0)]  x

lim
x  0   lim
x  0   1
x x
Since the limit dose not exist the function is not differentiable at x = 0. Hence
continuity does not necessarily mean differentiability.

29
3.4 Rules of Differentiation
Differentiation is the process of finding the derivative of a function. It involves
nothing more complicated than applying a few basic rules or formulas to a given
function.Some of the rules are listed below.
I. Constant Function Rule
Given a function f(x) = k, where k is any constant, then y’=f’(x) = 0
Proof: - for any x and x we have f  x  x   k and y  f  x  x   f ( x)  0

y
.Hence, we have for any x  0 ,
x
y  f  x  x   f  x   k  k 
Thus, f’(x) =
lim
x  0  lim    lim  0.
x x 0  x  x 0  x 
y lim 7  7
Example 1. If f(x)=7; lim
x  0  x 0 0
x x

II. Power Function Rule

The derivative of the function y=f(x) = xn, where n is any real number is equal
to nxn-1

f  x   x is
n
Proof: - Let a function and x  h, then

f '  x   lim
 x  h n
 x
n

h0
h

But
( x  h) n  x n  (1n ) x n 1 h  ( n2 ) x n  2 h 2  ( 3n ) x n 3 h 3  ...  ( nn ) x n  n h n 

n(n  1) n  2 2
 x n  nx n 1 h  x h  ...  h n
2!

30
 nx n 1 h n(n  1) x n  2 h 2
(x 
n
  ...  h n  x n )
 f ' ( x )  lim 1! 2!
h0
h


n n 1 x 
n 1 n2

h  nx  h  ...  h 
n 1

 1! 2!  = nxn-1
 x   lim  
1
 f h 0 h
dy
Example 1. y  5 x 3 ,  f ' ( x)  y '  3(5 x 31 )  15 x 2
ax
1 6
2. f(x)= 6
, f ' ( x)  6 x  6 1  6 x  7  7
x x

III. Sum/ Difference Rule

The derivative of the sum/difference of a differentiable functions is equal to the
corresponding sum/difference of the derivatives of these functions.
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
Proof: - Let F(x) = f(x)  g(x)
F ( x  x)  F ( x)
 F ' ( x)  lim
x  0 
x
[ f ( x  x )  g ( x  x)]  [ f ( x)  g ( x )]
 lim
x  0 
x

f ( x  x)  f ( x) lim g ( x  x)  g ( x)

=
lim
x  0  x  0 =
x x
= f’(x)  g’(x)
Example 1) f(x) = 9x2 + 3x + 7
d (9 x 2  3 x  7 ) d (9 x 2 ) d (3 x ) d (7 )
  
f’(x)= dx dx dx dx

=18x +3 + 0 = 18x + 3
2
2) f(x) = 9 x  3x

31
 d (9 x 2  3 x) d (9 x 2 ) d (3 x)
f’(x) =    18 x  3
dx dx dx
Note. A constant factor may be taken out side the derivative sign, i.e., if y =
Cf(x), where C is a constant, then y’ = Cf’(x).
Proof: - like that of (I), we have y = Cf(x);
Cf ( x  x)  Cf ( x) f ( x  x)  f ( x)
Y’ =
lim
x  0  C lim
x 0  Cf ' ( x)
x x
[( x  x) 2  ( x) 2 ]
Example: f(x) = 6x2; f’(x) = 6 lim
x  0  12 x
x

32
 IV. 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) as two differentiable functions, then
d
[f(x) . g(x)] =f’(x). g(x) + f(x) . g’(x)
dx
Proof: - Let F(x) =f(x) . g(x)
F ( x  x)  F ( x) lim [ f ( x  x).g ( x  x)]  [ f ( x).g ( x)]
 F’(x) = lim
x  0  x 0
x x
By adding and subtracting g ( x  x) f ( x) in F(x), we get;
lim f ( x  x).g ( x  x)  g ( x  x) f ( x)  g ( x  x) f ( x)  f ( x).g ( x)
F’(x) = x 0
x
lim [( f ( x  x)  f ( x)]g ( x  )  f ( x)[ g ( x  x)  g ( x)
= x  0
x
lim ( f ( x  x)  f ( x)]g ( x  x) f ( x)[ g ( x  x)  g ( x)]
= x  0 +
x x
F’(x) = f’(x). g (x) + f(x). g’(x)
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
Example: - 1) y=5x3(2x-5)
3
 Let f(x) =5 5 x , f’(x)=15x2

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
= 40x3-75x2

33
 V. 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
f ( x) d f  x f ' ( x)  f ( x).g ' ( x)
h(x)= ,then ( ) 
g ( x) dx g ( x) [ g ( x)] 2
f ( x)
Proof:-Let h(x)= g ( x)

 f ( x )  h( x ) g ( x )
 f ' ( x)  h' ( x) g ( x)  h( x) g ' ( x) ---------------------------------------product rule

h’(x)g(x)= f’(x) - h(x)g’(x)

f ( x)
f ' ( x)  g ' ( x) f  x
h’(x)= g ( x) ; h x  
g x
g ( x)

f ' ( x ).g ( x)  f ( x).g ' ( x)

=
[ g ( x )] 2

Example: differentiate with respect to x.

2

f ( x)  x ; f ' ( x) 
2 x.(1  x)  x 2 (1) x 2  2 x

1 x (1  x) 2 (1  x) 2

VI .Composite Function/chain rule/

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

function y =   x  has a corresponding valued of x, the derivative y'   '  x

x

, then the composite function Z  f   x   at the given point x also has a

derivative, which is equal to:
dz dz dy
Z x  f y ( y ) ' ( x) or  .
dx dy dx

34
 f ( ( x  x))  f ( ( x))
Proof: - By definition f '    x    lim
x  0
x
Let   x   y and  ( x  x)  y  k , then  (x+ x)  y  k
f ( ( x  x)  f ( ( x)) f ( y  k )  f ( y ) k
  . 
x k x
f ( y  k )  f ( y )  ( x  x)   ( x)
= . , but as x  0, k also tends to zero
k x
f ( ( x  x))  f ( ( x)) lim f ( y  k )  f ( y ) lim  ( x  x)   ( x)
 lim
x  0  k 0 . x  0 
x k x
=f ‘(y).  ‘(x) =f ‘(  (x)).  ‘(x)
Thus, for instance, if y=f(x), where x =  (u) , and z= z (v) and v= x(t), then the
derivative y’(t) is given by: y’(t)= f’(x) .  ’ (u) z’ (v) x’ (t) or

dy dy dx du dv
 . . .
dt dx du dv dt
Example: - 1) Differentiate the following composite functions.
i) if y = 5x2, z = 7y + 3,
dz dz dy
:. dx  dy . dx  7 10 x  70 x

ii) x = 10p – p2, p = 0.7y -2

dx dp dx
:. dy  dy . dp  0.7(10  2 p)

Corollary: If y = [f(x)]n , y’ = n[f(x)]n-1. f’(x)

dy 1 1 6x  5
 (3x 2  5 x  7) 2 . 6 x  5 
1
Example: y=(3x2 + 5x + 7) ;
2
dx 2 2 3x 2  5 x  7

35
VII. Inverse Function
If a function y= f(x) has a derivative f’(x0)  0 at the point x0, then its inverse
x=  (y) also has derivative at the corresponding point y 0= f(x0), and  ’(y0)=

1 d 1
1 or 
, or  ’(y0) = f ' ( ( y 0 ) dy dy
f ' ( x0 ) ( )
dx
 ( y 0  y )   ( y o )
Proof: - By definition  ’ (y0) = y  y
lim

1 0 y1  y 0

Let x1   (
k
y 0
 y ); x 0a   ( y 0 )

Since y and x (f and  ) are inverse functions of one another; it follows that:
 (y0+  y)=k; iff f(k)=y1
 (y0)= a; iff f(a) = y0
The statement y1  yo in the above limit may be replaced by k  a;
k a 1
   ' ( x0)  lim
k a 
lim
Thus ’(y0)= k  a f ( k )  f (a) f (k )  f ( a)
( )
k a
1 1
lim
  ' ( y0 ) 
=
y  0
f ( ( y1  y ))  f ( ( y 0 )) f ' ( ( y 0 ))
y

Example, 1. Find the derivative of the inverse function for the following given
function.
y  1 dy 1 1 1 ( y  1) 2
;    
a. x= y  1 dx dx ( y  1)  ( y  1) 2 2
[ ]
dy ( y  1) 2
( y  1) 2

dy 1 1 1 1
   
b. x=y ; dx dx2 2 y 2y 2 x
( )
dy 1

36
VIII. 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.
There fore, it may sometimes be difficult to solve an equation explicitly for a
dependent variable interms 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.
Examples:
dy
1. Find by implicit differentiation.
dx
a) 6x2 + y3 = 0 b) x  y  3

dy 1 12 1 12 dy
12x + 3y2 =0  x  y 0
dx 2 2 dx
dy 12 x 4x dy
=- 2  2 = -
dx 3y y dx

1
x 2  y
1

y 2 x
c) 4x3 + x2y – 3xy2 – 5y3 = 9
 12x2dx + 2xydx + x2dy – 3y2dx – 6xydy – 15y2dy = 0
(12x2 + 2xy – 3y2)dx + (x2 – 6xy – 15y2)dy = 0
12 x 2  2 xy  3 y 2 dy

15 y 2  6 xy  x 2 dx

37
3.5 Derivatives of logarithmic and exponential functions
A) Natural logarithms.
dy 1
a) Given the function y = ln x, its derivative will be : =
dx x

f(Q) f(x)

f(p)
x
2 p Q

Fig. 1 The graph of the function y=f(x)

Proof: - By definition,
lim f ( x  x)  f ( x)
f’(x) = x  0
x
lim f (Q )  f ( p )
= Q p
Q p

p p p
Let k = Q  p  i. Q - p = ;because, k(Q – p) = p ,and Q – p =
k k
Q 1 Qk pk p
ii. p  1  k ;because, Qk – pk = p ; pk

pk

pk

1
ln(1  )
k Q p 1
then, f’(x) =
lim
k  ; 1 1
p p pk k
( )
k
k 1 1 1 k 1 1
=
lim
k  ln(1  )  lim
k  ln(1  )  ln e 
p k p k p p,

1 k
Where lim
k  (1  ) e
k
1
Since “p” takes any value of x, in the domain, f’(x) = ,
x

38
But in general, for a function y = ln f(x), where f(x) is another function and if both

dy f ' ( x)
are differentiable, f(x) ≠ 0, then dx  f ( x)

dy d ( x) 1
Example: 1) y =lnx;   , where f(x)=x
dx x x
dy f ' ( x) 6 x 2 3 3
2) y= ln2x3;
dx

f ( x)

2 x3
 , where f(x)=
x 2x

B) Derivatives of an exponential function

dy
a) Given the function y=ex, its derivative will be ;  ex
dx
x
Proof: - If y  e is an exponential function with base “e”, then the inverse of
the function will be x= log ey=lny
dy
dx 
y

dx 1
 , then
dy y

dy 1 1
   y  ex
dx dx 1
( ) ( )
dy y

In general, for the function y = ef(x) ,

where f(x) is a differentiable function, then

dy
 f ' ( x ).e f ( x ) .
dx
Examples: Find the derivative of the following functions.
dy
a) Y = ekx; Let kx = f(x)  f’(x) = k, then  f ' ( x).e f ( x ) = kekx
dx
where k is any constant number.

x
2
dy 2
7
 14 xe x
7
b) y=
e ;
dx
c) y=k3 lnk2 ; let z3=f(x) and g(x)=lnz2

39
 dy
 f ' ( x ).g ( x )  f ( x ) g ' ( x )
dz

2 2 z 3 (2 z ) 2
=3
z ln
z +
z 2
 3z2 ln
z +2z2

= z2(3 ln z2+2)
= z2(in z6+2)

B. The case of base b

dy 1
i. If y= log bx is a function, then 
dx x ln b
Proof: Let y = log bx , using change of base theorem, we can exprese
log e x ln x
y= log bx = b

log e lub

dy 1 d (ln x) 1 X ln x
 
dx lub dx

x ln b
// log b =
ln b
f  x
In general, if y= log b is a function of f(x) is another function; then

dy f ' ( x)

dx f ( x) ln b

Example 1 . Compute the derivative of the following functions

a) y =b(1+sx2) , let f (x) = 1+ 5x2  f’ (x) =10x , thus

dy f ' ( x) 10 x
 
dx f ( x) ln b (1  5 x 2 ) ln b

 f ' ( x)  2 x e x
2

b) y= aex-2 ;let f(x)=e-x2

dy  2 xe  x
2

 2x
  
dx e  x ln a
2
ln a

dy
ii) If y = bx is a function, then  bx lnb
dx
x
Proof: - Let y  b , and let b=elnb, hence
dy
y= exlnb; then  f ' ( x). ef(x)
dx

40
 where f(x)=xlnb, f’(x)=lnb
dy x x

dx
 ln b. exlnb =
ln b b .  b ln b
x
Or, given y  b , applying “ln” on both sides, we have; lny= x lnb
(lny)’= (x’ lnb)  find the derivatives
dy dy dy
 lnb dx   y ln b, but y=bx hence, = bxlnb
y dx dx

f ' x . b
f  x dy f  x
In general, if y b is a function, then  . ln b
dx
Example; compute the derivation of the following functions ?

y  7 3  t  , let f  x   3 
 2
2
f '  x   2t , thus
a.  
t 

f t
f '  t . 7
dy  
. ln 7 =  2t. 71 t  . ln 7
2

dt

x dy x x
b. y  6 ; let f(x) = x  f’(x) =1, thus  1. 6 . ln 6  6 . ln 6
dt

3.6 Higher Order Derivatives

3.6.1 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)…

f  x , f  x
ii iii
(instead of y” and y”’ we some times write y (2) and y(3), or ,

f  x f  x f  x
 4  5  n
, ,..., ,...
th
The derivative of order n (or the n derivative) is the derivative of the

derivative of order (n-1), i.e. y (n) =(y (n-1))’.

41
The derivatives of higher orders have a variety of applications in Economics and
other different disciplines. For this we will see in chapter three.
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 1 st, 2nd, 3nd and 4th order derivatives of
the functions;
a) y=f(x) = 8x3+12x2 + 5x + 7
1st order y’= f’(x) =24x2+24x+5
2nd order y”=f”(x) = 48x+24
3rd order y”’=f”’(x) =48
4th order y (4) (x) =0
2x
b) Y = f(x) = , x1
x 1

2 x 1
2
1st order y'  f '  x  

 4 x 1
3
2nd order y' '  f ' '  x  

12 x 1
4
3rd order y' ' '  f ' ' '  x  

f  x f  x  48 x 1
 4  4 5
4th order   ,…etc.

3.6.2 Formulas for the nth derivatives of some functions

i. Let us generate the nth derivative of the power function y   ax b m
,

where m, a and b are any real numbers and x>0. As a result of successive
differentiation we have :

f ' ( x)  m  ax b m 1
.a  m(a)  ax b m 1

f ' ' ( x)  m(a )(m  1)  ax b .a  m(m  1)(a )  ax b

m2 2 m2

f ' ' ' ( x)  m(m  1)(m  2)(a )  ax  b .a  m(m  1)(m  2)(a )  ax 

2 m 3 3

..... ………. ……… ………

42
 f  x  ax b
 n n mn
 m(m  1)(m  2)...(m  n  1)(a )

// (-n+1)= -(n-1)
ii. In a special case when m is a natural number and if a=1and b=0, we
have:
y=xm, hence f(n)(x)=m(m-1)(m-2)…(m-n+1)xm-n
iii. 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.
x
iv. For an exponential function: y  a ,where  0  a  1 .
A successive differentiation results in
x
f ' ( x)  a ln a

f ' ' ( x)  a  ln a x 2

f ' ' ' ( x)  a  ln a 

x 3

f  x  ln a
 n x n
a

f  x
x  n x
V. In particular, if y  e , then we have for any n e .

1) For the following differentiable functions find the nth derivative?

a) y   ax b 1
b) y = eax C. y= ln(ax + b)

Answer (a)

f(n)(x)=(-1)(-2)(-3)…(-1-n+1)( a
n
)  ax b 1 n

a  ax  b
n 1 n
= (-1) n n!

43
Answer (b)

f '  x  a e
ax …

2 ax
f '' a e
...

f  x
 n n ax
a e

Answer (c)
a
f '  x 
ax  b

f ' '  x  a
2
 ax b 2

f  x   a  1  ax b
  n n 1 n 1 1  n 1
( n  1)! a
... ….. …..

=a  1 n 1
 n  1! a n 1  ax  b
1  n 1

( 1) n 1 ( n  1)!a n
= .
( ax  b) n

The sign of the Derivative

In section 3.6, we have seen derivatives of higher orders. From which the second
derivative has a special importance. 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.
Conditions:-
a) First order derivative

44
 If f(x) is a differentiable function at any point and/ or interval, then
dy
i. If f’(x)(= )  0, then the value of the function tends to increase(or
dx
f(x) is an increasing function at a given point and/or interval
or the rate of change of f(x) with respect to x is positive.)
dy
ii. If f’(x)(= )  0, then the value of the function tends to decrease (or
dx
f(x) is decreasing function at a given point and/or interval) ; (or the
rate of change of f(x) with respect to x is negative)
b) Second order derivative
d2y
i) if f”(x) (= )  0 , then the slope of the curve tends to increase
dx 2
(positive).
d2y
ii) If f”(x) (= )  0 , then the slope of the curve tends to decrease
dx 2
(negative).
c) The possible combination of 1st and 2nd order derivatives and their
interpretations.
i. If f’(x)>0 and f” (x) >0
 The value of the function is in creasing at increasing rate (the slope of
the curve is positive and increasing as the value of x increases.)
ii. If f’(x)>0 but f”(x) <0
 The value of the function is increasing at decreasing rate ( the slope of
the curve is negative but decreasing as the value of x increases.)
iii. if f’(x) <0 and f” (x)<0
 The value of the function is decreasing at decreasing rate (the slope of
the curve is negative and decreasing as x increases.)
iv. if f’(x) <0 but f”(x)>0
 The value of the function is decreasing at an increasing rate (the slope of
the curve is negative but in creasing as x increases. )
v. What will be the conclusion, if f”(x) =0? (Concave and convex curve.)
We can identify the concavity and convexity of the given function( curve)
simply by looking at the sign of the second order derivative. Hence:

45
  A function is said to be concave up ward (convex down ward) curve,
if it increases at an increasing rate or f” (x)>0.
 A function is said to be concave down ward(convex up ward) curve,
if it increases at a decreasing rate or f” (x) <0,
 A function can be neither concave nor convex at a given point.This
point is called point of inflection occured when f”(x)=0.

F -
B-
,
D

G
E
1
A1
-C

0 x

Figure 3. Illustration of concavity, convexity & point of inflection.

From the above figure; we can see different up ward sloping functions( curves.)
 Curve EGF is concave up ward (convex downward), which shows that the
functions is increasing at an increasing rate because f”(x) > 0.

46
  Curve C G D is concave downward (convex up ward), which shows that
the function is in creasing at a decreasing rate because f” (x) <0.
 Curve CGF and EGD are neither concave nor convex at point G.
 At point G, f”(x) = 0, and G is point of inflection or inflection tangent for
CGF and EGD.
Example: 1) For the following functions identify whether they are increasing or
decreasing at a given points.
2
a. f(x) = x  6 x  17 ,at x=2 and x=4
f’(x)= 2x-6
When x=2  f’ (2) =2(2)-6=-2<0, the function is decreasing.
When = 4  f’ (4) -6 = 2>0, the function is increasing.
b. f(x) = x2+4x+5, at x =-3 and x = -1, and x =-2
f’(x) = 2x+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.
2. For the following function identify whether they are concave, convex or
has point of inflection.
a) f(x)=2x2-4x
f’(x) = 4x-4
f” (x) = 4>0 , then the curve is convex downward.
b. f (x) = x3-3 x2+4
f”(x) = 3x2-6x
f”’(x) = 6x – 6, point of inflection is where f”(x)=0, hence it will be at x=1.

3.8.1 Maximization and Minimization

Minimum or maximum points can be identified using first order and second
order derivatives. If a function is differentiable and continuous at a given point,
then:

47
 1. A function f(x) is said to have a maximum, at a point(s) when it changes
from an increasing to a decreasing function.
2. A function f(x) is said to attain a minimum at a point(s) when it changes
from a decreasing to an increasing function.
3. The point (x0,f(x0)) is an inflection point if concavity changes from up
ward to downward or vice versa.
Definition: the value of x = xo, where f(x) is stationary is called critical value(s)
of f(x).

Necessary and sufficient conditions for maximization

a. Necessary condition.
i. f’(x) = 0. Let ut call the value xo a criticalvalue of x.

b. sufficient conditions
i) if f”(x) < 0, then the critical point is relative maximum.
ii) if f”(x) > 0, then the critical point is relative minimum.
iii) If f’(x) = 0, test in conclusive (maximum, minimum or inflection.)

3.8 2 Retrain for the nth Derivative test

It may be possible to be confronted with a situation that is not covered by the
second order derivative test. In this case we have to consider applications of
further derivatives.
Hence, if a function is differentiable at nth order and continuous at a point, then
we can develop a rule for maximum, minimum or point of inflection. Given a
function f (x) and a critical point x = x 0, such that f”(x0) =0, then the stationary
point x=x0, will be:

f  x  <0.
 n
1. a relative maximum, if n is even and
0

f  x  >0.
 n
2. a relative minimum, if n is even and
0

3. a point of inflection, if n is odd number.

Note: The nth derivative must be nonzero value at critical value x0.
Examples:

48
i. To optimize f(x) = x3-6x2-9x-8
a) take the first derivative and find the critical points
f’(x) = 3x2 – 12x-9=0
x2-4x+3 = 0
(X-3)(X-1) = 0
Hence, the critical points are x =1 and x = 3
b. take the second derivative
f” (x) = 6x-12
c. evaluate f’’(x) at the critical points
 f’’(1) =6(1)-12=-6<0, relative maximum.
 f’’ (3) = 6(3) -12 = 6>0, relative minimum.
ii) f(x) = x5
1) f’(x) = 5x4  x4 = 0  critical point is x= 0
2) f’’(x) = 20x3 and f ‘’(0)=0.Test inconclusive.

3) f’’’(x) = 60x2  x2=0  critical point is x= 0 and f ‘’’(0)=0. Test

inconclusive.
4) f(4)(x)=120x  x = 0  critical point is x = 0 and f (4)(0)=0. Test
inconclusive.
5) f(5)(x) = 120  f(5)(0)=120 here, since n is odd (n=5) the critical point
shows the existence of an reflection point.
iii) f(x) = x2(x-1), find the critical values and test to see if at the critical values the
function is at a relative maximum, minimum or possible inflection point.
f’(x) = x2(x-1) + x2=0
= 2x2-2x + x2 = 3x2-2x = 0
= x(3x-2) = 0
2
= x = 0 or x = are the critical values
3
f’’(x) = 6x – 2
x0 = 0  f”’(0) = 6(0) -2 =-2<0, relative maximum

49
 2 2 2
x0 =  f’’( ) = 6( ) -2 = 4> 0, relative maximum
3 3 3

SELF CHECK EXERCISE

Chapter Three
dy
I. Find for:
dx
1
1) y = 2) y = x3 3) x-2
x
II. Differentiate the following functions:
1
1) 2x3 2) 3) x 4) (ln x)3
x 1
III. Find the limits of the following function using derivatives.
ex 2 1
1) lim
x  2) lim
x0 xx 3)
lim
x 1 [  ]
x x 1 x 1
2

IV. Differentiate the given expression using the chain rule.

1) If x = at2, y = 2at, find dy

dx

2) If x = 2t + 3, y =t2 – 1, find dy
dx

3) If Z = y6, y = 3x4 + 5, find dy

dx

V. Find dy by implicit differentiation.

dx
1) 6x4 – 3xy3 + 2xy – x + 7y = 10
2) ey – ex + xy = 0
IV. Differentiate with respect to x.
x
1) ln 2) exlnx
x 1
VII. Find the derivatives of the following.
1) y = 5x4 + 2x3, find yIII
2
2) y = , find yII
x

50
VIII. Examine the necessary and sufficient conditions for max
and min for the function:
3x2 – 12x + 9 = f(x)
IX. Find the critical values and test to see it at the critical values the function is
at a relative max, min, or possible infection point.
f(x) = x2(x -1)3

51
CHAPTER 4
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 decisionproblems 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.

4.1 Demand, Supply and Market equilibrium

a) Point Elasticity of demand
From micro-economics I, we can remember that elasticity is the relative
change in demand in response to a relative change in price. If the changes
are small and the demand function Q=f(p) is continuous at price P, we can
express elasticity of demand as:
 dQ
Q dQ p
ed = = - dp  Q
dp
p
p dQ
Infact, 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,

52
 p dQ p dQ dQ
ed = (-) Q dp
 /ed/ = 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 ed if the demand function is Q=7-2p
i) At P=1 ii) At p=2
dQ p p 2p
ed = dp . Q  -2 × 7  2 p = 7  2 p

 2(1) 2
i) At p=1, ed = 7  2(1) = - , hence demand is inelastic at p = 1.
5
 2( 2) 4
ii) At p=2, ed = = , demand is elastic at p = 2.
7  2(2) 3

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

p dQ
elasticity of supply is given by: es= Q dp .

Note:-The slop of the demand curve is negative and hence e d is negative.

But conventionally we use the absolute value. Similarly, the slope of supply
curve is generally positive and hence es is positive.
Example: 1) Find es, for the supply function Q = 5+2p2
i) At p =2 ii) At p = 3
dQ p 4 p
es = dp . Q  5  2 p 2

4( 2) 16
i) At p = 2, es = 2 = , supply is elastic
5  2( 2) 13

4(3) 36
ii) At p =3, es = 2 = , supply is elastic.
5  2(3) 23
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

53
 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

c) The relation ship 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
= dQ .Q  p dQ

dp dp Q 1
= dQ .Q  p  p( dq . p  1)  p( ed  1)

1 1
MR = P (1- ) = AR (1-
ed ed
; ARaveragerevenue
)
A R = ed
Or AR= MR ( )
ed  1 P.Q
P
Q

MR 1 1 MR AR  MR
= 1-   1 
AR ed ed AR AR

AR
:. ed =
AR  MR

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

54
4.2 Price and income elasticties
Give the engle curve equation Q = f(y), where y-is income.Then the point income

dq y
elasticity can expressed as: ey = dy . Q .From the above expression, we note

that:
a) If ey > 1, then it is a luxery 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
 The given function can be re-expressed as Q =  .
2 8
dQ y
ey = dy . Q

1 8000

=8 1 y , but y= 8000
(  )
2 8
1 8000
[ ] 1000
= 8 1 8000 =
(  ) 1000.5
2 8
 0 < ey < 1, hence it is necessity good.

4.3 Cost Functions

For producing a given level of out put, 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 .

55
 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
MC = = = .Q  AC   Product rule.
dQ dQ dQ dQ

d ( AC )
MC= Q. dQ
+AC

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

 MC  AC   1  d (TC )  TC 
d ( AC ) 1
dQ
=
Q Q  dQ Q 

Characteristics of the Slope of AC Curve:

i. When AC curve slopes downward [ i.e., if the slope of AC is
negative.],then
d ( AC ) 1
= ( MC  AC ) < 0.
dQ Q

 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 ) > 0.
dQ Q

 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 ) = 0
dQ Q

 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

56
 i) AC and its slope
ii) MC and its slope
iii) The values for which MC = AVC
3 2
0.5 Q - 0.7 Q - 30Q  300
i) AC = TC 
Q Q
300
= 0.5Q2- 0.7Q -30+ Q

d ( AC ) 300
dQ
= Q – 0.7 - Q 2

d (TC )
ii) MC = dQ
= 1.5Q2 – 1.4Q – 30

d ( MC )
dQ
= 3Q – 1.4

iii) MC = AVC
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 breaks even.
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 ( ) d (TR ) d (TC )
Hence Mπ = =   M  MR  MC
dQ dQ dQ

57
 Q3
Example: 1) A firm assumed a cost function C (Q) =  210Q , where Q is the
10
monthly output. And its revenue function is given by R (Q) = 1500Q -1.5Q2
.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?
Q3
Solution: - Given TC =  210Q ; TR = 1500Q – 1.5 Q2; MC = 330
10
Required:
Q =?
TC =?
Q3
d[  210Q ]
MC = d (TC )  10 
3 2
Q  210 ,but MC = 330
dQ dQ 10

3Q 2
 thus  210  330  Q  20, therefore the level of output is 20units per
10
month.
Q3 (20) 3
And TC =  210Q , but Q=20  Total cost =  210( 20)  5000
10 10

ii. Find the level of out put that maximizes the firm’s profit.
Mπ = 0
But π = R(Q) – TC(Q)
Q3 Q3
= (1500Q -1.5Q2) – (  210Q ) = 1290Q – 1.5 Q2 -
10 10
d ( ) 3
 Mπ = dQ
= 1290 -3Q - Q2
10

 3Q 3
 - 3Q + 1290 = 0
10
3Q2 + 30Q – 12900 = 0
Q2 + 10Q – 4300 = 0, using general quadratic formula
Q = -70.76 or Q = 60.76473
 Q ≈ 60.76473 units

58
iii. Find the MR and MC at this level of output (60.76) and comment on the result.
At Q = 60.76
3 2
MC = Q  210
10
3
MC (60.76) = (60.76473) 2  210
10
= 1107.7057 + 210 = 1317.7057≈ 1317.71
MR (60.76) = 1500 – 3(60.76473)
= 1500 – 182.29419
= 1317.7059
≈ 1317.71
, because R (Q) = 1500Q – 1.5 Q2 and MR = 1500 – 3Q.
 Therefore, MR = MC at the level of output that makes Mπ = 0

4.4 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.

59
TC TC
TR
Loss

TR

Loss

0 Q
Q*
MC
MR MC

MR

Q
Q*

M П=0

Q
0 -ve Q* -ve

60
Mathematical illustration.
1. The necessary condition for profit (π) to be a maximum.
Π (Q) = TR (Q) – TC (Q)  total profit function
d d (TR ) d (TC )
   Marginal profit function
dQ dQ dQ

MΠ = MR – MC
 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.
d 2 d 2 d 2 (TR ) d 2 (TC )
< 0, but =  <0
dQ 2 dQ 2 dQ 2 dQ 2

d ( MR ) d ( MC )
=  <0
dQ dQ

d ( MR ) d ( MC )
 dQ
< dQ

 This is called the second order

Slope of MR< slope of MC

condition (sufficient condition)

d 2 (TR) d 2 (TC )
That is 
dQ 2 dQ 2

Example:
1) Maximize the following total revenue and total profit function by:
a. Finding the critical value
b. Testing the second order condition
c. Calculate the maximum profit.

Solution:-

61
a) TR = 24Q – Q2
d (TR )
dQ
= MR = 24-2Q = 0 Q = 12 is critical value.

Q3
b) π = 240Q - -Q2 = 91
6
d ( ) Q2
dQ
= Mπ = 240 - - 2Q = 0
2
 Q2 +4Q – 480 = 0 using general quadratic formula, we get Q = 20 or Q =
-24
d 2 ( ) d ( M )
  Q  2
dQ 2 dQ

At Q = 20  π “(20) = - (20) – 2 = -22 it is relative maximum. Hence, the

( 20)3
maximum profit is π = 240(20) - - (20)2 – 91
6
8000
= 4800 - - 400 – 91
6
= 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
= 12Q + 3Q2

 12Q +3Q2 = 0  Q (Q – 4) = 0
Q = 4 is the critical value.
d 2 (C ) d ( MC )
II.   12  6Q , but Q = 4
dQ 2 dQ

 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.

62
SELF CHECK EXERCISE
Chapter Four
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
3. Given u(x,y) = 100x - x  50 y  5 to 2x + 5y = 600
2
i. find the optimal choice?
ii. Find the max (profit)?
4. A factory determines that the cost of manufactory Q units of a commodity

10 Q 2
may be approximated by c(Q) = 100 -  . How many units should
Q 100

be produced in order to minimize the cost?

5. Find the elasticity of demand for the following function at P = 4, 8Q + 2P
= 56.

63
CHAPTER 5
Differential Calculus of Functions of Several Variables
So far we have considered the derivatives of functions of one independent
variable. But many economic activities involve functions of more than one
variable. For example Qd = f (P, Y, T, …). To measure the effect of a
change in a single independent variable on a dependent variable, the
partial derivative is needed.
Objectives
At the end of this chapter you will be able to:-
 Differentiate between partial and total derivatives.
 Solve economic optimization problems using partial and
total derivatives.
 Interpret derivative results for extremum.
 Understand the rules of differentiations

5.1 Partial derivatives

To be able to handle more general problems we now extend the idea of a
derivative to cover functions of two or more independent variables.
Consider a function of two independent variables x, y.
U=(x, y), when u is a function of two variables we can see how u changes with x
or y or both. There fore, we may express:
1. how u changes with x, but y held un changed.
2. how u changes with y, but x held un changed.
Thus this type of expression is called the partial derivatives of u with respect to x

du f ( x  x, y )  f ( x )
and expressed as: dy  x  0
lim

x

Similarly if x held unchanged, the partial derivative of u with respect to y is:

du lim f ( x, y  y )   f ( y )
 x  0
dy y

64
To sum-up the partial derivative measures the instantaneous rate of change of the
dependent variable, as result of a very small change in one of the independent
variable, when the other variables are held to be constant.

5.1.1 First –order partial derivatives

Let us consider a function f(x) =f(x1, x2, …, xn).If the variable x1 undergoes a
change, while x2, …, xn all remain constant, there will be corresponding change in
y. The difference quotient in this case can be expressed as:

y f ( x1  x1 , x 2 ,..., xn)  f ( x1 , x 2 ,...xn)


 x1  x1
y
If we take the limit of , as x1  0, the limit will constitute a derivative. We
x1

call it the partial derivative of y with respect to x1 and denoted by:

dy f ( x1  x, x2 ,..., xn)  f ( x1 , x2 ,..., xn) lim y
 fx1 lim
x ,  0 = x  0 x
dx1 x1 1
1

Example: I. Compute the partial derivative of the following function with respect
to each independents variable.
a. u=x2y+xy3
du
 y ( 2 x)  y 3 (1)  2 xy  y 3  the partial derivative of with respect to x.
dx
du
 x 2 (1)  x(3 y 2 )  x 2  3 xy 2
dy

x
b. u = y

du y (1)  x(0) 1
 
dx y2 y

du y (0)  x(1) x
 2

dy y y
du du y

c. Find dx , dy foru  e
x

y
 du  d ( x ) e x  yx y 1 e x
y y

dx dx

65
 du d ( x y ) x y y y

  e  x y . ln xe x  x y .e x . ln x
dy dy

d. u = ln(x3+y2)
 d (x3  y 2 ) 
 
 du  dx   3x
2

dx (x3  y 2 ) x3  y2

 d (x3  y 2 ) 
 
 du  dy  2y
  3
dy (x  y )
3 2
x  y2

5.1.2 Higher order partial derivatives

For the function u = f(x, y), if it is differentiable then we have the
followind derivatives.
I. Direct partial derivatives,
d 2u d du d 2u
i. fxx or  ( ) 
dx 2 dx dx dxdx
d 2u d du d 2u
ii. fyy or  ( ) 
dy 2 dy dy dydy

II. Cross partial derivatives,

d 2u d du
iv. fxy or  ( )
dxdy dx dy

d 2u d du
v. fyx or  ( )
dydx dy dx

Example: 1) y = 3x12 + 2x1x22 + x23 + 100.

Direct partial derivatives will be;

2
dy d2y d (6 x1  2 x 2 )
 6
2
 6 x1  2 x 2 ;
dx1 dx1
2
dx1

dy d2y
 4 x1  6 x 2
2
 4 x1 x 2  3 x 2 ;
dx 2 dx 2
2

Cross partial derivatives will be:

66
 dy d dy d 2
 ( ) (4 x1 x 2  3 x 2 )  4 x 2
dx1 .dx 2 dx1 dx 2 dx1

dy d dy d 2
 ( ) (6 x1  2 x 2 )  4 x 2
dx 2 .dx1 dx 2 dx1 dx 2

Young’s Theorem
The mixed (cross partials) for a given function will always be equal if both
cross partials exit and are continuous. I.e. if f(x, y) is a continuous function
with continuous partial derivatives we have:
d 2u d 2u
fxy = fyx, i.e., 
dxdy dydx

Example:1) Find the cross partials for the function u (x1, x2) = x1 lnx2
du du x
  ln x 2 ,and  1
dx1 dx 2 x 2

d 2u d dy d x1 1
 ( ) ( )
dx1 dy 2 dx1 dx 2 dx1 x 2 x2

d 2u d dy d 1
 ( ) (ln x 2) 
dy 2 dx1 dx 2 dx1 dx 2 x2

There fore, here the young’s theorem holds true.

2) Given Cobb-Douglus production function
Q = f (L, K) = AL  K  , show that fLK = fKL
dQ dQ
 AK  L 1  A L K  1
dL dK
d 2Q d 2Q d dQ d
  ( ) ( A L K  1 )  AK  1 L 1
dLdK dKdL dL dK dL
d 2Q d dQ d
 ( ) ( AK  L 1 )  AK  1 L 1
dKdL dK dL dL
d 2Q d 2Q
:. 
dLdK dKdL

67
5.1.3 Applications of partial derivatives
Partial derivatives have a wide range of applications. Some of them are:

Demand Analysis
If two goods Q1 and Q2 with prices P1 and P2 are assumed, then the demand q1 and
q2 of Q1 and Q2 will be written as: Q1 = f1 (p1, p2), and Q2 = f2 (p1, p2).
The partial derivatives of these two functions will indicate the variations in the
demand as one of the prices vary while other price remains unchanged. There
fore, we can obtain four partial derivatives of these two functions:
Q1 = f1 (p1, p2), and Q2 = f2 (p1, p2) as follows:
dQ1
1)  is the partial (marginal) demand of Q1 with respect to p1.
dp1

dQ1
2)  is the partial (marginal) demand of Q1 with respect to p2.
dp 2

dQ2
3)  is the partial (marginal) demand of Q2 with respect to p2.
dp 2

dQ2
4)  is the partial (marginal) demand of Q2 with respect to p1.
dp1

We can also identify the nature of commodities with the help of partial derivatives
in the following way:
a) If P2and Q2 and also Q1, then the commodities
Q1 and Q2 are said to be complementary, i.e.
dQ 2 dQ1
 0 as well as  0
dP2 dP2

b) If P1and Q1 and also Q2, then the commodities Q1 and Q2 are said
to be complementary, i.e.
dQ1 dQ 2
 0 as well as 0
dP1 dP1

c) If P1and Q1 and also Q2, then the commodities Q1 and Q2 are said
to be substitutes, i.e.
dQ 2 dQ1
 0 as well as 0
dP1 dP1

68
 d) If P2and Q2 but Q1, then the commodities Q1 and Q2 are said to be
substitutes, i.e.
dQ1 dQ 2
 0 and 0
dP2 dP2

Example 1. Determine the nature of the commodities of the given demand

functions for two commodities Q1 and Q2.
Q1 = P1-1.5 P20.9 and Q2 = P10.8 P2-0.1
For demand function: Q1 = P1-1.5 P20.9
dQ1 1.5  0.1
 0.9 P1 P2 0
dP2

For demand function: Q2 = P10.8 P2-0.1

dQ2  0.2  0.1
 0.8 P1 P2 0
dP1

There fore, the commodities Q1 and Q2 are substitute.

Note that: If P1 and Q1 and also Q2 ,then the commodities Q1 and Q2 are
said to be substitutes, i.e.
dQ 2 dQ1
 0, as well as  0,
dP1 dP2

Partial Elasticties
Partial derivatives are also helpful to calculate and estimate the partial
elasticities of some economic variables such as: partial elasticities of
demand, supply, income elasticity of demand, and cross elasticity of
demand .On the basis of formula derived for point elasticity of demand,
we can define:
a) Partial elasticity of demand for Q1 with respect to its own price P1, (

P1 dQ1
( ))
Q1 dP1

b) Cross elasticity of demand for Q1 with respect to its own price P 2, (

P2 dQ1
( ))
Q1 dP2

69
 c) Cross (partial) elasticity of demand for Q2 with respect to its own price

P1 dQ 2
P1, ( ( ))
Q2 dP1

d) Partial elasticity of demand for Q2 with respect to its own price P2, (

P2 dQ2
( ))
Q2 dP2

Income elasticity of demand: Given the demand function Q1 =

 1   2 P1   3 P2   4 y, where y- is income, P1 – price of the commodity, P2 –

price of a substitute commodity, then

y dQ1
Income elasticity of demand is: ey = ( )
Q1 dy

P2 dQ1
Cross elasticity of demand is: eQ1Y = ( )
Q1 dP2

Example: 1) Find the possible partial elasticities of demand for the demand
function:
Q1 = P1-1.5P20.9 and Q2 = P10.8P2-0.1
 Partial elasticities of demand for the demand function:
Q1 = P1-1.5P20.9 are as follows:
p1 dQ1 P  0. 5 0. 9
i. ( )  1.5 1 0.9 [1.5P1 P2 ] = (-1.5)
Q1 dP1 P1 P2
P2 dQ1 P 1.5  0.1
ii. ( )  1.5 1 0.9 [0.9 P1 P2 ]  (0.9)
Q1 dP2 P1 P2
 Partial elasticities for the demand function Q2 = P10.8P2-0.1 are:
p 2 dQ 2 P 0.8 1.1
i. ( )  0.8 2  0.1 [0.1P1 P2 ] = (-0.1)
Q2 dP2 P1 P2
P1 dQ 2 P  0 .2  0 .1
ii. ( )  0.8 1  0.1 [0.8 P1 P2 ]  (0.8)
Q2 dP1 P1 P2
Example: 2) Compute the income elasticity and the cross-elasticity of demand for
white teff, for the demand equation for white teff,
QWT = 5000 -8PWT + 2PRT + 0.2y, with y = 5000,

70
PWT = 800, and the price of read teff (RT) PRT = 600.

y dQWT 5000
( )
 ey = QWT dy 800 (0.2) = 1.25 income is elastic.

dQWT
 0.2,
dy and Q = 5000 - 8(800) + 2(600) + 0.2(5000)
WT

= 5000 – 6400 + 1200 + 1000 = 800

PRT dQWT 600
eWTRTY = ( ) (2)  1.33
QWT dPRT 800

Cross elasticity is elastic (1.33), and it is substitute good.

Marginal productivity
The production of certain commodities requires the use of several factors of

production. Such factors may be land, labor, capital, machinery, entrepreneur

ship, ….etc. The mount of production, there fore depends on the extent of various

required factors of production. Suppose the quantity of production Q commodity

is a function of land (Ld), labor (Lb) and capital (K). Then the average product

Q Q
per unit capital is and the ratio will show the average product of a given
K L b

Q
commodity per unit labor. And the partial derivative will show the rate of the
K

change in the total amount of production Q with respect to marginal change in K

(or the marginal physical product of capital). It defines as the change in out put

resulting from instantaneous change in capital when other factors of production

are held unchanged.

71
 Example: 1) given the production function Q+24K-4k3-2KL the partial

derivative of the production function with respect to capital is marginal physical

Q
product of capital (MPPK)= =24_12K2-2L, similarly
K

Q
(MPPL)= =-2k
K

5.2 DIfferentials and total derivatives

5.2.1 Differentials
If the function Z=f (M) is differentiable at the point M, then its total increment at

this point can be represented as:

 z= A  X+B  Y+  (  X,  Y) +  (  X,  Y) ………… (I)

Where +  (  X,  Y and +  (  X,  Y) are infinite small functions as

x  0 and y  0 .

Definition:-The differential dz of the function Z=f (M) differentiable at the point

M is a part of the total increment of this function at the point M, which

is linear with respect to the increment  X and  Y. dz=

x  y . -------------- (II)

Using the knowledge of derivative we can write expression (II) as follows:

f  x, y  x  f  x, y  y .
1 1
dz= x y

72
The differentials of independent variables x and y are the increments of these

variables. I.e. dx=  x and dy=  y. Then we can write the differential of the

' '
function as: dz= f (x, y) dx + f y (x, y) dy.
x

It follows from relation (I) and (II) that the difference between the total increment

and the differential of the function at the point M.  Z-dz=  (  X,  Y) 

X+  (  X,  Y)  Y is an infinite small as  X  0 and  Y  0, of a

higher order than that of  =  x   y 

2 2
(  is the distance between

the points M(X, Y) and M1 (X +  X, Y+  Y). More over,

z  dz x y
x  0 (
 lim   )  0
lim
x  0
y  0  y  0  

x y
Since  and  are infinite small, and

and  are bounded function: /

x y

/ ≤ 1 and /  / ≤1. Hence we get  z - dz= 0(  ) or  z=dz = 0 (

 x   y 
2 2
).Leaving the quantity 0(  ) for sufficiently small  x and

 y, we get an approximate formula  z ≈ dz. Which is widely used on the

approximations since it is easier to compute a differential than a total increment.
Thus in the expression dy = f’(x)dx, the derivative f’(x) considered as a converter
factor, which serves to convert an infinitesimal change dx into a corresponding
change dy.
Example: 1) Given y = x3 + 2x2 + x
dy = f’(x)dx = (3x2 + 4x+ 1)dx

73
Illustration: suppose X changes from 2  2.01, then by what value Y changes?
From the given information  x= 0.01
Using the differential results: dy= 3x2 + 4x+1) dx
= (3x2 +4x+1) (0.01)
= [3(2)2 + 4(2) +1] (0.01) = 0.21. Using the actual change:

y  f  x  x   f  x    2.01  2  2.01

3 2
 2.01  2  2
 
3
 2 2
 2 =

=8.1206+8.0802+2.0i+8-8-2=0.2108

Then as can be seen from the above results, the value 0.0008 is the error term.
The error happens because dy and dx refers to infinite small changes rather than
substantial changes. As  x becomes smaller and smaller,  Y should
approximately dy.
For more clarity see the figure bellow.

F(x)=y L
Q

E
y
D
P R
x

X
0 X0 X0+  x

where: QR =  y
PR =  x
DR = dy
QD = error term

The slope of PQ is linearly approximated by the line L at
the point P.

74
75
5.2.2 Total differentials
Suppose a Utility function is given by: U=f (X, Y). And assuming U be a
continuous and differentiable function at any point, then the differential of a

du du
function U=f (X, Y) is defined by du= dx  dy = fx dx+fydy
dx dy

The separate terms on the right of the above expression are called partial
differentials and their sum, du is called the total differential.
The result can be generalized to any number of variables. Again let us consider
another example of utility function: u = f(x1, x2, …, xk), where u is utility function,
which is continuous and differentiable and xi(i = 1, 2, …,k) the consumption
commodities, then the total differential of the given function expressed as:
du du du
du = dx1  dx 2  ...  dx k
dx1 dx 2 dx k
k
du = u1dx1 + u2dx2 + …+ukdxk =  uidxi
i 1

In which the right hand side:

du
dx1  Marginal utility of x1 commodity times the increment in consumption
dx1

of the commodity;
du
dx 2  Marginal utility of x2 commodity times the increment in consumption
dx 2

of the commodity.

Example: 1) Find the total differential of:

i. U = (x2 + y2)(2x2 – 4y)
du = (x2 + y2) d(2x2 – 4y) + (2x2 – 4y) d(x2 + y2)
= (x2 + y2) (4xdx – 4dy) + (2x2 – 4y) (2xdx + 2ydy)
= (x2 + y2) 4xdx + (2x2 – 4y) 2xdx – (x2 + y2) 4dy + (2x2 – 4y) 2ydy
= (4x3 + 4xy2 + 4x3 – 8xy)dx – (4x2 + 4y2 – 4x2y + 8y2)dy

76
 = (8x3 + 4xy2 – 8xy)dx – (4x2 + 8y2 – 4y2 – 4x2y)dy
x3  y 2
ii. U=
x y

( x  y )(dx 3  dy 2 )  ( x 3  y 2 )(dx  dy )
du =
( x  y) 2

( x  y )(3x 2 dx  2 ydy)  ( x 3  y 2 )(dx  dy )

=
( x  y) 2

(2 x 3  3x 2 y  y 2 ) dx  (2 xy  y 2  x 3 ) dy
=
( x  y) 2

x1
iii. y =
x1  x 2

( x1  x 2 )dx1  x1 (dx1  dx 2 )
dy =
( x1  x 2 ) 2

x 2 dx1  x1 dx 2
=
( x1  x 2 ) 2

Basic Rules of Differentials

Let K constant
f  a function, such that f(x, y),
g  a function, such that g(x, y),
h  a function, such that h(x, y),then

1. Differential of constant
dk = (o)dk=0
2. Differential of a sum/difference
Let u = f  g
d d
du = dx ( f  g )dx  dy ( f  g )dy

d d d d
= dx ( f )dx  dx ( g )dx  dy ( f )dy  dy ( g )dy

d d d d
= ( dx ( f )dx  dy ( f )dy )  ( dx ( g )dx  dy ( g )dy )

77
 = df  dg
Example: Find the total differential of:
i. u = 5x3 + 3y2
du = d(5x3) + d(3y2)
= 15x2dx + 6ydy
3. Differential of a power function
Let Kun be a function, and u = f + g
d(Kun) = nKun-1du = nK(f+g)n-1[df + dg]
a.And if u = f, then
Kun = Kfn d(Kun) = d(Kfn) = nKfn-1df.
4. Differential of a product
Let, u = f.g
du = f.dg + g.df
Example:
u = (x – y)(x2 + y); f = (x – y), g = (x2 + y)
du = f.dg + g.df
= (x – y) d(x2 + y) + (x2 + y) d(x – y)
= (x – y) [2xdx + dy] + (x2 + y) (dx – dy)
= [(x – y)2xdx + (x2 + y) dx] + [(x - y)dy - (x2 + y)dy]
= [2x2 – 2xy + x2 + y]dx + [x - x2 ]dy
= (3x2 – 2xy + y)dx + (x - x2 )dy
5. Differential of a quotient
f
Let, u = g ;g 0
f gdf  fdg
du = d[ g ] 
g2

Example:
x1
Y=
x1  x 2

( x1  x 2 )dx1  x1 (dx1  dx 2 )
dy =
( x1  x 2 ) 2

78
 x 2 dx1  x1 dx 2
=
( x1  x 2 ) 2
6. Differential of a chain function
Let z = z(u), u = u(y); y = y(x)
d d
dz = d[z(u)] = ( z ) du and du = d[u(y)] = (u ) dy , and dy = d[y(x)] =
du dy

d
( y )dx
dx
d d d
dz =[ du ( z )][ dy (u )][ dx ( y )dx]

Example:
Z = u3 + 2 ;u=x+1
d d
dz = [ (u 3  2)][ ( x  1)dx ]
du dx
dz = 3u2 × 1dx = 3(x+1)2dx

7. Differential of a natural exponential function of the form: y = ex

d
dy = d(ex) = (e x )dx  e x dx
dx
Example:
Z = ex3+y2, Let u = x3+y2 z = eu
d u
dz = e du  e u du
du
du = d(x3 + y2) = 3x2dx + 2ydy
dz = ex3+y2 (3x2dx +2ydy) = 3x2ex3+y2 dx + 2yex3+y2dy
8. Differential of a natural logarithmic function of the form: y = lnx.
d 1
dy = d(lnx) = [ ln x ]dx  dx
dx x
a. If y = lnu, u = f(x), then
d d
dy = [ ln u ][ u ]dx
dx dx
1
dy = f ' ( x )dx
u

79
 Example:
Q = ln(x2 – y), where u = x2 – y, there Q = lnu
d 1
dQ = [ ln u ]du  du, du  d ( x 2  y )  2 xdx  dy
du u
1 2x 1
dQ = (2 xdx  dy )  2 dx  2 dy
x y
2
x y x y

2x 1
= x 2  y  x 2  y dy

5.2.3 Total Derivatives

Let us consider the function:

Q = f(x, y) and x = w(z)

Z w X f Q
f

To find the rate of change of a function with two or more independent variables
where the independent variables them selves are related, then we use total
derivative.
From the above figure, we can observe that the variable Z affecs Q through two
ways:
i) Indirectly, via the function W and then f-the straight arrow.
ii) Directly, via the function f-the curved arrow.
Where as the partial derivative of is more appropriate for expressing the direct
effect alone, the total derivative is essential to express both effects jointly.
Therefore, to get total derivatives, first we have to find the total differential dQ =
fxdx + fzdz, then dividing both sides of this equation by the differential dz. Finally
the result is:
dQ dx dz
 fx  fz
dz dz dz

80
 Q dx Q dz
=  .
x dz z dz
Q dx Q
= 
x dz z
dy
Example: 1) f(x, w) = 6x2 –w3 and x = g(w) = 4w2 + 2w + 5, find
dw
dy dy dx dy d d d
    (6 x 2  w 3 ). (4 w 2  2w  5)  ( x 2  w3 )
dw dx dw dw dx dw dw
= 12x (8w + 2) – 3w
= 12(4w2 + 2w + 5) (8w + 2) -3w2
dz
2) x3 + x2y + y2z = 0, find
dx
In solving the above problem, first interpret as having x and y as an independent

dz
variables and z as dependent variable, then could be easily find. Hence
dx
u = f(x, y, z) = x3 + x2y + y2z = 0
du dx dz dz
 fx.  fz  (3x 2  2 xy)  y 2 ( )  0
dx dx dx dx
dz (3 x 2  2 xy )
  
dx y2

dy
3) Find of the above equation?
dx
Consider x and z as an independent variables and y dependent variable.

du dx dx dy dy
f f f f
2

dx

x dx

x dx
y
y dy x 
y dx

 
2 2
2 (3 x  2 xy)dx  ( x  2 yz)dy  0
  x2
dy 3  2 xy
dx x  2 yz 
81
4) Find dy/dx of the above equation (equation2)
Consider y and z as independent variables and x dependent variable.

3x2dx + 2xydx + x2dy + 2yzdy = 0

(3x2 + 2xy)dx + (x2 + 2yz)dy = 0

dx ( x 2  2 yz )

dy (3x 2  2 xy )

5.3 Implicit and inverse function rules

We have already explained about implicit and explicit function from chapter two
and therefore function of the form y = f(x1, x2, … xk) express y explicitly in terms
of xi and are called explicit functions.
But functions of the form f(x, y) = 0 do not express y explicitly in terms of x, and
are called implicit function.
To find the derivatives of implicit functions, we apply the total differential rule.
For instance, given the implicit function F(y, x) = 0, the total differential is given
by:
dF(y,x)=d0
Fy dy + Fxdx=0
dy  Fx df dF
Fy dy= -Fx dx, and the derivative will be dx  Fy , where Fx  and fy= dy
dx

1
dy
,and hence, the inverse of = fy
dx ( )
Fx
dy
Example: 1)Find for the implicit function f(x, y)= x2+y2+7=0
dx

82
dy  Fx dy  x
   //df=2xdx+2y7dy=0
dx Fy dx y

dy x
 
dx y

dy
2) Find  0 for the implicit function F(x, y)= x3+x2y+y2x
dx
dF= 3x2dx+2xydx+x2dy+2yxdy+y2dx
(3x2+2xy+y2) dx+(x2+2yx)dy

dy  (3 x  2 xy  y )
2 2
 
dx ( x 2  2 xy )

dy
3. Given y= ln(x1+x2), and x,=2t, then find
dt
dy dy dx1 dy dx 2
  .  .
dt dx1 dt dx 2 dt
1 1 2 2t
= ( 2)  (2t )  
x1 x2 2t t 2

1 2 3
=  
t t t

5.4 Maximization and minimization of multivariable

The maximum and minimum points of a two variable case are obtained by
calculating the first and second order differentials of the two variables. If we
have a function given by u = f(x, y) then:
1. First order Condition (F.O.C)
du = fxdx + fydy = 0, for any arbitrary values of dx and dy, not both zero.
fx = 0; fy = 0
2. Second order condition (S.O.C)
du = fxdx + fydy

83
 d(du) = d(fxdx + fydy)
d d
d(du) = dx (du )dx  dy (du )dy

d d
= dx ( f x dx  f y dy )dx  dy ( f x dx  f y dy )dy

d2u = (fxxdx + fyxdy)dx + (fxydx + fyydy)dy

= fxxdx2+ fyxdydx + fxydxdy + fyydy2
=
fxxdx2+ 2fyxdxdy + fyydy2 ,note: fxy= fyx (young’s theorem)
Therefore, for the function u = f(x, y) to have a local maximum or
minimum, can be expressed as follows:
Conditions for a maximum
du du
i. fx =  0 and fy = 0
dx dy

ii. fxx 0, and fyy< 0

iii. fxx . fyy > fxy2
Conditions for a minimum
du du
i. fx =  0 and fy = 0
dx dy

ii. fxx > 0, and fyy > 0

iii. fxx . fyy > fxy2
3. Conditions for a saddle point.
If the product of the second order direct practical derivative evaluated at the
critical point is less than the product of the cross partial at that point, we get a
saddle point. Suppose if we have a function u=f(x, y, z) and let us attempt to
draw the graph of the given function below.

84
 z

u  f ( x, y , z )

As saddle point is a point where the function will be at a maximum when viewed
against the y axis(or against the xz-plane) and at minimum when viewed along the
x-axis(against yz-plane)
Conditions: for a saddle point must full fill the following conditions
i. fx = 0 and fy = 0
ii. fxx.fyy < 0
iii. fxx fyy < fxy2
4. Conditions for a point of inflection.
i. fx = 0, and fy = 0
ii. fxx.fyy > 0
iii. fxx.fyy < fxy2
5. Condition for inconclusivity of the test:
If the product of the second order directs partial evaluated at the given point
equally to the product of the cross partials evaluated at that point then we have
no information about the maximum and minimum condition, therefore it is
called inclusive.
i. fx = 0, and fy = 0
ii. Any value for the second partial
iii. fxx.fyy = fxy2

85
 Example: 1) Find the extreme values of the function:
Z = 8x3 + 2xy -3x2 + y2 + 5
i. First order condition: (F.O.C)
fx = 24x2 + 2y – 6x = 0 -------------------------(1)
fy = 2x + 2y = 0 ---------------------------------(2)
Solving (1) and (2) simultaneously:
24x2 + 2y – 6x = 0
2x + 2y = 0

8x(3x – 1) = 0  x = 0, y = 0 and x = 1 , y =  1
3 3

Then (0, 0) and ( 1  1 ) are the critical values.

3, 3
ii. Second order condition (S.O.C)
fxx = 48x – 6
fyy = 2
 At (0, 0), fxx = -6 < 0
fyy = 2>0

o At ( 1  1 ), fxx = 48  1
 6  10  0
3 ,
3 3
fyy = 2 > 0
iii. Condition for a saddle point.
dz dz
 24x2 + 2y – 6x, and  2x + 2y
dx dy

dz dz dz dz
( )  2  f xy ; ( )  2  f yx ,
dx dx dx dy

but, fxx and fyy are know, hence remains to know behavior of the function at
the critical points of the following expressions:
At (0, 0): fxx.fyy < fxy.fyx = fxy2
i.e -6  2 < 2  2 = 22, thus at the order pair (0, 0) there is a saddle point.

* At ( 1  1 ), fxx.fyy >fxy.fyx = fxy2

3, 3

86
 i.e 10  2 > 2  2 =22, thus the function is at a relative minimum at the order

pair ( 1  1 ).
3, 3

5. 5. Unconstrained and constrained functions

When finding the relative extreme of an objective function of two choice
variables, the decision made regarding one variable dose not affect the
choice of the other variable. Such functions which involve no constraints
are called un- constrained functions. For example for a hypothetical utility
function of two variables u=f(x, y), to get Utility maximized, we might
think that the consumer could purchase even an infinite amount of both
goods. This type of phenomena as it is clear purchasing the first good
doesn’t affect the purchase level of the second one. But, is it really always
true? Of course not Such an assumption has no relevance in reality
because the consumption of two goods also depends on his/her purchasing
power (in other words the problem of utility optimization takes in to
consideration the purchasing power of the consumer.)

Constrained functions
Constrained functions are in which complete freedom of action is not
possible. From the above example, as such what we need to find is how
much of x and y commodity (good) should the consumer buy with the
given purchasing power to maximize his utility. And we also know that
with the given purchasing power if the consumer bus more of x, he/she
will have to buy less of y or vice versa. There fore most economic
optimization problems are of this nature. There is always a constraint on
the variables and as such the variables are not independent.
Example
1. Utility is usually constrained by budget.
2. Production is constrained by factor costs or production quota, etc.

87
5.6. Constrained Extremum: the method of lagrange for
any equality constraint
Given a function y = f(x1, x2); subject to a constraint g(x1, x2) = K, a new function
(lagrange function) can be formulated as follows:
a) Set the constraint equal to zero. i.e, g(x1, x2) – K = 0
b) Multiply by  (any undetermined number) and add the product to the
original function:
L(x1, x2,  ) = f(x1, x2) +  [K-g(x1, x2)] ------------------------(1)
Or = f(x1, x2) -  [g(x1, x2)-K] ------------------------ (2)
Where L(x1, x2,  ) is lagrangian function;
f(x1, x2) is objective function;
g(x1, x2) is constraint function;
 is lagrangian multiplier.

Economic meaning of the lagrangian multiplier

 - approximates the effect on the objective function of a one unit change in the
constant of the constraining function. Thus
i. if   0 , for every one unit increase (decrease) in the constant of the
constraining function, the objective function will decrease(increase) by a
value approximately equal to  .
ii. if  . <0, a unit increase (decreased) in the constant of the constraint will
lead to an increase (decrease) of the objective function by the value
approximately equal to  .
Note:-The interpretation of  differes with the formulation of the lagrangian
function (see equations 1 and 2 above)
C) To optimize the lagrangian function, partially differentiate it with respect
to x1, x2 and  as follows:
i) First order condition (F.O.C)
dL df dg
   0 ------------------------------------ (1)
dx1 dx1 dx1

88
 dL df dg
   0 ------------------------------------ (2)
dx 2 dx 2 dx 2

dL
 K  g ( x1 , x 2 )  0 ------------------------------------ (3)
d
ii) Second order Condition (S.O.C)
A) A stationary point will be a maximum, if Lx1x1 < 0 , and Lx2x2 < 0,
and (Lx1x1 . Lx2x2 ) > L2x1x 2

B) A stationary point will be a minimum, if Lx1x1 > 0 , and Lx2x2 > 0,

and (Lx1x1 . Lx2x2 ) > L2x1x 2
C) The test will be in conclusive at a stationary point, if Lx 1x1 . Lx2x2 =
L2x1x 2

In general:
1) If there are K choice variables such as:
Optimize: Y=f(x1, x2, …, xk) subject to g (x1, x2, …, xk) =c, then
the lagrangian function is
L(x1, x2, …, xk,  ) = f(x1, x2, …xk) +  [c-g (x1, x2, …xk)]
and the first order condition will consist K+1 simultaneous
equation.
L  = c-g (x1, x2, …xk) = 0 ------------------------------------- (1)
LX1 = fx1 -  gx1 = 0 ---------------------------------------------- (2)
Lx2 = fx2 -  gx2 = 0 ---------------------------------------------- (3)
------------------------------------------------------------
Lxk = fxk -  gxk = 0 ---------------------------------------------- (k+1)
2) If there exists more than one constraint, (say two).
Y= f(x1, x2, …xk)  objective function
Subject to: g(x1, x2, …xk) = C (constraint functions)
and z(x1, x2, …xk) = M

Lagrangian Function will be:

L(x1, x2, …xk) = f(x1, x2, …xk) +  [c-g(x1, x2, …xk)] +  [M-Z(x1, x2, …xk)],

89
then L  = c-g(x1, x2, …xk) = 0 ------------------------------------------ (1)
L  = M-Z(x1, x2, …xk) = 0 --------------------------------------- (2)
Lx1 = fx1 -  gx1-  zx1 = 0 --------------------------------------- (3)
Lx2 = fx2 -  gx2-  zx2 = 0 --------------------------------------- (4)
------------------------------------------------------------------------
Lxk = fxk -  gxk-  zxk = 0 --------------------------------------- (k+2)
Example: 1) Assuming a consumer has a utility function and given by: u(x, y) =
5lnx + 3lny, if the budget constraint is given by: 10x + 14y = 124.
a) Find the optimal choice of the consumer.
b) Find the MRSxy at the optimal choice.
Solution: - Max u(x, y) = 5lnx + 3lny  objective function. Subject to 10x
+14y = 124  constraint function.
i) Write the lagrangian function L(x, y,  ) = u(x, y) +  (124 – 10x –
14y)= 5lnx + 3lny +  (124 – 10x – 14y)
ii) Compute the first order condition (F.O.C)
5
Lx =  10  0 ------------------------------------------------ (1)
x
3
Ly = y  14  0 ---------------------------------------------- (2)

L  = 124 – 10x – 14y = 0 ----------------------------------- (3)

Solving for  is equation (1) and (2)
5 5 5 3
 10  0  =  = 14 y
 x =
x 10 x 10 x
7
y
3
3 3
 14  0  = 14 y
y
7
X= y -------------------------------------------------------------- (4)
3
Substituting equation (4) in (3):
7
10( ) y + 14y = 124
3
112y = 372
The optimal choice of the consumer is:

90
 Y = 3.32
 x 7.75
The lagrangian multiplier will be:
 = 0.06.
And at the critical value of the order pair (7.75, 3.32) the maximum level of utility
is
Max U (7.75, 3.32) = 5ln7.75 + 3ln3.32
= 5(2.047692843) + 3(1.199964783)
= 10.23846422 + 3.599894349
= 13.83835857
5
[ ]
mu x 5y
c) MRSxy =  x 
mu y 3 3x
[ ]
y
5(3.32)
At the optimal point, we find that MRSxy = 3(7.75)  0.714 .

SELF CHECK EXERCISE

Chapter Five
du du
I. Find dx , dy for :

1) u = x2y2 + x5 +y6
7
2) u =(x2 – y2) 5

x2
3) u = (x + y)2 e y2

4) u = x2 log ey+yex
II. Apply the differential calculus method to solve the following tasks.
1) Compute the marginal productivity of labor with capital fixed, for
the production function:
X = 10L0.7K0.3

91
2) Determine the marginal utility function of the first and the second commodity,
for the utility function of two commodities:
U = u(x1, x2) = (x1 – 2) (x2 + 1)3
III. Compute the first order partial derivatives.
1) Given f(x1, x2) = x12 e3x1+5x2, find fx1 and fx2.
IV. Find the partial derivatives of second order?
x y
1) u = x  y

2) u = x2 – xy2
V. Find the partial derivatives of higher order?
x y
1) z = x  y

VI. Find the total differential of u for:

1) u = x2y3
2) u = x2 + 3y2
3) u = log(x2 –y2)
4) u = z2, z = x2 –y2
xy
5) u = x  y

VII. For two commodities the prices are given by P 1 = 108 – 5x1 and P2 =
35 – 2.5x2 and the total cost function is C = x 12 + x22, show that for
maximum profits x1 = 9, x2 = 5. And find profit (  ) max.

92
Chapter 6
Integral calculus
In the preceding sections we have seen the differentiation concept which is the
process of finding out rates of changes or marginality of an economic
variable. But given the marginal function, we might be interested to find the
original or the total function.Therefore in this chapter we will consider about
the concept of integration.

Objective:
At the end of this chapter you will be able to:
 Undefined the definition of integration.
 Explain the difference between definite and indefinite
integrals.
 know some rules of integration.
 Comput problem using different rules of integration.
 Apply the concepts of integration to economic issues.

6.1 The concept of integration

In algebra, the operation of subtraction is the inverse of the operation of addition
and the operation of division is the inverse of multiplication.
In calculus the inverse of the operation of differentiation is called integration or
antidifferentiation whose derivative of differential is already known.
The resulting function is and antiderivative or antidifferential usually called an
integral.
There are two fundamental concepts of integral calculus indefinite integral and
definite integral.

93
Indefinite integral
Definition if the deferential coefficient of F(x) with respect to x is f(x), then and
integral of f(x) with respect to x is F(x), then an integral of f(x) with respect to x
is F(x).
dF ( x)
That is if F(x) be function of x such that  f ( x) then F(x) is called an
dx
anti-derivative or and integral of f(x) with respect to x.
dF ( x)
Symbolically: if
dx
 f ( x) , then  f ( x ) dx  F ( x ).

Here, i. f(x) is called the integrand or the function to be integrated.

ii. dx suggests that the operation of integration is to be with
respect to the variable x,
iii.  is the sign of integration. It indicates the inverse of the
differentiation process.s
iv. dx is the differential of x so that f(x)dx may be considered as a
differential of the primate primary F(x)
Thus dF(x) = f(x)dx so that F(x) =  f ( x ) dx

We say, F(x) is integral of f(x) with respect to x. It may be noted that F(x) is an

d
dx 
indefinite integral of f (x). It follows that [ f ( x) dx ]  f ( x),

94
The Nature of Integrals
From the above discussion we understood that integration is the reverse process
fo differentiation and by the reverse process, the integration of derived function
f(x) gives in the set of primitive function F(x) +c, where c is and constant hence
the indefinite integral remains to be a function of x, that means, there are infinite
possibilities of parents (primitive) for a given off spring. There fore unless some
additional information is provided an integral of a given function is not unique.
Example: I which of the following function yield a derived result of one?
dy
1. if y = x2, then = 2x
dx
dy
2. if y = x2+3, then = 2x
dx
dy
3. if y = x2-25, then = 2x
dx
dy
In general, if y = x2+c, then = 2x, were c is any constant.
dx
There fore, the set of all anti-derivatives of a continuous function f(x) is called the

indefinite integral of f(x) and is denoted by:  f ( x)dx  F ( x)  c, where F(x) is

d d d
anti- derivative of f(x). It follows that [f(x)+c]= [F(x)]+ [c]=f(x)
dx dx dx
Example: Integrate the following.
1 11 1
i. f(x) = x   xdx  x  c  x2  c
11 2
3 1
3 3 x 2 2 52
ii. f(x)=x
2
  x 2
dx 
3
 c 
5
x c
1
2

6.2 Rules of Integration

If a function is continuous and differentiable, at a given point or interval, then
we has the following rules:
1. Integral of constant

95
  adx  ax  c, where a is constant

2. Integral of a sum/difference

 ( f ( x)  g ( x))dx   f ( x )dx   g ( x)dx

= F(x) + C1  G(x) + C2
= F(x)  G(x) + C, where C = C1 + C2
Ingeneral:

f k ( x) dx 
[ f 1 ( x)  f 2 ( x)  ...  f k ( x)]dx   f 1 ( x)dx   f 2 ( x)dx  ...    F ( x)  F
1 2 ( x)  .

3. Integral of a multiple.
i)  af ( x)dx  a  f ( x ) dx  aF ( x )  C

1
ii)  f (ax)dx  a F (ax)  C
1
iii)  f (ax  b)dx  a F (ax  b)  C
4. The power rule:
1
x dx  x n 1  C , wheren  1
n

n 1
5. The exponential rule:

e dx  e x  C
x
a)
e ax
 e dx  C
ax
b)
a

Variant:  f ' ( x)e f ( x ) dx  e f ( x )  C

a bx
a dx   C , Where a, b are constants.
bx
c)
b ln a
ax
 a dx  C
x
i.
ln a
6. The logarithmic rule:

96
 1
a)  x dx  ln x  c, x  0
1
b)  dx  ln /x/+c, x  0
x
f ' ( x)
Variant i.  f ( x)
dx  ln/f(x)/+c, x > 0

f ' ( x)
ii.  f ( x)
dx  ln /f(x)/+c, x  0.

dx 1 ax
iii. a 2
 ln
 x 2 2a a  x
c

dx
iv.  x a2 2
 ln x  x 2  a 2  c

6.3 Some techniques of integration

In the preceding section, we have seen the properties of integration. Based
on the properties/rules of integration which is possible to solve/compute
different integration problems? But there may be some difficult problems
that can not be solved simply and directly by an ordinary rule’s of
integrals. In this case we have to assist the following methods of
integration.
7. Integration by substitution
If the integrand can be expressed as a constant multiple of another

du
function u and its derivative , integration by substitution is permissible.
dx
du
Hence,  f ( x )dx   u (
dx
)dx   udu

8. Integration by parts
If an integrand is a product or quotient of differentiable functions of x and can not

du
be expressed as a constant multiple of u. , integration by pars may prove
dx
helpful. It is derived from the product rule of differentiation.
d
i.e [ f ( x).g ( x )]  f ( x) g ' ( x )  f ' ( x) g ( x )
dx

97
 f(x)g(x) =  [ f ( x).g ' ( x)]dx   [ f ' ( x).g ( x)]dx

 [ f ( x).g ' ( x)]dx  f ( x).g ( x)   [ f ' ( x).g ( x)dx  c

Or if u = f(x), and v = g(x), then

 udv  uv   vdu  c
Examples: I compute the integrals:
1)  5dx  5 x  c
 (x  3 x  1)dx  x dx  3 xdx   1dx
2 3
2)
1 1
= ( x 4  c1 )  3( x 2  c 2 )  ( x  c3 )
4 2
1 4 3 2
= x  x  x  c, (where C = c1+c2+c3)
4 2
1 5 4
3)  5 x 3 dx  5 x 3 dx  5( x 4  c1 )  x C
4 4
1 1 4 3
4)  (2 x  1) 2 dx  [ (2 x  1) 3 ]  c  x  2x 2  x  c
2 3 3
4 3
Or =  (4 x 2  4 x  1)dx  x  2x 2  x  c
3
1 7 1 1
x dx  x  c  x8  c
7
5)
7 1 8
1
e dx  e 5 x  c
5x
6)
5

 2 xe dx   (x ) 1 e x 2 dx  e x 2  c
x2 2
7)

2x
 2 dx  c
x
8)
ln 2
32 x
9)  3 2 x dx  c
2 ln 3
xdx
10)  , use substitution method, and let t =1+x2, then dt = 2xdx and
1 x2

xdx 1 dt 1 1
1 x 2
 
2 t
 ln t  c  ln(1  x 2 )  c
2 2
dx
 (ln x) ?
4
11)
x

98
 dx
Let t = lnx; then dt = ,
x
dx 1 1
 (ln x)   t 4 dt  t 5  c  (ln x) 5  c
4

x 5 5

 xe dx  ?
x
12)
Let u = x, dv = exdx
du = dx, v = ex

 xe dx  xe x   e x dx  xe x  e x  c  e x ( x  1)  c
x
:.

6.4 The definite integral

From the preceding section we have seen that, an indefinite integral possesses no
definite numerical values. A definite integral has a numerical value independent
of the constant C. the definite integral of a continuous function f(x) over the
interval a to b (a<b) is expressed mathematically as;
b
a
f ( x ) dx, where a = is lower limit of integration and

b= is upper limit of integration.

Definition: the definite integral of a continuous functions f(x) is the difference of
the indefinite integral evaluated at the upper and lower limits.
b
i.e 
a
f ( x) dx  [ F ( x)  c] ba  [ F (b)  c]  [ F ( a )  c]

= F (b)-F (a)
2 2
x4 ( 2) 4 (1) 4 1 3
Example: 1)  x dx 
3
  4 3
1
4 1
4 4 4 4
1
1
2) 
0
e x dx  e x
0
 e1  e 0  e  1

6.4.1 Properties of definite integrals

1. Reversing the order of the limit changes the sign of the definite integral.
b a

i.e.  f  x  dx    f  x  dx
a b

99
2. If the upper limit of integration equals the lower limit, the value of the definite

 f ( x)dx  [ F (b)  c]  [ F (b)  c ]  0

b
integral is zero. i.e b

3. The definite integral can be expressed as the sum of component of a finite

number of definite sub-integrals.
c b c

 f  x dx   f  x  dx   f  x  dx , where a  b  c .
a a b

Further information about definite integrals:

b b

i)   f  x  dx    f  x  dx
a a

b b

ii)  kf  x  dx  k  f  x  dx
a a

b b b b

iii)   f  x   g  x   h x   dx   f  x  dx   g  x  dx   h x  dx .
a a a a

UV 
b B
b
iv)  Udv 
a
a
  Vdu
A

6.4.2 Improper integrals

A definite integral with infinity for either an upper of lower (or both) limit of
integration is called an improper integral.
 b 

i.e  f  x  dx, or  f  x  dx, or  f  x  dx , are improper integrals.

a  

These integrals can be defined as limits of other integrals;

 b

 f  x  dx  blim
  f  x  dx, and
a a

b b

  x  dx   f  x  dx .
lim
a  
 a

If the limit in either case exists, the improper integral is said to be convergent.
If the limit doesn’t exist, the improper integral is said to be divergent.
Example: I) compute the following definite integrals:

100
 
dx 1


1)  1  1, then the improper integral is convergent.
1 x2 x

dx b

2)  1

 blim
  2 x 1   , it is divergent.
x
1 b
dx dx b
3) 
0 1 x
?  blim
1 
0 1 x
  blim
1 2 1  x
1
2

6.5 Economic applications of integrals

6.5.1 Applications of indefinite integrals
The indefinite in integral can be used to estimate the level of capital stock, total
cost, and total revenue etc from the respective marginal functions. i.e. it is the
process of movement from marginal to total function.

Examples:
1. The integral can be used to estimate the level of capital stock form the rate of
investment (change of capital stock)
i.e Kt =  I (t )dt  K (t )  c, where C is the initial capital stock, Kt – capital stock,
d
I(t) – function of investment. Because [ K (t )  c ]  K ' (t )  I (t ).
dt
Given the rate of investment I (t) = 20t2 and initial stock t = 0 is 30, what will be
the total capital function?
1 20 3
 20t dt  20  t 2 dt  .20t 3  c  t  C Since C is initial capital,
2
K (t) =
3 3

20 3
then C = 30, hence K (t) = t  30.
3
2. The integral can also be used to estimate total cost (TC) from marginal cost
(MC).
I.e. TC =  mcdQ  F (Q) + C =VC +FC

101
For instance, if the MC function of given factory is a function of an out put, say
mc= (TC)’= 25 + 30Q – 9Q2, and fixed cost (FC) = 55, what will be the function
of total cost (TC)?
 TC (Q) =  m(Q )dQ   (25  30Q  9Q 2 )dQ 
= 25Q+15Q2-3Q3+C, but C = FC= 55, then
TC (Q) = 25Q + 15Q2-3Q3+55
3. Again the integral can be used to estimate total revenue (TR) form marginal
revenue (MR).
I.e. TR (Q) =  mr (Q)  C
If the marginal revenue of a firm is given as MR (Q) =25-Q2, then what will be its
total revenue function [TR (Q)?]
2 1 3
 TR (Q) =  (25  Q )dQ  25Q  3 Q  C , since revenue of a firm is

zero at initial time (with out production one can not find a revenue), then TR (Q)

1 3
= 25(Q)- Q
3

6.5.2 Applications of definite integrals

Definite integral is widely applicable to solve various economic issues such as
consumers and producers surplus, cost, revenue, etc.

Consumer surplus [cs]

Consumer surplus is the difference between the price that a consumer is willing to
pay for a commodity rather than go with out it and the actual price he/she pays for
the commodity. The degree of satisfaction derived form a commodity is a
subjective matter.
If DD1 is the market demand carve then demand Q0 corresponds to the price Po
the consumer surplus is DD1po= Area DD1Q0O-P0D1Q0O
Q0
Cs= 0 f (Q ) dQ  P0 Q0 , where f (Q) stands for the demand function

102
Example 1) if the demand function P = 25 – 2Q, we can find the equilibrium price
P0 and equilibrium quantity demanded Q0 with the help of the supply function 4P
= 10+Q. thus Po = 5, and Q0= 10
10 10
Consumer surplus (Cs) = 0
PdQ  P0 Q0   ( 25  2Q) dQ  5  10
0

0 -50=25  10 – (10) -50

= [25Q-Q2] 10 2

350
2) Given the demand function P= Q  5 , find the consumer’s surplus at P0=12.

350 290 290

At P0 = 12  12  Q  5  350  60  12Q0  Q0  12 , hence Q0= , p0  12
12
290
Q0 350 12
-12
 Cs   dQ  P0 Q  350 ln(Q  5)
0 Q5 0
0

290
  350[ln 355  ln 5]  290
12
= 350(5.87-1.61) -290 = 350  4.26  290
= 1491 – 290 = 1201

cs D1

P0 P=f(Q)

0 Q0 Q

103
Producer surplus [Ps]
With the given supply function, the producer would have supplied several
quantities at different prices less that P0. At P0 the producer supplies all these
quintiles. Hence if SS1 is the market supply curve and if Q0 is the supply at market
Q0
price p0, the producer surplus is the area SS 1P0 =P0Q0- 0 g (Q )dQ, where the

supply function is given by p=g (Q).

2
Example: - 1) find the producer surplus for the supply function
P – Q = 9,

when Q0=7.
At Q0 = 7  p02  7  9  p02  16  p0  4; p  9  Q is the supply function.
Q0
 Ps  PoQo   P (Q ) dQ
0

Q0
= p0Q0 - 
0
p (Q ) dQ

7
= 4  7  0 9  QdQ
3
2
= 28- (9  Q) 2 7
0
3
3
2 3
= 28 - [(16) 2  (9) 2 ]
3
74 1
= 28 - 3
3 3

104
 P

P=g(Q)

P0 S1

Ps

Q
0
Q0

Cost
The MC function is the derivative of the cost function:
d (Tc (Q )]
Marginal cost (MC) = , say it follows that the total cost function in
dQ

the integral of the mc function

 Cost[C (Q)] =  ( 5+Q2)dQ
Example: 1) The marginal cost function for a certain product is 5+ Q 2 Find the
total cost and average cost functions, if the fixed cost is 50.

105
 d
 C  Q   =5+ Q2
dQ

 Cost[C (Q)] =  ( 5+Q2)dQ

1
= 5Q+ Q 3  c
3
For Q = 0, C (0) = 50, given
Whence, 50 = 5x0+0+Cor C = 50
1
Hence the cost function is given by C (Q) = 5Q+ Q 3  50 and the cost function
3

C (Q ) 1 50
is given by AC =  5  Q2  ,
Q 3 Q

106
Self – check exercise
Chapter Six
I find the integrals of the following functions

  (1  3x)
2
i) x dx ii) dx

5 x 1
 (3e  iv) 
2x
iii) ) dx dx
x 3

 (e  e 2 x ) dx vi)  (4 t  3 t 2  5 t 3 )dt
2x
v)
II Determine the following integrals
1 dx
 ( x  1)( x  ii) 
2
i) )dx
2 x x
xdx
iii)  1 x
iv) x
3
7  6 x 2 dx

 x ln xdx  xe
x
v) vi) dx

III compute the following definite integrals:

2 1 2 5
i)  3
x 3 dx ii) 
2
e x dx iii) 0 2 x
dx

IV. Given the supply function p= (Q+3)2, find ps at p0=81, Qo = 6

V. B/Dar textile factory discharges pollutant in to a river that passes across the

city of several towns at rate of p(t) = t( t 2  1);0  t  5, where p(t) is a total

number of tons of pollutants discharged in to river will be discharged in to the
river during the first three years of operation?
2
VI. Find the consumption function if MPS = given that consumption is 100,
5
when income is zero
VII. Find the consumer surplus, given the demand
3p = 36 – 5x, if po = 2, x0 = 6

107
Chapter 7
Linear differential and difference equations
So far we have seen the concept of differentiation and integration and their
application to economic problems. Now we are going to learn about the concepts
of linear differential and difference equations of the first order level, and their
economic applications as well.
Objectives:
At the end of this chapter you will be able to:
 Understand the difference between differential and difference concepts
 Apply the concepts of differential and difference to economic problems.
 Solve problems of the type of differential and difference equations.
 Identify the orders and degrees of the equations

7.1 Definition and concepts

A differential equation is an equation which involves derivatives. It is an implicit
functional relation ship between variables and their differentials. The order of
differential equation is of the highest order of any of the derivatives contained in
it. A differential equation is order n if the nth derivative is the highest order
derivative in it. The highest power to which the derivative of the highest order
occurs is the degree of a differential equation.
dy
Example 1) y  x 2  x is the differential equation of order one, and degree one.
dx
4 2
d 2 y   dy 
2)  2   8   xy is of order two, and degree three
 dx   dx 
5
 dy  7
3)   - 6
 dx  x = 0 is of order one, and degree five

7 3
d 2 y  d 4 y 
4)  2   4   80 y of order four, and degree three.

 dx   dx 

108
A different equation is said to be linear if the dependent variable is of the first

d nY d n1Y
degree a 0  a1 , , , anY  f ( x) is a linear differential equation of
dx n dx n 1
order n.

If a0, a1, …, an are constants and f(x) = 0 in the above equation we have a linear
homogeneous differential equation of order n with constant coefficients. Ordinary
differential equations involve only one independent variable and its derivatives.
When there are several independent variables we may have when there are several
independent variables we may have partial differential equations. To solve a
differential equation means to find all its solutions and incase it has no solution, to
show it is so. A solution of a differential equation in any function which satisfies
the equation i.e. reduce it to identify when substituted in to the equation. A
differential equation of order n has a general solution containing n arbitrary
independent constants. A particular solution may be obtained form the general
solution by assigning to the arbitrary constants certain specific values which are
obtained from any given information or the initial conditions given in the
problem.
To solve differential equations we recognize their different types and follow
certain standard procedures some of which are considered below.

I. direct integration
dy
To solve the differential equations of the type  f (x) we can resort to
dx
integration because, if f(x) is the derivative of F(x), we can write the above
equation dy=f(x)dx

 dy   f ( x) dx

 y  F ( x)  c

dy dy
Example 1)  ky may be written  dy
dx ay

109
 1 dy 1
a y
 ln y  x  c
a
ln y  x  c ln y  ax  c
ax  ac
ye
 e ac e ax
Or y= ex+c
We may write y=c1ex, where c1=ec

ii. Separable differential equation

If M is a function of X and N is a function of y and we have a first order differential
equation.
d
M(x) +N(y) 0
dx
This may be written
M(x)dx +N(y)dy =0
The solution is obtained by writing

 m( x)dx   N ( y )dy  0
dy y
Example equation  , find the general and particular solution, if y=1, when
dx x
x=1, then c=1
dy dx dy dx
 The above equation may be written y

x
, so that   
y x

 LnY=LnX+LnC, where LnC is an arbitrary constant.

The solution is there fore,
Y=Cx is general solution
Y= x is a particular solution
iii) Exact Differential Equations
dy
An equation of the form M(x, y) +N(x, y) 0
dx
dm dN dm dN
where dy  dx is called an exact differential equation dy  dx is a necessary

and sufficient condition for a differential equation to be exact.

110
The solution of the exact differential equation can be shown to be:

 d 
F(x, y) =  Mdx   Ndy    dy  Mdx dy
 

Example: Given ( xy 2  y )dx

d
 ( xy  y ) dx   ( x 2 y  x) dy   [
dy 
( xy 2  y ) dx ]dy
2
F(x, y) =

x2 y2 x2 y2 d x2 y2
=  xy   xy   [ (  xy)]dy
2 2 dy 2

x2 y2 x2 y2 x2 y2
=  xy   xy   (  xy) dy
2 2 2
x2 y2 x2 y2 x2 y2
=  xy   xy   xy  c
2 2 2
x2 y2
=  xy +c
2

7.1.1 First order linear differential Equations

d
 yp( x)  Q( x ) is linear homogeneous of order one. If Q(x) = 0, it
dx

dy
becomes homogeneous, i.e.  yp ( x)  0 whose solution is obtained by
dx

dy
expressing y   p ( x)dx hence lny=   p ( x )dx

p  x  dx
e

:. Y =C

dy
If Q(x)  0 we can show that the solution of  yp ( x)  Q ( x ) is given by
dx

y = e   p ( x ) dx (  Q( x )e 
p ( x ) dx
 c)

dy
Example: 1) The solution of  yx  x can be written
dx
x2 x2
y = e   p ( x ) dx (  xe 
xdx
 c) = e  ( xe 2 dx  c)
2

 x2 x  x2
=e 2
[e 2
 c]  1  ce 2

111
 dy
General form:  vy  z , where, v and z are constants.
dt
dy
General solution: y  vdt  zdt  ln y  vt  zt  c

lny = -vt + zt + c
z
y (t) = =Ae-vt + , where A is arbitrary constant.
v

Ae-vt =Yc  complementary solution, which represents the derivation of the

function from the equilibrium value.
If an initial condition or boundary value is given, “A”, can be specified, in which
case we get a definite solution.
z z z
i.e at t=0, y(0) = Ae-v (0) +  y(0) A +  A = y(0) - .
v v v
z -vt z
Definite solution: y(t) = [y(o) - ]e + .
v v
dy
Example 1) Given  2 y  4, find the general solution.
dx
a) Using the general formula
b) By separating the variables
z
Solution: a) y(t) = Ae-vt +
v
4
= Ae-2x +
2
 y(x) = Ae-2x +2
b) Separating the variables.
dy
 4  2y
dx
dy
  4  2y   dx ; let u = 4-2y
du = -2dy
du
dy =
2
du
( )
 2 xc
 u
1

112
 1
 - ln u  x  c1  ln u  2  2c1
2
 ln(4-2y) = -2x-2c1
 4-2y = e 2 x c2 // c2 = -2c1 
 4-2y = ce 2 x // e c2 =c 
c 2 x
Y=  e 2
2
 y(x) = A e 2 x  2

Domar Economic Growth Model

Investment has a dual character. It affects aggregate demand and promotes full
employment. It also leads expansion of capital stock and hence of supply of out
put.
Domar tries to determine as to how rapidly must investment grow to maintain full
capacity out put. Let b stand for marginal propensity to consume, S for marginal
propensity to save and  for the capital coefficient which represents average and
marginal productivity of capital. If I, Y, S, and K stands for investment, income,

1 1
savings and capital respectively, the multiplier K=  and the production
1 b S
function is of the form y=  K, then we have increment to total demand equals to

dy dI 1 dI
total supply. Since increment to total demand: k  , and
dt dt 1  b dt

dy dk
increment to total supply:   I
dt dt

1 dI dI St

1  b dt
 I or
I
 Sdt , Solving we get I =I0
e

113
This is the time path of the investment level required to maintain full capacity out
put and suggests that investment must grow exponentially the rate S , if  and
S are large, investment will require a correspondingly high rate of growth. It

a I o st
follows that since y= C+I, C= a + by, we have y =  e . If a =0, i.e., if
s s

St
consumption is proportional to income, we have y=y e 0

Example;
In stead of constant S and  , let us have variable S (t) and  (t ), then the
differential equation can be written;
dI
 S (t ) (t ) dt , Show that the solution is
I

I = Ioe  s ( t ) ( t ) dt
 ln I   S (t ) (t )dt
I = e  s ( t ) ( t ) dt

7.1.2 First order linear Difference equations

A difference equation expresses a relation ship between a dependent variable and
a lagged independent variables which changes at discrete interval of time.

Difference functions
Let y be the value of this variable at a time t. suppose we know that the value of
this variable at a previous time t-1 is yt-1. The equation expressing the relation
between the values of the variable at times t and t-1is called a difference equation.
If a, b, and c are constants then y t= ayt-1 + b is a linear first order non-
homogeneous difference equation. There is a separate constant term independent
of y. The time log is one.
Yt = ayt-1 + byt-2 is a linear second order homogeneous difference equation. The
time lag is two. Yt = ayt-1 + byt-k +c is a liner kth order non- homogenous difference
equation. The time lag is k. In economics we often come across situations where
variables occur with discrete time lags. We now consider the calculus of finite

114
differences which deals with this subject. The use of this differences as variables
amounts to using lagged variables corresponding to previous time periods.

Differences
The difference yt  yt 1  yt is called the first difference of Yt and provides
the rule for computing y t . It may be noted that y is a function of t but that it
takes only integral values. Thus y can be evaluated at intervals not
continuously.The second difference is written:
2 Yt =  (  Yt) =  Yt+1 - Yt
= (Yt+2 – Yt+1) – (Yt+1 – Yt)
= Yt+2 – 2Yt+1 + Yt
The third difference is:
 3Yt =  2Yt+1 -  2Yt
= (Yt+3 – 2Yt+2 + Yt+1) – (Yt+2 – 2Yt+1 + Yt)
= Yt+3 – 3Yt+2 + 3Yt+1 - Yt , and so on.
An ordinary difference equation is an equation involving difference like  Yt,
2 Yt, etc.
The order of difference equation is the highest difference in the equation.
The degree of a difference equation is the degree of the term of the highest order.
A difference equation of degree one is said to be linear. A difference equation
may be written with or without explicit presence of difference terms.

Examples:
1) yt+1 – yt = 5 or y t  5 are equivalent forms of a difference equation of
degree one. The subscript t may be taken arbitrarily. Thus t may be replaced by t-
1 or t+1 throughout and this equation can be written in the alternative forms:
Yt –yt-1 =5 or yt+2 – yt+1 = 5

115
 2) Determine the order and the degree level of the following difference

equations: i) y t3 2  3 y t  2 it is second order, third degree.

7.1.2 First order linear difference equations

A difference equation expresses a relation ship between a dependent variable and
a lagged independent variables which changes at discrete intervals of time.
Example: Ct = f (yt-1)
General form of difference equation: yt+1 – byt = c or yt = byt-1 +c, where b and c
are constants.
c
General solution: yt = Abt + , where b  1, but for b = 1, then yt = A
1 b
+ct
c c
Definite solution: yt = [y0 - ]b t  , b  1 , for b = 1, then yt = y0 + ct
1 b 1 b
Example 1) Solve the following first order linear difference equation.
Yt+1 -2yt = 3, y0 = 5


Definite solution: y t   y t 

c  t
b 
1 b
c 
  5 
1 b 
3 

1   2  
 2  1 3 2
t

y t
8  2  3
t

7.2. Economic applications

7.2.1. Uses of differential equations in economics

Differential equations find wide applications in all branches of economics. It is

more applicable to derive cost function whose growth rate is given; it helps for
utility and demand analyses, market equilibrium analyses, macro- growth
economic analyses, etc.
Example 1) Given the demand function Qd= c + bp, b<0, and supply function
Qs= g+hp, g<0

116
 Determine the conditions for price stability in the market. (i.e. under what
conditions p(t) change to p as t   ?)
Solution: first find equilibrium price ( p )
Qd=Qs
C+bp = g+hp
C-g = hp – bp
cg
 p =
hb
dp
Assuming that the rate of change of price in the market ( ) is a positive linear
dt
function of excess demand, (Qd – Qs), we have:
dp
= m (Qd – Qs), where m is the adjustment coefficient, and m>0
dt
dp
= m[c+bP – (g + hP)]
dt
= m(c + bP – g – hP)
= m [(c-g) – (h-b)P]
dp
 m(h  b) p = m(c-g) general form
dt
Since V = m (h-b), and z = m(c-g)
 m ( h b ) t m (c  g )
Pt = A e +
m( h  b )
 general solution.

Definite solution:
cg
At t = 0, P(0) = A +
hb
cg cg
Pt = [P0 - ] e-m(h-b)t +
hb hb
Pt = (P0 - P ) e-m(h-b)t + P
Let K = m (h-b) t, where K>0, (since h-(-b) =positive)
Pt = (P- P ) e-Kt + P
Whether, pt tends to p as t   , depends on whether the exponential expression

 kt 1
( e kt  0 as t  ) .Since e = e kt , , e  kt tends to 0 as t  ) .

117
As a result the time path will lead the price towards the equilibrium position.
Depending on the relative magnitude of po- p , the above solution yields three
positive time paths.
Case -1 If P0 = p , pt = p price adjustment is immediate.
Case -2 If P0 > p , P0 - p >0  Pt > p and Pt approaches p from above as t
 
Case -3 If Pt < p , Pt < p and Pt approaches the equilibrium price from below as
t 
2) Find the demand function (Q = f (p)), if the point elasticity, e = -1.
Solution:
dQ p
e = dp . Q  1

dQ  dp
 Q

p


dQ dp
 Q
 
p

Ln Q = -lnP+c1
lnQ + lnP =c1
ln(QP) = c1

Qp = ec 1

e c1
Q=
p

,[ c1  k ]
1
Q= kp e

7.2.2 Uses of Difference Equations in Economics

The change from continuous time to discrete time produces no effect on the
fundamental nature of dynamic analysis.

The cobweb model

For many products (such as agricultural products) which are planted a year before
marketing, current supply deepens on last year’s price.

118
 Qst-1 = f (Pt), or Qst = f(Pt-1)
When such a supply function interacts with the demand function of the form:
Qdt = f (Pt ), interacting dynamic price patterns are observed.
Using the linear versions of the lagged SS and the un-lagged DD functions, we
develop a market model as follows:
Qdt = c + bPt, (c > 0 and b < 0)
Qst = g + hPt-1, (g < 0 and h > 0).
Find first order linear difference equation. At equilibrium c + bPt = g + hPt-1
h g c h g c
 Pt = Pt 1  , where b  and c =
b b b b
Definite solution:-
t

 g  c h  g  c
p t
=
 p0 b  h     b  h

  b
 
t
  h   

p  p p    p
 
 b 
t 0


Self – check exercise

Chapter Seven
I. Solve the following separable differential equations
dy dy
1)  3 xy 2)  e x y
dx dx
II. Solve the exact differential equation
1) 2y3dx + 3xy2dy = 0
III. solve the following
a. using the general formula

119
 dy
 2y  4
dx
b. using separating the variable
dy
 4  2y
dx
IV. solve the following (find the complementary function)
d2y dy
1) 2  3  2 y  0
dx dx
V. find the particular solution
d2y dy
1) 2
 2  y  xe x  0
dx dx
VI. Write the following equations
1) write respective expression of difference
yt - yt + 1 + yt - 1 = 0
2) without expressions of difference
2 y t  y t  1 y t  1  0

ANSWER KEY TO SELF CHECK EXERCISE

Chapter One
1. What is a function? (State the definition of function?)

120
 The definition stated as follows: If to each value of the variable X
(within a certain range) there corresponds one or several values of
anther variable Y, then Y is a function of X or , in functional
notation, y = f(x).The variable x is called the independent or the
explanatory variable or argument. The variable y is a dependent
variable or the value of the function.

2. Identify the difference between function and relation?

If to each value of the variable X (within a certain range) there
corresponds one or several values of anther variable Y, then Y is a
function of X. If to each value of the variable X (within a certain
range) there corresponds one or several values of anther variable Y,
then Y is a function of X If, a given value of X corresponds to more
than one values of anther variable Y then Y is not a function of X, but
it is simply called relation. Hence, a function is a special type of
relation, but a relation is not necessarily to be a function.

3. Given the following set of functions for similar markets. Find the
equilibrium price and Quantity.
Qd = 85 – 3p
Qs=-5+15p
At equilibrium point, Qd=Qs ,then 85-3p=5+15p
90=18p; p=5;Qd=Qs=85-3(5)=-5+15(5)=70
[ ans. p=5; Qs = 70 =Qd ]

4. For the following set of functions, find the equilibrium price and
quantity.
Qd2 + 3Qd = -p+20
10Qs – 3Q 52  5  p
 Qd  Qs

121
 2 2
Q d
 3 Q  P  20  10 Q  3 Q  P  5
d s s

2
4 Q  7 Q  15  0

 Q  3  Q  5   0
 4

Q=3
And therefore, Qd2 + 3Qd = -p+20; 3.3+3.3=-P+20
18-20=-P  P=2

[ans. P = 2, Qd = 3 = Qs]

ANSWER KEY TO SELF CHECK EXERCISE

Chapter Two
I.
1. lim
x 2 x2 = lim
x2 ( 2) 2  4

x 2  4x  3 ( x  1)( x  3) lim x  3 2
2. lim
=
lim
 x 1  1
x 1
x 2  2x  3
x 1
( x  1)( x  3) x3 4 2

1  x  1  x lim 1 x  1 x 1 x  1 x
3. lim
x 0  x 0 [ ]
x x 1 x  1 x
1 x 1 x 2x
=
lim
x 0  lim
x 0
x( 1  x  1  x ) x( 1  x  1  x )

2
=
lim
x 0 1
1 0  1 0

p 3  8 lim ( p  2)( p 2  2 p  4) lim

4. lim
p 2  p 2  p 2 ( 2) 2  2(2)  4  12
p2 p2

II.
x2 x2 11 1
1. lim
x 1  lim
x 1  lim[( x  1)  ]
x 1 x 1 x 1
3x  7
2.
lim
x2 
x2  4
x 2  x lim x( x  1)
3. lim
x 1  x 1 1
x 1 x 1

122
 5
4. lim
x 0 
x

x2  3  x
5. lim
x  x[ x 2  3  x]  lim
x  x ( x  3  x )  (
2
)
x2  3  x

x( x 2  3  x 2 ) 3x 3
lim
 lim  lim 3
= x  x  x  2
x 3  x x 3  x 1 3
2 2
2 1
x
2 x  3 x 1 lim 2 x  1  2 x 1 lim 2
6. lim
x  ( )  x ( )  x  (1  ) x 1
2x  1 2x  1 2x  1
1 2
: Let y  2 x  1 ,2 y  2 x  1  y  1 2  x

1 y  12 lim 1 1 12 1
 lim
y  (1  )  y  (1  ) y .lim
y  (1  )  e  (1  1 ) 2  e
y y y 

12  2 2  33  ...  n 2 lim n( n  1)(2n  1)

7. lim
n  n 
n3 6.n 3
1 lim 2n 2 lim 3n lim 1 1
= [ n  2  n 2  n 2 ]  [ 2  0  0]  1
6 n n n 6 3

ANSWER KEY TO SELF CHECK EXERCISE

Chapter Three
I.
1 1
1) y =  dy   x  2 dx  dy   2
x dx x

2) 2).y = x3  dy  3x 2
dx
3) 3).x-2  2 x 3
II.
1) 2x3  (2 x 3 )'  6 x 2

123
 1 1 0( x  1)  1(1) 1
2) ( )'  
x 1 x 1 ( x  1) 2
( x  1) 2
1 1 12 1 1
3) x  ( x )'  ( x 2 )'  x 
2 2 x
1
 [(ln x)]'  3(ln x ) 3 
4) (lnx) 3 x

III.
e x lim (e x )' lim e x
1) lim
x   x   x  
x ( x)' 1

2) lim
x 0 x x  lety  x x  ln y  ln x x  x ln x

1
( )
ln x lim x   lim x  0
lny =
lim
x 0 [ x ln x ]'  lim
x 0 [ ]  x 0 x 0
1 1
( 2 )
x x
x
Hence, ln lim y = 0  lim
x 0  e
y 0
 1  lim
x 0
x

3)

2 1 2  x  1 lim 1  x  ( x  1)' 1 1
lim
x 1 [  ]  lim
x 1 ( )  x1 ( 2 )  lim
x 1   lim
x 1 ( )
x 1 x 1
2
x 1
2
x 1 [( x  1)]'
2
2x 2

IV.
dx dy
1)  2at ;  2a
dt dx
1 dt dy dt dy 1 1
      2a 
2at dx dx dx dt 2at t
2) dx = 2dt
1 dt dy
 , dy  2tdt  2t
2 dx dt
dt dy 1
 dy     2t  t
dx dx dt 2
dz
3)  dz  6 y 5 dy  6 y5; dy = 12x3dx,
dy

dy dz dz dy
 12x 3 ,     6 y 5  12 x 3 = 72 y 5 x 3
dx dx dy dx

124
 V.
1)  24x3dx-3y3dx-9xy2dy+2ydx+2xdy-dx+7dy = 0
= (24x3-3y3+2y-1)dx + (7y+2x-9xy2)dy = 0
dy ( 24 x 3  3 y 3  2 y  1)

dx (7 y  2 x  9 xy 2 )

2)  eydy – exdx + ydx + xdy = 0

= (ey + x)dy + (y – ex)dx = 0
VI.
x
1) ln = lnx – ln(x+1)
x 1
x 1 1 1 1 x 1 x 1
(ln )'   ( ) 1    
x 1 x x 1 x x  1 x ( x  1) x ( x  1)

ex 1
2) [exln x]’ = exln x +  e x (ln x  )
x x
VII.
1) y = 5x4 + 2x3
yI = 20x3 + 6x2
yII = 60x2 + 12x
yIII = 12x + 12
2
2) y =
x
2
yI = 2(-1)(x)-2 =
x2
4
yII = -2(-2)(x)-3=
x3
VIII.
a) Necessary Condition
Take the first derivative and find the critical points
i. f’(x) = 0
6x – 12 = 0
x = 2 is a critical point
b) Sufficient Conditions
Take the second derivative

125
 i. f’’(x)  6
f’’’(2) = 6> 0, then the critical point is relative minimum.
IX. f(x) = x2(x-1)3
i.  f’(x) =3x2(x-1)2 + 2x(x-1)3 = x(x-1)2(3x+2x-2)
= x(x-1)2(5x-2) = 0

x = 0 or x =1 or x = 2
5
ii. f’’(x) = [f’(x)]’=[(x-1)2(5x2-2x0]’
= 2(x-1)(5x2-2x)+(10x-2)(x-1)2
F’’(0) = -2<0, max.
18
F’’( 2 5 )   0, min .
25
F’’(1) = 0, inconclusive
Hence, f’’’(x) = 2(5x2 -2x) + 2(10x – 2)(x-1) + 10(x-1) + 2(x-1)(10x – 2)
F’’’(1) = 6, is inflection point.

126
 ANSWER KEY TO SELF CHECK EXERCISE
Chapter Four
50 dQ 150
1.  Q = p 3 ; dp
 4
p

p dQ p  150
E dp     ( 4 )  3
Q dp 50 p
( 3)
p

2.  Qx = 50 – 0.2px + 0.1py – 0.8pz – 0.5I

dQ dQ x
 0 .1 
dp dp y

py dQ x p y  0.1
exy =  
Qx dp y 50  0.2 p x  0.1 p y  0.8 p z  0.5 I

At Px = 5, Py = 10, Pz = 20 and I = 40
10  0.1
exy =
50  0.2  5  0.1  10  0.8  20  0.5  40
1 1
= 
50  1  1  16  20 24
Since exy is positive, then two goods are substitutes.
3. i) (1) 100x – ½ x2 + 20y – 5 +  (600 – 20x – 5y)
(2) First order condition:
du
 100  x  2  0
dx
du
 50  5  0
dy

du
 600  2 x  5 y  0
d

   10 , x = 80, y = 88
600 - 2  80  5 y  0
Y = 88
ii) Max profit at optimal point will be:

127
Max п = 100(80) – ½(80)2 + 50(88) – 5 + 10(600 - 2  80  5  88)
= 800 – 3200 + 4400 – 5 + 6000 – 1600 – 4400 = 1995
 10 2Q  10 Q
4. I. [C (Q)]’ = Q 2  200  Q 2  100  0

 100  Q 3
=  0  Q 3  100  0
100Q 2

Q 0  Q = 10 is a critical point.
1 20 d 2 C (Q) 1 20 3
II.  3  2
}  3
  0 which is a relative minimum.
100 Q dQ 100 (10) 100

Thus the factory should be produced 10 units of a commodity in order to

minimize the cost.
5.  Q = -1/4P + 7
dQ 1
Here we have dp   4

1
p 
p dQ p 1 4
ed  
p
  ( ) 
Q dP 1 4 1
7 p 7 p
4 4
For p = 4
1
 ( 4)
4 1
edp  
1 6
7  ( 4)
4

128
 Answer Key to Self-Check Exercise
Chapter five
I.
1) u = x2y2+x5+y6
du = 2xy2dx+5x4dx+0y6=0
du
 2 xy 2  5 x 4
dx
And du = 2xy2dy + ox5dy + 6y5dy
du
 2 x 2 y  6 y5
dy
7
2) u = (x2-y2) 5
2 2
du 7 2 14 x 2
  ( x  y 2 ) 5 ( 2 x)  (x  y 2 ) 5
dy 5 5
2 2
du 7 2  14 y
  ( x  y 2 ) 5 ( 2 y )  (X 2 Y 2 )5
dx 5 5
x2
3) u = (x + y)2 e y 2
x2 x2
du 2x
  2( x  y )  1  e y 2  2  e y 2  ( x  y ) 2
dx y
x2
x
 2( x  y ) e y2
[1  ( x  y )]
2y
x2 x2
dy 2 x 2 y3
 2( x  y ) e y 2  e ( x  y) 2
dx y3

4) u= x2 log e y  ye
x

du x log e e
  2 x log e y  ye   ye x
dx y  ye x

ye x
= 2x log ey+yex +
y  ye x

du x 2 log e e x 2 (1  e x )
  (1  e x
) 
dy y  ye x y  ye x

II

129
 dx  0.3 k 0 .3
1)   10k  0.7 L
0.3
 7 0.3  with capital fixed.
dL L
du
2)  dx,  2( x 2  1) ( x,  2) is the marginal utility function of the first
3

commodity;
du
  3( x,2)( x 2  1) 2 is the marginal utility function of the second
dx 2

commodity.
III.

1)  f x x
1
2
1
(3e 3 x , 5 x 2 )  2 x, (e 3 x , 5 x 2 )

= x, e3x,+5x2(3x,+2)
 fx2 = 5x,2 e3x,+5x2

IV.
xu
1) u = x  y

d2y d du d  2y 2 y  2  ( x  y) 4y
  ( ) (  
dx 2
dx dx dx ( x  y ) 2
( x  y) 4
( x  y) 3

d2y d du d 2x  2 x  2 x( x  y )  4x
  ( ) ( ) 
dy 2
dx dx dx ( x  y) 2
( x  y) 4
( x  y) 3

2) u = x2 - xy2
d 2 u d du d
 2
 ( ) (2 x  y 2 )  2
dx dx dx dx
d 2u d du d
  ( ) ( 2 xy )  2 x
dy 2 dy dy dy

d2y d du d
  ( ) ( 2 xy )  2 y
dxdy dx dy dx

V.
x y
1)   x  y

dz ( x  y )  ( x  y )  2y
  
dx ( x  y) 2
( x  y) 2

130
 dz ( x  y )  1  ( x  y ) 2x
  
dy ( x  y) 2
( x  y) 2

d 2z d dz d 2x 2[( x  y ) 2 ]  2( x  y )(2 x )
  ( ) [ ]
dxdy dx dy dx ( x  y )2 ( x  y) 4

( x  y )[2 x  2 y  4 x]  2 x  2 y
= 
( x  y) 4 ( x  y) 3

d 2x d dz d  dy  2( x  y )2  2( x  y )(2 y )
  ( ) ( ) 
dydx dy dx dy ( x  y ) 2
( x  y) 4

( x  y )[2 x  2 y  4 y ] 2 x  2 y
= 
( x  y )( x  y ) 3 ( x  y) 3

VI.
1) u = x2y3
 du  2 xy 3 dx  3 yx 2 dy

2) u = x2 +3y2
 du  2 xdx  6 ydy

3) u = log (x2 – y2)

2 xdx 2 ydy
 du   2
x2  y 2
x  y2

4) u =  2 ,   x 2  y 2
 u  ( x2  y 2 ) 2  x 4  2 x 2 y 2  y 4

 du  4 x 3 dx  4 xy 2 dx  4 x 2 ydy  4 y 3 dy

= (4x3 - 4xy2)dx +(4y3-4x2y )dy

xy
5) u = x  y

yx  y 2  xy x 2  xy  xy y2 x2
 du  dx  dy  dx  dy
( x  y) 2 ( x  y) 2 ( x  y) 2 ( x  y) 2

VII. Since p1 = 108 – 5x, and p2 = 35- 2.5x2, then

 = p1 1  p 2  2 ( x1 2   2 2 )
= p1 1  p 2  2  x1 2  x 2 2
= (108 – 5x1) (x1) + (35-2.5x2)x2 - x12 - x22

131
 = 108x1 – 5x12+35x2 – 2.5 x22 – x12 – x22
= 108x1+35x2 – 6x12-3.5x22
d
=  dx  0 gives
1

108 – 12x1 = 0
x1=9
d
 0 gives
dx 2

35 - 7x2 = 0
x2 = 5
d ( d )
2
 0  12  0
d x1

d ( d )
2
 0  7  0
d x2

d (d ) d (d ) d (d )

2
 2

dx1 dx 2 dx1 dx 2

(-12) (-7) > 0

Thus profit ( ) max = 108 x1 + 35 x2 – 6x12 – 3.5 x22 and x1 = 9, x2 = 5
There fore,  max = 108  9 + 35  5-6 (9)2-3.5  (5)2=
= 972  175 – 486 – 87.5 = 573.5

132
 Answer key to self – check exercise
Chapter Six
I.
1
1 1 3
x2 2
i)  x dx   x dx   c  x2  c
2
1 3
1
2

 (1  3 x) dx   (1  6 x  9 x 2 ) dx   dx  6  xdx  9  x 2 dx
2
ii)
= x + 3x2 + 3x3 + c
5 1
 (3e  ) dx  3 e 2 x dx   dx
2x
iii)
x x
x 1 1 1 1
iv)  3
dx  (  xdx   dx )  x 2  x  c
3 6 3
1 2x 1  2x
 (e  e  2 x )dx   e 2 x dx   e  2 x  c
2x
v) e e
2 2
1 2 3
vi) [ 4 t  3 t 2  5 t 3 ]dt  t 4 dt  t 3 dt  t 5 dt
   
5 5 5
4 4 3 3 5 8
= t  t  t c
5 5 8

II.
i)

1 1 1 1 1
 ( x  1)( x  ) dx   ( x 3  x 2  x  )dx  x dx   x 2 dx 
2
xdx   dx
2 3

2 2 2 2
1 4 1 3 1 2 1
= x  x  x  xc
4 3 4 2

dx dx 2
ii) x x
 3

x
c
x 2

xdx 1 ( x  1)( x  1)  1
  x(1  x)  
x 2 11
iii)  2
dx  dx  dx
1 x
( x 1)
x 1

dx 2 3 1
=  x  1dx  
x 1

3
( x  1) 2  2( x  1) 2  c

133
 1
vi) x 7  6 x 2 dx let u 7-6x2, du = -12 xdx, but xdx = - du
3

2
1 1 1 4 1
  u 3 ( du )   u 3  c   3 7  6 x 2) 4  c s
2 6 16

1
v)  x ln xdx let u = lnx  du 
x
dx

dv = xdx  v  x 2
2
x2 x2 1
  x ln xdx  ln x  ln x( )   , dx
2 2 x
x2 1 x2 1
= ln x   xdx  (ln x  )  c
x 2 2 2

 xe
x
vi) dx, let u = x, dv = exdx, du = dx, v = ex
 xe x   e x dx  xe x e x  c  e x ( x  1)  c

III.
2 x4 1 3
i)  x 2 dx  2
1  [2 4  (1) 4 ]  3 4
1 4 4
1
 exdx  e  e1  e 0  e  1
x 1
ii) 2
0

5 2 dx
 dx  5  5 ln(2  x )  5[ln 4  ln 2]
2 2
iii) 0 0
2 x 0 2 x

iv) At p0  81, Q0 , p0  (Q0  3)  81  Q0  3  Q0  6

2

1
= 486 - (9 3  33 )  486  343  9  252
2
V p1(t )  t t 2  1, to =0 and t3=3
3 3 3
0
p1(t )dt   0
t t 2  1dt  0
t 4  t 2 dt

2 4 2 32 2 3
= (t  t ) , (4t 3  2t ) 30  (3 4  3 2 ) 2 (4  33  2  3)
3 3
= 596.992  114
2 3
VI  mpc  1  mp3  1  
5 5

134
 3 3
Consumption C=  5dy  5 y  c
3
Using the given condition 100 =  0  c,
5
3
The consumption function is c =  0  c,
5
3
The consumption function is c = y  100.
5
VII.  3 p  36  5 x
5
p  12  x
3
xo 6 5
Cs = 
0
pdx  p 0  0  
0
(12 
3
x ) dx  2  6

5 5
= [12x - x 2]60  12  12  6   6 2  12
6 6
= 72 – 30 – 12 = 30

135
 Answer key to self – check exercise
Chapter Seven
dy
I. 1)  3 xy
dx
dy
  3 xdx
y

3 2
ln y  x c
2
dy x y dy dy
2.  dx  e  dx  e ey  ey  e dx
x x

In ey = ex + c
II. 1) 2y3 dx + 3xy2dy = 0
dy
  2y dx   3 xy 2 dy   [
dy 
3
( 2 y 3 dx) dy

d
= 2xy3+xy3-  dy 2 xy dy
3

 Gxy
2
= 2xy3 + xy3 - dy

= xy3 +c = 0
dy
III. 1)  2y  4
dx
z
 y ( t )  A e vt 
v
4
= A e 2 x   y (t ) = A e 2 t  2
2
dy
2)  4  2y
dx
dy du  2 dy
  4  2y   dx, let u = 4-2y , dy  
du
2

du
( )
  2  dx   1 in u = x+c1
u  2
in = -2x – 2c1

Ln (4-2y) = -2x – 2c,

136
  C 2  2c1 ,
4-2y = e-2x + c2
4-2y = c e-2x ec2=c
-2y = c-2x-4
c 2 x
y e 2
2
 y ( x )  A e- 2x + 2

d2y dy
IV 1) 2
 3  2y  0
dx dx
2
The characteristic equation is m  3m  2  0 ,(m-1) (m-2) = 0  or m = 2
Since m has two distinct roots (real) in which case the complementary

y  c em  c2 em2 ,  y c 
x 2x
x x
function
c 1
1
ce1
 c2 e

d2y dy
V) 1) 2
2  y  xe x  0
dx dx

 m 2  2m  1  0  (m  1)(m  1)  0  m1  m2  1

 y c
 c1e x  c 2 xe x

Here p(x) = ex, Q(x) = xex, f(x) = xex

 xe x .xe x x 2e 2x 1 3
P1(x) =  e x (1  x)ex  xe x .e x dx    e 2 x (1  x  x)dx   3 x  c3
e x .xe x xe 2 x 1
Q1(x) =  e x (1  x)e x  xe x .e x dx   e xe
dx  x 2  c 4
2

1 1
 yp  p1 p  Q1Q  ( x3  c3)ex  ( x 2  c 4) xe x
3 2
x3 x x3
ex  c3 e x  c4 x e  (  c3  xc 4 )e x
= 6 6

VI) 1) yt - yt+1 +yt+2 = 0

 (yt+2-yt-1) - (yt+1-yt) + (yt+1-yt) + yt = 0

 y t 1 t

_ y  y  y 0
t t

137
  ( y t )  y t  y t  0

2 y  y  y
t t t
0

2) 
2
y y
t t 1  y 1 0
t

 ( y t 1  y t )  y t 1  y t  0

yt+2 – yt+1-yt+1+yt-yt+1+yt=1
yt+2-3yt+1+2yt=1
1) yt+1-2yt= 3, y0 = 5
 Definite Solution:
c c
Yt = (yt - )b t 
1 b 1 b
3 3
= [5 - ]( 2) t 
(1  (2)) (1  ( 2))

Yt = 8  2t – 3  yt = 2t+3-3
2) yt+5 + 2yt+4 + 57 = 0, y0 = 1
 In general form:
yt+5 = -2yt+4 – 57
 yt+1 = -2yt – 57, y0 = 11
Definite Solution:
c c
Yt = (y0 + )b t 
1 b 1 b
 57  57
= (11 - )( 2) t 
1  ( 2) 1  ( 2)

Yt = 30(-2)t – 19
At t = 0, y0 = -19
At t = 1, y1 = -79
At t = 2, y2 = 101
Then the time path diverges and oscillatory.
dQ p  (5 p  2 p 2 )
VIII) . 
dp Q Q

138
 dQ (5 p  2 p 2 ) Q
   (5  2 p )
dp Q p

 dQ    (5  2 p)dp
Q = - (5p +p2) +c
At p = 10, = 500=-50-100+c
650 = c
Qd = 650 – 5p – p2
IX) Assuming market model
Dd = Sp

 20 – 2 p t
= -5 + 3 p t 1

-2pt = -25 + 3 p t 1

p t
= 25  3
2 2 p t
, where b =  3 25
2 and c = 2
25 25
)( ( )
Definite Solution: p = [4 - 2 3 2
t ]( ) t 
1  ( 3 ) 2 1  ( 3 )
2 2
3 t
p t
= -1(
2
) 5

Substituting this expression in the demand function

Qt = 20 – 2pt  20  2[1( 3 )  5]  20  2( 3 )  10

t t
2 2

Qt = 2(- 3 )  10 the time path for quantity.

t
2

139
References
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