Solution Exercises – Chapter 2 part 3.

Lecturer: Audrey Dalmasso [email protected]

III. Instantaneous Rates of Change in Economics
III.1. Elementary Functions
Exercise 16. Cost function, minimum, Break-even points
Financial analysts in a company that manufactures DVD players arrived at the following daily cost
equation for manufacturing x DVD players per day:
C(x) = x² - 300x + 25000

1. Calculate the coordinates of the minimum cost C(x).

2. If the revenue function is R(x) = 2x(x – 356) + 56620, determine the profit function and the
break-even point(s).
3. Show the variations of P(x) (construct a table).
4. Use the first and second derivative to prove that the point (x; P(x)) = (206 ; -10,816) is a
minimum.

Solution:
1. Calculate the coordinates of the minimum cost C(x).

The first derivative of C(x) is:

C '(x) = 2x - 300

To find the vertex, solve C '(x) = 0  2x - 300 = 0

300
𝑥= = 150
2
C(150) = (150)² - 300(150) + 25000 = 2500

The point (150 ; 2500) is a vertex. Let's prove that it is a minimum by computing the second
derivative C ''(x).

C ''(x) = 2
Hence, C ''(150) = 2 > 0

We can conclude that the dot (150 ; 2500) is a minimum.

Note:

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2. If the revenue function is R(x) = 2x(x – 356) + 56620, determine the profit function P(x) and the
break-even point(s).

𝑃(𝑥) = 𝑅(𝑥) − 𝐶(𝑥) = 2𝑥(𝑥 − 356) + 56620 − (𝑥² − 300𝑥 + 25000)

𝑃(𝑥) = 2𝑥 2 − 712𝑥 + 56620 − 𝑥 2 + 300𝑥 − 25000

𝑃(𝑥) = 𝑥² − 412𝑥 + 31620

The profit function P(x) is 𝑃(𝑥) = 𝑥² − 412𝑥 + 31620.

Are they any break-even points? Solve 𝑃(𝑥) = 0  𝑅(𝑥) = 𝐶(𝑥)

𝑥² − 412𝑥 + 31620 = 0

∆ = 𝑏² − 4𝑎𝑐 = (−412)2 − 4(1)(31620) = 43264

−𝑏 + √∆ 412 + 208
𝑥1 = = = 310
2𝑎 2
−𝑏 − √∆ 412 − 208
𝑥2 = = = 102
2𝑎 2

There are 2 break-even points for 𝑥 = 310 DVD players or 𝑥 = 102 DVD players.

3. Show the variations of P(x) (construct a table).

Find the first derivative 𝑃′ (𝑥)of P(x). Solve 𝑃′ (𝑥) = 0 then, study the sign of 𝑃′ (𝑥).
𝑃′ (𝑥) = 2𝑥 − 412
𝑃′ (𝑥) = 0  2𝑥 − 412 = 0
412
𝑥= = 206
2

2
 - 206 +
′ (𝑥)
𝑃 = - 0 +
2𝑥 − 412
𝑃(𝑥)

P(206) = -10816
𝑃(206) = (206)² − 412(206) + 31620 = -10816

4. Use the first and second derivative to prove that the point (x; P(x)) = (206 ; -10,816) is a
minimum.
412
𝑃′ (𝑥) = 0  2𝑥 − 412 = 0 𝐻𝑒𝑛𝑐𝑒, 𝑥= = 206
2
𝑃′′ (𝑥) = 2
𝑃′′ (206) = 2 > 0 Conclusion: The point (206; -10,816) is a minimum.

III.2. Marginal Cost, Revenue, and Profit

Exercise 17. Additional Cost, Marginal Cost
The cost C (in dollars) of producing x units of a product is given by: 𝐶(𝑥) = 3.6√𝑥 + 500.
Directive: Round up to 3 digits after the decimal point.

a) Find the additional cost when the production increases from 9 to 10 units.
Hint: The additional cost is C(10) - C(9)
b) Find the marginal cost when x = 9
Hint: Marginal Cost = C '(x)
c) Compare the results of a) and b).

Solution:
The cost function is 𝐶(𝑥) = 3.6√𝑥 + 500 = 3.6𝑥1/2 + 500

a) 𝐶(10) = 3.6√10 + 500 = 511.384

𝐶(9) = 3.6√9 + 500 = 510.8
𝐶(10) − 𝐶(9) ≈ 0.584
The additional cost when the production increases from 9 to 10 units is $0.584.
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b) 𝐶 ′ (𝑥) = 3.6 (2) 𝑥 2−1 = 1.8𝑥 −1/2 = 𝑥
√
1.8
𝐶 ′ (9) = = 0.6
√9
At a production level of 9 units, the total production costs are increasing at the rate of $0.6 per unit.

c) The 2 results are quite similar.

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Exercise 18. Additional Cost, Marginal Cost
When the price of a glass of lemonade at a lemonade stand was $1.75, 400 glasses were sold. When
the price was lowered to $1.50, 500 glasses were sold. Assume that the demand function is linear
and that the marginal and fixed costs are $0.10 and $25, respectively.
a) Find the profit P as a function of x, the number of glasses of lemonade sold.
b) Find the marginal profits when 300 glasses of lemonade are sold and when 700 glasses of
lemonade are sold.

Directive: Round up to 4 digits after the decimal point.

a)
• p = f(x) = demand function
𝑝 = 𝑎𝑥 + 𝑏 since we assume the demand function is linear.

Step 1: find the slope of the demand function.

𝑓(400) = 1.75
𝑓(500) = 1.50

𝑓(500)−𝑓(400) 1.5−1.75
= 500−400 = −0.0025  𝑝 = −0.0025𝑥 + 𝑏
500−400
Step 2: find the y-intercept of the demand function.
𝑓(500) = −0.0025(500) + 𝑏 = 1.50
𝑏 = 1.5 + 0.0025 ∗ 500 = 2.75
Hence, the demand function is 𝒑 = −𝟎. 𝟎𝟎𝟐𝟓𝒙 + 𝟐. 𝟕𝟓
• The revenue function is 𝑹(𝒙) = 𝒑𝒙 = −𝟎. 𝟎𝟎𝟐𝟓𝒙² + 𝟐. 𝟕𝟓𝒙

• The marginal cost is C '(x) = $0.10 and the fixed cost is $25,
then, the cost function is C(x) = 0.10x + 25
Finally, the profit function given by:
𝑃(𝑥) = 𝑅(𝑥) − 𝐶(𝑥) = −0.0025𝑥 2 + 2.75𝑥 − (0.1𝑥 + 25)
𝑷(𝒙) = −𝟎. 𝟎𝟎𝟐𝟓𝒙² + 𝟐. 𝟔𝟓𝒙 − 𝟐𝟓

c) Marginal profit = 𝑃′ (𝑥) = −0.0025(2)𝑥 + 2.65 = −0.005𝑥 + 2.65

𝑃′ (300) = −0.005(300) + 2.65 = 1.15
At the 300 output level, the approximate change in profit per unit change in production is $1.15. It
means that the profit will increase by $1.15 if production is increased by one unit.

𝑃′ (700) = −0.005(700) + 2.65 = −0.85

At the 700 output level, the approximate change in profit per unit change in production is -
$0.85. It means that the profit will decrease by $0.85 if production is increased by one unit.

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III.3. Marginal Average Cost, Revenue, and Profit

Exercise 19. Average cost, marginal cost, marginal average cost

Assume the cost function is C(x) = 0.125x² + 20x + 5,000, where x the number of units produced.
The demand function is p = 0.5x + 10,500.
a) Determine the average cost, the marginal cost.

b) Calculate the marginal average cost at a production level of 100. Interpret this result.

Solution
a)

The average cost function is:

𝐶(𝑥) 0.125𝑥²+20𝑥+5000
𝐶̅ (x) = = = 0.125𝑥 + 20 + 5000𝑥 −1
𝑥 𝑥

𝑑𝐶
The marginal cost 𝐶 ′ (𝑥) = 𝑑𝑥 such as:

𝐶 ′ (𝑥) = 0.125(2)𝑥 + 20 = 0.25𝑥 + 20

b) Calculate the marginal average cost at a production level of 100. Interpret this result.

The marginal average cost function is:

𝑑𝐶̅
𝐶̅ ′ (x) = = 0.125 − 1(5000)𝑥−2
𝑑𝑥
′ 5000
𝐶̅ (x) = 0.125 −
𝑥²

5000
𝐶̅ ′ (100) = 0.125 − = −0.375
(100)²

At a production level of 100 units, the average production costs are decreasing at the rate of $0.375
per unit.

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IV. Price Elasticity
PRICE ELASTICITY
Exercise 21. Elasticity
The demand function for a product is modeled by 𝑝 = 20 − 0.02𝑥, 0 ≤ 𝑥 ≤ 1000,
Where p is the price (in dollars) and x is the number of units.
a) Determine when the demand is elastic, inelastic and of unit elasticity.
b) Use the result of part a) to describe the behavior of the revenue function.

Solution:
a) Find the price-elasticity of demand.
20
𝑝̅ 𝑝/𝑥 −0.02 20 −0.02 −1000
𝑥
𝜂= = = = + = +1
𝑝′ 𝑑𝑝/𝑑𝑥 −0.02 −0.02𝑥 −0.02 𝑥

b) Determine when the demand is unit elastic.

For a given price, the demand is unit elastic if | η | = 1.

−1000
Solve the equation: | + 1| = 1
𝑥

−1000 −1000
+1=1 or + 1 = −1
𝑥 𝑥
−1000 −1000
=1−1 or = −1 − 1
𝑥 𝑥

−1000 −1000
=0 or = −2
𝑥 𝑥
−1000
No solution 𝑥= or
−2
𝒙 = 𝟓𝟎𝟎
The demand is unit elastic, when 𝑥 = 500.
Graph of the revenue function with 𝑅(𝑥) = 𝑥𝑝 = 20𝑥 − 0.02𝑥²:

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