Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

CHAPTER ONE

1. INTRODUCTION
1.1. Theoretical Vs Mathematical Economics

Since mathematical economics is merely an approach to economic analysis, it should not and does
not differ from the nonmathematical approach to analysis in any fundamental way. The purpose
of any theoretical analysis, regardless of the approach, is always to drive a set of conclusions or
theorems from a given set of assumptions or postulates via a process of reasoning. The major
difference between “mathematical economics” and “literary economics” lies principally in the fact
that, in the former, the assumptions and conclusions are stated in mathematical symbols rather than
words and in equations rather than sentences; moreover, in place of literary logic, use is made of
mathematical theorems-of which there exists an abundance to draw upon-in the reasoning process.

Moreover, mathematical economics draws upon mathematical logics unlike the literary logic,
which is drawn by literary economics. At this juncture, you may ask yourself “If the two
approaches’ ends are the same-establish valid hypotheses, then why do economists choose
mathematical approaches with which many literary people are in phobia?”

In fact, it is amazing to see people in horror with mathematics for mathematics is making things
simpler and our life less costly. The choice between literary approach and mathematics approach
to economic reasoning is like the choice between horse cart and plane for travel from Hawassa to
Addis. The time and cost savings associated with plane or cars has driven out the horse cart from
the market of travel from Hawassa to Addis. An economist without the tools of mathematics is
like a blind person swimming in the middle of an ocean. Till this person gives up, he will continue
to struggle till he reaches an island; but his blindness has left him as incapable to identify whether
swimming to the north, south, east or west is the shortest distance to an island. But an economist
equipped with the tools of mathematics is like a normal person with motorboat or ship depending
upon his personal inclination to each. As a result, most economic researchers are extensively using
the tools of mathematics to economic reasoning. Specifically mathematical approach has the
following advantages:

➢ The language used is more precise and concise;

➢ There are wealth of mathematical assumptions that make things simple and lifeless costly

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

➢ By forcing us to state explicitly all our assumptions as a prerequisite to the use of

mathematical theorems, it keeps us from the pitfall of an unintentional adoption of
unwanted implicit assumptions
➢ It helps us to understand relationships among more than two economic variables simply
and neatly with which the geometric and literary approaches are at high probability of risk
of committing mistakes.
1.2. Functions

For calculus is the study of functions, it is necessary to see what a function is. Function, as you
might remember it, is a unique mathematical rule that relates one or more variables to determine
another variable. It is a special type of relation in which an independent variable (domain) can
never be tied with more than one dependent variable (range). It is a relationship between numbers
in which to each element in the input (domain), there corresponds exactly one element in the output
(range).

For most functions in this course, the domain and range will be collections of real numbers and
the function itself will be denoted by a letter such as f . The value that the function f assigns to the
number x in the domain is then denoted by f (x) (read as“ f of x ”), which is often given by a

formula, such as f (x) = x 2 + 4 .

Figure 1.1 Interpretations of function f (x)

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Functions are often defined using more than one formula, where each individual formula describes
the function on a subset of the domain. A function defined in this way is sometimes called a
piecewise-defined function. Here is an example of such a function.

Determining the natural domain of a function often amounts to excluding all numbers x that result
in dividing by 0 or in taking the square root of a negative number. This procedure is illustrated in
the following example.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

There are four methods of representing functions. These are:

i. Vein diagram

A B C

1 1
1 1 1 1
2 2
2 2 2 2
3 3
3 3 3 3
4 4
4 4 4

The column which represents initial points of the rays is the column of domain and the column to
which the rays are directed is the column of range. In this example, Vein diagram A and B are
functions since we don’t have any two range values mapped from a single domain. But, C is not a
function since the independent variable [domain] value 1 is tied to output [range] values of 2 and
5.

ii. Set of order pairs

A = (1, 2), (2,3), (2,4), (3,6), (4,0)

B = (0,1), (1,2), (4,8), (9,10), (3,0)

iii. Equations (commonly used in economic researches)

In this example, A is not a function since domain ‘2’ is mapped to more than one element in the
range but B is a function.

A. Y= x + 4 is a function
Domain: x+4  0; i.e.=  x : x  −4 and Range : Y  0

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

B. Y 2 = x + 1 is not a function since Y can be either x + 1 or - x + 1

Domain : x  -1; Range: Y 
iv. Graphs(commonly used in economic education)

1.2.1. Types of Functions

Generally there are two major types of functions; i.e.

i. Algebraic functions
ii. Non algebraic function

⇒Algebraic functions

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Before generalizing what an algebraic function is (are), let’s see each type of algebraic functions.

a. Polynomial functions: polynomial function of a single variable is given by the general

form:
p(x) = a 0 x 0 + a1 x1 + a2 x 2 + a3 x 3 + ... + an x n
a 
where  i
n  whole number
If n = 0, Y will be a constant function like Y = 3
If n = 1, Y will be a linear function like Y = 2x+3
If n = 2, Y will be a quadratic function like Y = 2 + 4 x + x 2
b. Rational functions: A rational function is a function which is the ratio of two
Polynomial functions. That is,
p1 (x)
R(x) =
p2 (x)
c. The third type of algebraic function is a function which is the square root of
Polynomial function.
NB. An algebraic function is a function which is either polynomial, rational, or the third
type of algebraic function. They can be with one variable or n-independent variables.

⇒Non algebraic functions/Transcendental functions

There are four types of non-algebraic functions that are commonly used in economics; i.e.

i. Exponential function
ii. Logarithmic function
iii. Trigonometric function and
iv. Incommensurable power functions

In this course you will be introduced with the first two non-algebraic functions and the rest are left
for further studies.

i. Exponential Functions

A function of the general form f (x) = b x , where b is a positive number, is called an exponential
function. Such functions can be used to describe exponential and logistic growth and a variety of

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

other important quantities. For instance, exponential functions are used in demography to forecast
population size, in finance to calculate the value of investments, in archaeology to date ancient
artifacts, in psychology to study learning patterns, and in industry to estimate the reliability of
products.

Note that the domain of exponential function is the set of real numbers and the range of the function
is that set of positive real numbers. Graphically, exponential functions look like the following.

Note: Every exponential function passes through (0, 1).

Exponential functions obey the same algebraic rules as the rules for exponential numbers. These
rules are summarized in the following box.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

ii. Logarithmic Functions

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

In calculus, the most frequently used logarithmic base is e. In this case, the logarithm log e x is

called the natural logarithm of x and is denoted by ln x (read as “ el en x ”); that is, for x  0 .

1.2.2 Multivariate Functions

Multivariate function is a function in which the dependent variable, y, is a function of more than
one independent variable.
For the case where the dependent variable, which we shall continue to call y, depends on two
variables x and z we express the function y = f (x, y) which we read as y is a function of x and
z . In this function there are two independent variables x and z . If we have possible values for x
and z we may substitute them to obtain the corresponding value of y. Since there are two
independent variables, we may fix one of them, say x , at a particular value and change the other
variable, z. This lets us investigate how y changes as z changes. The approach corresponds to
comparative statics analysis in economics where economists investigate the effect of changing one

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

variable while other things remain unchanged. We can, of course, also investigate the effects on y
of changing x while z is held constant.
1.2.4. Inverse and Implicit Functions
Inverse Functions
Many important mathematical relationships can be expressed in terms of functions. For example,
the demand for a product is a function of the price p. Mathematically, Qd ( p) = 50 − 2 p . In many

cases, we are interested in reversing the correspondence determined by a function. Thus, we can
express price of a product as a function quantity demanded, Q as below:
1
p (Qd ) = 25 − Qd
2
As this examples illustrates, reversing the relationship between two quantities often produces a
new function. This new function is called the inverse of the original function and is usually
denoted by f −1 .
Note: It turns out that one-to-one functions are the only functions that have inverse functions. A
function is one-to-one if no two ordered pairs in the function have the same second component
and different first co𝑚𝑝𝑜𝑛𝑒𝑛𝑡𝑠.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Example: Find f −1 for f ( x) = x −1

Solution
Step 1: Find the domain of f and verify that f is one-to-one. The domain of f is [1,  ). f is one-
to-one, hence f −1 exists.
Step 2: solve the equation y = f ( x) for x

y = x −1
y2 = x −1
x = y2 +1
Thus, x = f −1 ( y ) = y 2 + 1
Step 3: Interchange x and y
y = f −1 ( x) = x 2 + 1

Step 4: Find the domain of f −1 . The equation f −1 ( x) = x 2 + 1 is defined for all values of x, but

this does not tell us what the domain of f −1 is. Remember, the domain of f −1 must equal the

range of f. From the graph of f, we see that the range of f is [0,  ). Thus, the domain of f −1 is

also [0,  ). That is, f −1 ( x) = x 2 + 1 x0

Check: For x in [0,  ), the domain of f, we have

f −1[ f ( x)] = f −1 ( x − 1)
=( x − 1)2 − 1
= x −1+ 1
=x
For x in [0,  ), the domain of f, we have

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

f [ f −1 ( x)] = f ( x 2 + 1)
= ( x 2 + 1) − 1
= x2
= x x 2 = x for any real number x
=x x =x for x  0

Question: Find f −1 for each of the following functions:

x x +1
a. f ( x) = , x0 c. f ( x) = , x  −2
x −1 x+2

3 4 + 3 4x
b. f ( x) = , x 1 d. f ( x) =
4x − 4 2

Implicit Functions
So far we have been working with functions in which dependent variable is an explicit function of
the independent variables. In other words, all the functions we have studied have the independent
variables on the right side and dependent variable y on the left side. For instance, in univariate
2x 2
functions, we have been considered functions like y = 2 x 2 + 1 , y = , y = ln( x + 1) and so on
x −1
and each denoted as y = f (x) . In multivariate functions, we have seen functions like

x12
y = 2 x + 5 x2 , y =
2
, y = x1e 2 x2 and so on and each denoted as y = f ( x1 , x2 ).
x1 + 2 x2
1

This ideal situation of an explicit function does not always occur in economic models. Frequently,
the equations which arise naturally have the independent variables mixed with the dependent
variable. In other words, the equations which appear in economic models have both the
independent and dependent variables on the left side and a constant on the right side. Such type of
functions are said to be implicit functions.

The followings are some examples of implicit functions:

4 x + 2 y − 5 = 0, and y 2 − xy + x 2 = 0 are examples of univariate implicit functions (or implicit

function with one independent variable x) and denoted as F ( x, y ) = 0 .

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

2 x12 − 3x22 + 4 y − 3 = 0 and 3x1 x 2 + x 2 y 2 = 0 are examples of implicit functions with two

independent variables x1 and x2 . Such type of functions are generally denoted as F ( x1 , x2 , y) = 0

Generally an implicit function with n independent variables will be denoted as

F ( x1 , x2 , . . . xn , y ) = 0

Notice that we use the capital letter F to denote implicit function and a small letter f to denote
explicit function. For instance, we use y = f ( x1 , x2 ) and F ( x1 , x2 , y) = 0 to de note an explicit and

implicit function with two independent variables x1 and x2 respectively.

1.2.5. Monotonic and Homogeneous Functions

A monotonic function is a function which is either strictly increasing or strictly decreasing in its
domain.

1. A function y = f (x) is strictly (or monotonic) increasing on the interval (a, b) if its graph
moves upward from left to right on that interval. More precisely, a function f is strictly increasing
on (a, b) if f ( x1 )  f ( x2 ) whenever x1  x2 on (a b) . For instance, the function in figure (a) is
strictly increasing.

2. A function y = f (x) is strictly (or monotonic) decreasing on the interval (a, b) if its graph
moves downward from left to right on that interval. More precisely, a function f is strictly

decreasing on ( a b) if f ( x1 )  f ( x2 ) wheneverx1  x2 on (a b) .For instance, the function in

figure (b) is strictly decreasing because the graph moves down ward from left to right.

3. A function y = f (x) is neither monotonic increasing nor monotonic decreasing if it is strictly

increasing on one interval and strictly decreasing on other interval in its domain (see Figure c).
The function in Figure c is neither monotonic increasing nor monotonic decreasing since it is
strictly increasing on the interval (0 b) and strictly decreasing on the interval (b )

Y Y Y

X X X
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Figure a Figure b Figure c
Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Homogeneous Functions

A function y = f ( x1 , x2 ,... xn ) is homogeneous with degree k if

f (tx1 , tx2 ,...txn ) = t k f ( x1, x2 ,...xn ) = t k y

In other words, a function f is homogeneous with degree k if it satisfies the property that when all
the independent variables are changed by same proportion or amount t, the dependent variable y
changes by tK.

Example: Show that the following are homogeneous or not. If so, find the degree homogeneity.

a) y = f ( x1 , x2 ) = x13 + 3x12 x2 + 3x1 x22 + x23

Solution
f (tx1 , tx2 , ) = (tx1 )3 + 3(tx1 ) 2 (tx1 ) + 3(tx1 )(tx2 ) 2 + (tx2 )3
= t 3 x13 + t13 3x12 x1 + t 3 3x1 x22 + t 3 x23
= t 3 ( x13 + 3x12 x2 + 3x1 x22 + x23 )
= t 3 f ( x1 , x2 )

Thus, from the above definition f is homogeneous with degree 3

b) y = f ( x1 , x2 ) = 2 x 2 + 7 x1 x2 + 6 x22
solution
f (tx 1 , tx2 ) = 2(tx1 ) 2 + 7(tx1 )(tx2 ) + 6(tx3 ) 2
= t 2 (2 x12 + 7 x1 x2 + 6 x22 )
= t 2 2 x12 + 7 x1 x2 + 6 x22 )
= t f ( x1 , x2 )

Thus, f is homogeneous with degree 1

c) y = f ( x1 , x2 ) = 3x12 + 6 x2
solution
f (tx1 , tx2 ) = 3(tx1 ) 2 + 6(tx2 )
= 3t 2 x12 + 6tx2 = t (3tx12 + 6 x2 )

Thus, since t cannot completely factor out, f is not homogeneous.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

1.2.5. Application of Functions in Economics

Functions, in economics, have diverse and versatile importance. To come up with neater
theoretical results, it is good to model relationships in terms of mathematical functions. Though
functions are used almost in all specializations of economics extensively, in this course you will
be introduced with the most common microeconomic and macroeconomic functions. Detailed
acquaintance with these functions is left for your “life in economics”.

The most common microeconomic functions are demand functions, supply functions, production
function, cost functions, revenue functions, profit functions, pollution functions, and other natural
resource functions. The most common macroeconomic functions are consumption, saving,
investment, and aggregate production functions. There are also, a lot of other economic functions,
but we don’t discuss them here due to time limit we have. For the sake of introduction, let’s take
some examples of economic functions.

Definitions

Demand Function: Qd = f ( p) = a − bp
Supply function : Qs = f ( p) = a + bp
Martket equilibrium : Qs = Qd
Revenue function : R = (number of sold )  (unit price) = pQ
Cos t function : C = f (Q) = VC + FC = mQ + b, where b is constant
Profit function :  = R(Q) - C (Q) = Re venue - cos t
Break − even point:  = R (Q) - C (Q) = 0

Marginal Analysis: In economics and business the term marginal stands for a rate of change.
Marginal analysis is an area of economics concerned with estimating the effect on quantities such
as cost, revenue, and profit when the level of production is changed by a unit amount. For example,
marginal revenue, marginal profit, marginal cost, etc.

Examples

1. Find the equilibrium point for the supply function S(p) = 3p + 50 and the demand function
D(p) = 100 -2p.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Solution.

Setting the equation S ( P*) = D( P*) to obtain 3 p * −50 = 100 − 2 p * . Solving for p * we find
p* = $30 . Substituting this value in S(p) we find q* = 40 .

Exercise

1. Suppose that a certain product has the following demand and supply functions.

Demand : 2 p + 5q = 200
Supply : 2 p − 5q = 10

a. Find the equilibrium price and quantity

b. If a $10 tax per item is levied on the supplier, who passes it on to the consumer as a price
increase, find the market equilibrium point after the tax.
2. A shoe store owner will buy 10 pairs of a certain shoe if the price is $75 per pair and 30
pairs if the price is $25. The supplier of the shoes is willing to provide 35 pairs if the price
is $80 per pair but only $5 pairs if the price is $20. Assuming the supply and demand
functions for the shoes are linear, find the market equilibrium point.
3. A manufacturer can produce printer paper at a cost of $2 per ream. The paper has been
selling for $5 per ream, and at that price, consumers have been buying 4,000 reams a month.
The manufacturer is planning to raise the price of the paper and estimates that for each $1
increase in the price, 400 fewer reams will be sold each month. Express the manufacturer’s
monthly profit as a function of the price at which the reams are sold.
4. A manufacturer can sell a certain product for $110 per unit. Total cost consists of a fixed
overhead of $7,500 plus production costs of $60 per unit.
a. How many units must the manufacturer sell to break even?
b. What is the manufacturer’s profit or loss if 100 units are sold?
c. How many units must be sold for the manufacturer to realize a profit of $1,250?

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

CHAPTER TWO
5. LIMIT AND CONTINUITY
2.1 The Concept of Limit
Roughly speaking, the limit process involves examining the behavior of a function f ( x ) as x
approaches a number c that may or may not be in the domain of f . Limiting behavior occurs in a
variety of practical situations. For instance, economists who speak of profit under ideal conditions
or engineers profiling the ideal specifications of a new engine are really dealing with limiting
behavior.

To illustrate the limit process, consider a manager who determines that when x% of her
company’s plant capacity is being used, the total cost of operation is C hundred thousand dollars,
where

8 x 2 − 636 x − 320
C ( x) =
x 2 − 68 x − 960

The company has a policy of rotating maintenance in an attempt to ensure that approximately 80%
of capacity is always in use. What cost should the manager expect when the plant is operating at
this ideal capacity?

It may seem that we can answer this question by simply evaluating C(80), but attempting this
0
evaluation results in the meaningless fraction . However, it is still possible to evaluate C ( x )
0
for values of x that approach 80 from the right ( x  80 , when capacity is temporarily overutilized)
and from the left ( x  80 , when capacity is underutilized). A few such calculations are summarized
in the following table.

The values of C(x) displayed on the lower line of this table suggest that C(x) approaches the
number 7 as x gets closer and closer to 80. Thus, it is reasonable for the manager to expect a cost
of $700,000 when 80% of plant capacity is utilized. The functional behavior in this example can
be described by saying “C(x) has the limiting value 7 as x approaches 80” or, equivalently, by
writing

lim 𝐶(𝑥) = 7
𝑥 → 80

More generally, the limit of f(x) as x approaches the number c can be defined informally as
follows.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

x 1 x −1
Example: Find a. lim x
x →0
b. lim x
x →0
c. lim 2 x − 1
x →1

Solution

x 1 if x  0
= .
x −1 if x  0

x
lim x = −1 (LHL-left hand limit) and
x → 0−

x
lim x = 1 (RHL-right hand limit)
x → 0+

x x x
 lim x  lim x , lim x
x → 0− x → 0+ x →0
does not exist(DNE)

1
lim x = −( LHL)
x → 0−
b.
1
lim x = +( RHL)
x → 0+

x x x
 lim  lim , lim does not exist(DNE)
x → 0− x x →0+ x x → 0 x

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

x −1 1−1
c. lim = =0/2=0
x →0 2x − 1 2 − 1

2.2 The Limit Theorems

Limits obey certain algebraic rules that can be used to simplify computations. These rules, which
should seem plausible on the basis of our informal definition of limit, are proved formally in more
theoretical courses.

Here are two elementary limits that we will use along with the limit rules to compute limits
involving more complex expressions.

Examples

a) lim f(x) = lim 5 =5

x→2 x→2

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

b) lim 9 = 9
x → −4

c) lim b = b since b is a constant.

x →3

d) lim f(x) = lim x = 4

x→4 x→4

e) lim x = b
x →b

f) lim f(x) = lim 5x = 5 lim x = 5(3) = 15

x →3 x →3 x→3

 
g) lim x3 = lim x = (2)3 = 8
x→2 x→2
3

−2
h) lim
1
= lim x -2
= lim  = 3 -2 = 1 = 1
x→ 3 x2 x →3  x →3  32 9

i) lim
x → −3
3
x2
x → −3

lim x2/3 = lim x
x → −3

2/3
= (-3)2/3 = 3
(−3)2 = 3 9

j) lim f(x) = lim 6x 4 = 6lim x 4 = 6 ( lim x) 4 = 6(1)= 6(1) = 6

x →1 x →1 x →1 x →1

Summary:
In evaluating limit of a function, we come up with one of the four different results that we
summarize them below. Assume that L represents some non-zero real number when L appears in
the denominator.

Limit of a function Conclusion

L Limit is L

0 Limit is zero
L

L Limit does not exist

0

Limit is indeterminate. To come up with

0 
, determinate limit, transform the function to
0  produce one of the form above / use L-Hopital’s
rule, h-method or limit by rewriting

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

More on Indeterminate Limits

Limits by Rewriting

Examples: Find limit of the following functions

x 2 − 3x + 2
a. lim
x→2 x − 2

Solution

x 2 − 3 x + 2 ( x − 2)( x − 1)
= = x − 1, x  2
x−2 x−2
x 2 − 3x + 2
 lim = limx − 1 = 1
x→2 x−2 x→2

2x
b. lim
x→0 2 x + x + 1 − x − 3x + 1
2 2

Solution

2x 2x 2 x 2 + x + 1 + x 2 − 3x + 1
= .
2 x 2 + x + 1 − x 2 − 3x + 1 2 x 2 + x + 1 − x 2 − 3x + 1 2 x 2 + x + 1 + x 2 − 3x + 1

=
2x ( ) 2x (
2 x 2 + x + 1 + x 2 − 3x + 1
=
2 x 2 + x + 1 + x 2 − 3x + 1 )
( 2 x + x + 1 ) − ( x − 3x + 1 ) x2 + 4 x
2 2
2 2

2 ( 2 x + x + 1 + x − 3x + 1 )
2 2

=
x+4

 lim
2x
= lim
2 ( 2 x 2 + x + 1 + x 2 − 3x + 1 ) =1
x→0 2 x + x + 1 − x − 3 x + 1 x→0
2 2 x+4

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

x ( x −1)
2
x −x
c. lim = lim = lim x = 1
x→1 x − 1 x→1 x − 1 x→1

L-H ô pital’s rule

The best method to deal with indeterminate limits is the L-H ô pital’s rule. L-H ô pital’s rule
f ( x) f '( x)
states that lim is equivalent to lim .
x→a g ( x) x → a g '( x )
2
x −x
Example: lim
x→1 x − 1

h-method
We put a + h in place of x and simplify such that h gets cancelled from denominator and
numerator. Putting h = 0 ,we get the limit of f ( x ) as a → 0 .
x3 − 1
Example: Evaluate lim
x →1 x − 1
2

x3 − 1 (h + 1)3 − 1
lim = lim
x →1 x − 1 h →0 ( h + 1) − 1
2 2

(h3 + 3h 2 + 3h + 1) − 1
= lim
h →0 (h 2 + 2h + 1) − 1
h3 + 3h 2 + 3h h 2 + 3h + 3 3
= lim = lim =
h →0 h 2 + 2h h →0 h+2 2

Expansion Method

This method is applicable to functions which can be expanded in series. The following expansions
are often used in economics.
x 2 x3
a. e x = 1 + x + + + ...
2! 3!
−x x 2 x3
b. e = 1 − x + − + ...
2! 3!
x 2 x3 x 4
c. log(1 + x) = x − 1 − + − + ... = ln(1 + x)
2! 3! 4!
d. By Binomial theorem, when x  1 , we get

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

 1 1  1  1  1  
  ( − 1)   − 1   − 2   
 .x 2 + x  x    x  3
1
(1 + x) = 1 + .x + 
1 x x
x
.x + ... 
 x 2! 3! 
 
 
 (1 − x ) (1 − x )(1 − 2 x ) 
= 1 + 1 + + + ... 
 2! 3! 

Examples: Evaluate limits of the following functions

 ex − 1 
a. lim  
x →0  x 
 x 2 x3 
 1 + x + + + ... − 1 
= lim  2! 3! 
x →0  x 
 
 
 x x2 
 1 + + + ... 
= lim( x)  2! 3! 
x →0  x 
 
 
 x x 2

= lim 1 + + + ...  = 1
x →0  2! 3! 
 e x − e− x 
b. lim  
x →0  x 
 e −1
x
We know that lim   =1 (i)
x →0  x 
Therefore, putting x = − x in (i), we get
 e− x − 1 
lim   =1 (ii)
x →0  −x 
The given limit can be written as
 e x − 1 + 1 − e− x 
lim   [adding (i) and (ii)]
x →0  x 
 e x − 1 + 1 − e− x   e x − 1 e− x − 1 e x − 1 e− x − 1
  lim  + = + = 1+1 = 2
lim − x  lim
=
x →0  x  x →0  x x →0 x −x

ex − e
c. lim
x →1 x −1
Putting x = 1 + h, where h → 0

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

ex − e eh+1 − e
lim =
x →1 x − 1 lim
h →0 h
e .e − e
1 h
e(eh − 1) eh − 1
=hlim
→0 h =hlim
→0 h =eh→lim
0 h
= e 1 = e

One-sided Limits and Limits at Infinity

One-sided Limits

To have a limit L as x approaches c, a function ƒ must be defined on both sides of c and its values
ƒ(x) must approach L as x approaches c from either side. Because of this, ordinary limits are called
two-sided.

If ƒ fails to have a two-sided limit at c, it may still have a one-sided limit, that is, a limit if the
approach is only from one side. If the approach is from the right, the limit is a right-hand limit.
From the left, it is a left-hand limit.

Intuitively, if ƒ(x) is defined on an interval (c, b), where and approaches arbitrarily close to L as
x approaches c from within that interval, then ƒ has right-hand limit L at c. We write

lim f ( x) = L
x →c+

Similarly, if ƒ(x) is defined on an interval (a, c), where and approaches arbitrarily close to M as x
approaches c from within that interval, then ƒ has left-hand limit M at c. We write

lim f ( x) = M
x →c−

x
For instance, the function f ( x) = we have
x

x x
lim x = −1 and lim =1
x → 0− x → 0+ x

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Limits at Infinity

In some types of economic functions, the main interest may be to determine the behavior the
function (x) as x assumes large positive and large negative values.

Theorem

Remarks

1. For any polynomial function f(x),

lim f(x) = (or − ) and lim f(x) = (or − )

x → x →−

p( x)
2. The limits at infinity for a rational function R(x) = can be calculated by dividing both
Q( x)
the numerator and denominator by the highest power of x that occurs either in the numerator or
the denominator and applying the above theorem on the simplified function.

Example: Evaluate each of the following limits

5x + 4 4 x 2 + 3x + 2
a) lim b) lim
x → 2 x + 3 x → − 2 x3 + 5

c. lim x2 + x + 1 − x2 − x − 1
x →

Solutions

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

a) since the highest power of x is 1 divide both the denominator and numerator by x as

5x + 4
5x + 4
lim = lim x
x → 2 X + 3 x → 2 x + 3

4 4
5+ lim 5 + lim 5+0 5
= lim x = x → x → x
= =
x → 3 3 2+0 2
2+ lim 2 + lim
x x → x → x

b) Divide both the numerator and denominator by x3 since it is the highest power as

4x 2 + 3x + 2
4x 2 + 3x + 2 x3
lim = lim
x → 2x 3 + 5 x → 2x 3 + 5
x3
4 3 2
+ 2 + 3
= lim x x x = 0+0+0 = 0
x → 5 2+0
2+ 3
x

c) Rewrite

 
x2 + x + 1 + x2 − x − 1 
x2 + x + 1 − x2 − x − 1 = x2 + x + 1 − x 2 − x − 1  
 x2 + x + 1 + x 2 − x − 1 


=
( x 2 + x + 1) − ( x 2 − x − 1)

x2 + x + 1 + x2 − x − 1
2x + 2
=
x + x + 1 + x2 − x − 1
2
2
2+
= x
1 1 1 1
1+ + + 1− −
x x 2 x x2
2
2+ 2
 lim x2 + x + 1 − x 2 − x − 1 = lim x = =1
x→ x→ 1 1 1 1 2
1+ + + 1− −
x x2 x x2

2.3 Continuous Functions and Criteria for Continuity

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Intuitively speaking, the function f is said to be continuous at x = c if you can draw the graph of
f at and near the point (c, f (c )) without lifting your pencil from the paper.

Example: Determine the continuity of each of the following functions at the indicated value of c.

x2 − 4
at c = 1 and c = 2
a) f(x) = x − 2

 x 2 if x  0
f ( x) =  at c = 1
b) 1 if x  0

Solutions

12 − 4
=3
a) Since f(x) is defined for all points except x = 2, f(1) is defined and f(1) = 1 − 2

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x2 − 4 ( x − 2)( x + 2)
Moreover , lim = lim = lim x + 2 = 3 and lim f ( x) = f (1) = 3 . Thus, f is
x →1 x − 2 x→1 ( x − 2) x →1 x →1

continuous at x = 1 since all the three conditions in the definition are satisfied. f is not continuous
at x = 2 since f(2) is not defined and condition one in the definition is not satisfied.

b) f(1) = 1 and thus f(1) is defined. lim f(x) exits and equal to 1 since lim− f(x) = lim+ f(x) = 1 .
x →1 x →1 x →1

limf(x) = 1 = f(1) = 1 and thus f is not continuous at x=1.

x →1

Exercise

Intermediate Value Theorem

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Remarks

1. A function f is continuous from the right at x =a if

lim f(x) = f(a) and

x →a +

A function f is continuous from the left at x=b if lim− f(x) = f(b)

x →b

2. A function f is said to be continuous on an open interval (a b) if f is continuous at every

number in the interval.

c) A function f is continuous on a closed interval [a b] if f is continuous from the right at

x = a , continuous from the left at x = b, and continuous at every number in the open interval
( a, b) .

For example, f(x) = x − 2 is defined for x 2 or on the interval [2 ). Moreover f(x) is continuous

from the right x = 2 since f(2) = 2 − 2 = 0 and lim+ f(x) = lim+ x - 2 = 0 = f(2) , and also
x →2 x →2

continuous at every number on open interval (2 ). Thus, f(x) is continuous on the interval [2 ).

Properties of Continuous Functions

Using the formal definition of continuity may not always be the most convenient way to determine
the continuity of a function, particularly on a given interval. Thus, it is better to use the properties
of continuous functions which described below in determining interval of continuity of a function.
1. A constant function f(x) = k, is continuous for all value of x.

2. Polynomial functions are continuous for all values of x.

3. Rational functions are continuous for all values of x except those that make a denominator 0.

4. If f(x) and g(x) are both continuous functions, then

I. f(x) + g(x) is continuous

II. f(x) – g(x) is continuous

III. f(x).g(x) is continuous

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

f ( x)
IV. ,when g ( x)  0 is continuous
g ( x)

V. The absolute value of f(x), ( i.e, |f(x)|) is continuous.

n f ( x) is continuous for all values of x when n is an odd positive

5. If f(x) is continuous, then

integer greater than 1.

n f ( x) is continuous when n is an even positive

6. If f(x) is continuous and non-negative, then

integer.

Example: Determine whether each of the following function is continuous or not with the help of
the above properties.

x
a) f(x) = 2x3 – x2 +3x+1 b) f(x) =
( x + 2)( x − 3)

c) f(x) = f ( x) = 3 x 2 − 4 d) f(x) = 3− x

Solutions

a) Since f is a polynomial function, it is continuous for all values of x.

b) Since f is a rational function, it is continuous for all x except –2 and 3 (values of x that make
the denominator o). Using interval rotation, f is continuous on (- -2), (-2 3), and (3 ).

c) The polynomial function x2-4 is continuous for all x. Since n=3 is odd, f is continuous for all x.

d) The polynomial function 3-x is continuous for all x and non-negative for x 3. Since n=2 is
even, f is continuous for x 3 or on the interval (- 3].

2.4 Economic Applications of Limit and Continuity

1. Studies indicate that t years from now, the population of a certain country will be
p = 0.2t + 1,500 thousand people, and that the gross earnings of the country will be E

million dollars, where E (t ) = 9t 2 + 0.5t + 179

a. Express the per capita earnings of the country P = E / p as a function of time t.
(Take care with the units.)
b. What happens to the per capita earnings in the long run (as t →  )?
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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Solution

E 9t 2 + 0.5t + 179
a. P(t ) = = b.
p 0.2t + 1,500

0.5 179
9+ + 2
9t + 0.5t + 179
2
t t = 3 = 15 million dollars per head
lim = lim .
0.2t + 1,500 1,500 0.2
x → x →
0.2 +
t
2. XYZ company is spending Birr “ y ” (in millions, and yielding sales of Br. S(x)(in
millions) represented by the function:
5 x 2 − 15 x + 4
S ( x) = , x  1 , determine the absolute ceiling for their sales.
2x2 − 2 x + 2
Solution
5 x 2 − 15 x + 4
lim = Birr 2.5 million
x → 2 x − 2 x + 2
2

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

CHAPTER THREE
3. THE DERIVATIVES
3.1. The Concept of First-Order Derivatives

In this section you will learn how the ideas and techniques of limits developed in the previous unit
can be used to define one of the fundamental concepts of calculus, the derivative, and two related
concepts; rates of change and the slope of tangent line.

Rates of change and slope of Tangent Line

I. Rates of Change

Let a function be defined as y = f(x)

If the independent variable x changes from x0 to x1, then the dependent variable y will change from
y0 = f(x0) to y1 = f(x1). In this case,

The change in x is said to be an increment in x and denoted as x (read as “delta x”). That is, an

increment in x from x0 to x1 can be represented as x = x1-xo or x1 = xo + x.

The corresponding change in y is said to be an increment in y and denoted by y (read as “delta

y”). That is, an increment in y from y0 to y1 can be represented as

y = y1-y0= f(x1) – f(x0)= f(x0+x) – f(x0)

Definitions

Given y = f(x)

1. The average rate of change of y with respect to x is the change in y resulted from some change
in x. the average rate of change of y between x=x0 and x=x1 is given by

Δy f(x 0 +Δx)-f(x 0 )
Average rate of change = =
Δx Δx

It is also termed as the difference quotient of the function and represents change in y per unit
change in x.

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2. The instantaneous rate of change of y with respect to x is a change in y as a result of an instant

change in x. It represents a change in y at a given point of x.

The instantaneous rate of change of y at a point x = x0 is given by

y f ( x0 + x) - f ( x0 )
Instantaneous rate = lim = lim
x → 0 x  x → 0 x

It is also termed as marginal rate of change of y at x= x0

Example

Given the function y = f(x) = 3x2. Find

a) Average rate of change of y for x changes from 1 to 4

b) Instantaneous rate of change of y at x = 1

Solutions

a) x0 = 1 and x1 = 4, and thus x = x1-x0 = 4-1 = 3

Moreover, y = y1-y0 = f(x1) – f(x0)

= f(4) – f(1)

= 3(42) – 3(12) = 48 –3 = 45

y 45
Thus, average rate of change = = = 15
x 3

b) by making x0 = 1 calculate the instantaneous rate of change as

f ( x0 + x) - f ( x0 ) f (1 + x) - f (1) 3(1 + x) 2 - 3(1) 2 3 1 + 2x + (x) 2  - 3

lim = lim = lim = lim
x →0 x x →0 x x →0 x x →0 x
6x + 3(x) 2
= lim
x →0 x
x
= lim (6 + x) = lim (6 + x) = lim 6 + lim x = 6 + 3(0) = 6
x →0 x x →0 x →0 x →0

II. Slope of a Tangent line

Suppose the figure given below be the graph of y = f(x)

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A secant line is a straight line which passes through two points on the graph of y = f(x). For
instance, line L2 which passes through P and Q in the above graph is a secant line. The slope of
the secant line which passes through the point (x0, f(x0)) and (x0+ x , f(x0+Δx) is given by

Δy f(x 0 +Δx)-f(x 0 )
=
Δx Δx

Intuitively speaking, a tangent line is a straight line which touches (but not crosses) the graph of
y=f(x) at a given point. For instances, line L1 in the above graph is a tangent line.

Y L2

Q L1

As it can be seen from the above graph, as x becomes closer and closer to o (as x →0), the point
Q approaches to point P. In other words, as x →0 the secant line L2 will approaches to line L1
and its slope will approaches to the slope of L1. This leads to the following formal definition of a
tangent line.

Definition

Given the graph of Y =f(x), the tangent line at (x0, f(x0)) is a line that passes through this point
whose slope is given by

f ( x0 + x) - f ( x0 )
tangent line slope = lim if the limit exists.
x → 0 x

Remarks

1. The slope of the tangent line at (x0, f(x0)) is always equal to the slope of the graph or the function
y = f(x) at (x0, f(x0)).

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

f ( x0 + x) - f ( x0 )
2. If lim = 0, then the graph of f has a horizontal tangent line at (x0, f(x0)).
x → 0 x

f ( x0 + x) - f ( x0 )
3. If lim =  (or - ), then the graph of f has a vertical tangent line at (x0,
x → 0 x
f(x0)).

3.2. Continuity and Differentiability of a Function

If a function f (x) is differentiable where x = c , then the graph of y = f ( x) has a non-vertical
tangent line at the point P(c, f (c)) and at all points on the graph that are “near” P. We would
expect such a function to be continuous at x = c since a graph with a tangent line at the point P
certainly cannot have a “hole” or “gap” at P. To summarize:

Notice that we are not claiming that a continuous function must be differentiable. Indeed it can
be shown that a continuous function f ( x ) will not be differentiable at x = c if f ( x ) becomes
infinite at x = c or if the graph of f ( x ) has a “sharp” point at P (c, f (c )) ; that is, a point where
the curve makes an abrupt change in direction. If f(x) is continuous at x = c but f '(c ) is infinite,
the graph of f may have a “vertical tangent” at the point P(c, f(c)) (Figure a) or a “cusp” at P

(Figure b). The absolute value function f ( x) = x is continuous for all x but has a “sharp point”

at the origin (0, 0) (see Figure c). Another graph with a “sharp point” is shown in Figure d.

3.3. Rules of Differentiation

Derivative Notations

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Given y=f(x), then

dy
f ' ( x) , , or y' all represents the derivative of f at x.
dx

Rule 1: Constant Function Rule

If y=f(x) = K, where k is any constant, then

dy
f ' ( x ) = 0 or =0
dx

That is, the derivative of a constant or a constant function is zero.

Example

Find the derivative of a) f(x) = 5

b) f(x) = 0

Solutions

dy d
a) f’(x) = 0 or = 0 or (5) = 0
dx dx

d
b) f’(x) = 0 or ( 0) = 0
dx

Rule 2: The Power Rule

dy
If y = f ( x) = x n , where n is any real number, then f ' ( x ) or = nx n −1
dx

Example

Find the derivative of the following functions

1
a) f(x) = x3 b) f(x) = c) f(x) = x
x2

Solutions

a) for f(x) = x3, f ' ( x ) = 3x3-1 = 3x2

1
b) f(x) = 2
= x-2 (by exponent rule)
x

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

d −2
Then, f ' ( x ) = ( x − 2 ) = − 2 x − 2 −1 = − 2 x − 3 = 3
dx x
1

c) f(x) = x = x (by exponent rule), then

2

d d 1 1 1 −1
f ' ( x) = ( x) = ( x 2 ) = x 2
dx dx 2
1 −1 1 1
= x2= 1 =
2 2x 2 2 x

Rule 3: Constant Times a function Rule

If g ( x) = kf ( x) where k is any constant, then.

g '( x) = kf '( x)

That is, the derivative of constant times a function is a constant times a derivative of a function.

Example

Find the derivative of f(x) = 3x2.

Solution

d d
f '( x) = (3x 2 ) = 3 ( x 2 ) ( Rule 3)
dx dx
= 3(2 x 2−1 ) ( Rule1)
= 2(2 x)
= 6x

Rule 4: The Sum and Difference Rule

Given two functions f(x) and g(x) with both f '( x) and g '( x) exist,

If h( x) = f ( x) + g ( x) then h '( x) = f '( x) + g '( x) ), and

if h( x) = f ( x) − g ( x) then h '( x) = f '( x) − g '( x)

In other words, the derivative of a sum (or difference) of two differentiable functions is the sum
(or difference) of the individual function derivatives. That is,

d d d
 f ( x)  g ( x) = f ( x)  g ( x) = f '( x) +− g '( x)
dx dx dx
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Example

Find the derivatives of the following functions

a) f(x) = 3x2 + 2x

b) y = 3 x − 3x2

Solutions

d
a) f ' ( x ) = (3 x 2 + x)
dx

d d
= (3 x 2 ) + (2 x) ( Rule − 4)
dx dx
d d
= 3 ( x 2 ) + 2 ( x) ( Rule − 3)
dx dx
= 3(2 x ) + 2(1x1−1 )
2 −1
( Rule − 2)
= 3( x) + 2( x )
0

= 6x + 2 ( sihce x 0 = 1)

d 3
f '( x) = ( x − 3x 2 )
dx
d d
= 3 x − (3x 2 ) ( Rule − 4)
dx dx
d 1 d
= ( x 3 ) − 3 ( x2 ) ( Rule − 3)
dx dx
b)
1 1 −1
= x 3 − 3(2 x 2−1 ) ( Rule − 2)
3
1 −2
= x 3 − 3(2 x)
3
1
= − 6x
3 3 x2

Remarks

The sum and difference rule can be generalized for any three or more differentiable functions.

For instances, for four differentiable functions f(x), g(x), r(x) and s(x), the sum and difference rule
can be extended as

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d d d d d
( f ( x)  g ( x)  r ( x)  s ( x)) = f ( x)  g ( x)  r ( x)  s ( x)
dx dx dx dx dx

Example

Find the derivatives of the following functions

a) f(x) = 3x4-2x3+x2-5x+7

5 −2 x 2
b) y = 2 − 4 +
3x x 9

Solutions

dy d
a) = (3 x 4 − 2 x3 + x 2 − 5 x + 7)
dx dx
d d d d d
= (3x 4 ) − (2 x 3 ) + x 2 − (5 x) + (7) ( Rule − 4)
dx dx dx dx dx
d d d d d
= 3 x 4 − 2 x 3 + x 2 − 5 ( x) + (7) ( Rule − 3)
dx dx dx dx dx
= 3(4 x ) − 2(3 x ) + 2 x − 5(1) + 0
3 2
( Rules 1 and 2)
=12 x3 − 6 x 2 + 2 x − 5

dy d  5 2 x2 
b) =  2 − 4 + 
dx dx  3 x x 9

d  5 x −2 x2 
=  − 2 x −4 +  ( Exponenent Rule)
dx  3 9 
d  5 −2  d −4 d  x2 
=  x  − (2 x ) +   ( Rule − 4)
dx  3  dx dx  9 
5 d −2 d 1 d 2
== ( x ) − 2 ( x −4 ) + (x ) ( Rule − 3)
3 dx dx 9 dx
5 1
= (−2 x −3 ) − 2(−4 x −5 ) + (2 x) ( Rule − 2
3 9
10 8 2x
= 3+ 5+
3x x 9

Remark

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The value of the derivative of y= f(x) at any specified value of x (say at x=a), denoted as
dy
f '(a)or can be obtained through the following steps.
dx x=a

dy
Step.1. Find f '(a)or by applying the necessary rules of differential.
dx x=a

dy
Step 2. Evaluate f '( a ) by substituting a in place of x in the result of f '(a)or from step 1
dx x=a

Rule 5: The Product Rule

If both the derivatives of f(x) , f '( x ) , and the derivative of g(x), g '( x) ,exist, then

d d d
 f ( x).g ( x) = f ( x). g ( x) + g ( x) f ( x)
dx dx dx
= f ( x).g '( x) + g ( x) f '( x)

That is, the derivative of the product of two differentiable functions, f(x)
and g(x), is equal to the first function, f(x), times the derivative of the second function, g '( x) ,
plus the second function, g(x), times the derivative of the first function f '( x ) ,.

Example

Find the derivative for a) y =2x2 (3x4-2)

b) f(x) = (x2+4) (5x4-5)

Solution

Let f(x) = 2x2 and g(x) = 3x4-2

then f '( x ) = 4x and g '( x) = 12x3

dy
To get use Rule-5 and substitute the above values as
dx

dy
=
d
 f ( x).g ( x = f(x) g '( x) + g(x) f '( x )
dx dx

= 2x2 (12x3) + (3x4-2) (4x)

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

= 24x5+12x5-8x

= 36x5-8x

Notice that you can also differentiate y = 2x2(3x4-2) by first multiplying the two expressions and
then applying the previous rules on the simplified single expression. For instances,

Y = 2x 2 (3x 4 -2) = 6x 6 -4x 2

dy d
then = (6x 6 -4x 2 )
dx dx
d d
=6 x 6 -4 (x 2 ) (Rule3and4)
dx dx
5
=6(6x )-4(2x) (Rule-2)
= 36x 5 -8x

b) Let y = f(x)=(x2+4) (5x4-5), then

dy
dx
= f ' ( x) =
d
dx

( x 2 + 4)(5 x 4 − 5) 
d d
= ( x 2 + 4) (5 x 4 − 5) + (5 x 4 − 5) ( x 2 + 4) ( Rule − 5)
dx dx
= ( x + 4)(20x ) + (5 x − 5)(2 x)
2 3 4
( Rule 1, 2, 3 and 4)
= 20x 5 + 80x 3 + 10x 5 − 10x
= 30x 5 + 80x 3 − 10x

Remark

The product rule can be extended for more than two differentiable functions. For instances,

if y = f(x).g(x).h(x), then

dy
= f ' ( x) g ( x)h( x) + g ' ( x) f ( x)h( x) + h' ( x) f ( x).g ( x)
dx

Rule 6: The Quotient Rule

f(x)
If y = r ( x) = with g(x)  0 and both f'(x) and g'(x) exis t, then
g(x)

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dy d  f(x) 
r ' (x)=
dx dx  g(x) 
=

d d
(f(x)).g(x)-f(x). g(x)
= dx dx
g(x)
2

f ' (x).g(x)-f(x).g ' (x)

=
g(x)
2

Notice that since subtraction is not commutative, interchanging the numerator in the quotient rule
as f(x).g ' (x)-f ' (x).g(x) will leads to a wrong result.

Example

Find the derivatives for the following functions

x2 x2 − x
a) y = b) f ( x ) =
2x −1 x3 + 1

Solutions

a) Let f(x) =x2 and g(x) = 2x-1, then f '( x ) = 2x and g '( x) =2

then after apply the quotient rule and substitute the above values to get

dy f ' ( x) g ( x) − f ( x) g ' ( x)
=
dx g ( x)2
(2 x)(2 x − 1) − x 2 (2)
=
(2 x − 1) 2
4x2 − 2x − 2x2
=
(2 x − 1) 2
2x2 − 2x
=
(2 x − 1) 2

x2 − x
, then
b) Let y = f(x) = x 3 + 1

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d 2  d 
( x3 + 1) ( x − x) − ( x 2 − x) ( x3 + 1)
dy
=
dx  dx 
dx ( x + 1)
3 2

( x3 + 1)(2 x − 1) − ( x 2 − x)(3x 2 ) 

=
( x3 + 1) 2
2 x 4 − x3 + 2 x − 1 − (3x 4 − 3x3 )
=
( x3 + 1) 2

− x 4 + 2 x3 + 2 x − 1
=
( x3 + 1)2

Notice that it may sometimes advantageous to check whether or not an expression can be
simplified algebraically before blindly using the quotient rule.

Example

2 x 4 − x3
Find f'(x) for f(x) =
x2

Solution

Instead of using the quotient rule, first simplify f(x) as

2 x 4 − x3 2 x 4 x3
f ( x) = 2
= 2 − 2 = 2 x 2 − x then apply the necessary rules of differentiation to get f'(x)
x x x
as

d
f ' ( x) = (2 x 2 − x) = 4 x − 1
dx

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Rule 7: The Chain Rule (Composite Function Rule)

The Chain Rule ■ If y = f (u ) is a differentiable function of u and u = f ( g ) is in turn a

differentiable function of x , then the composite function y = f ( g ( x)) is a differentiable function

of x whose derivative is given by the product

dy dy du dy
= . or, equivalently, by = f '( g ( x)) g '( x)
dx du dx dx

Example

1 2
The cost of producing x units of a particular commodity is C ( x) = x + 4 x + 53 dollars, and the
3
production level t hours into a particular production run is x(t ) = 0.2t 2 + 0.03t units. At what rate
is cost changing with respect to time after 4 hours?

Solution

dC 2 dx
We find that = x + 4 and = 0.4t + 0.03 . So according to the chain rule,
dx 3 dt

dC dC dx  2 
= . =  x + 4  ( 0.4t + 0.03)
dt dx dt  3 

When t = 4 , the level of production is x(4) = 0.2(4)2 + 0.03(4) = 3.32 units and by substituting
t = 4 and x = 3.32 into the formula for , we get

dC 2 
=  (3.32) + 4   0.4(4) + 0.03 = 10.1277
dt t =4 3 

Thus, after 4 hours, cost is increasing at the rate of approximately $10.13 per hour.

dy
Find if y = 2u 2 + 1 and u = 3x − 1.
dx

Solution

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dy du
First find and as
du dx
dy d du d
= (2u 2 + 1) = 4u and = ( 3x -1) = 3
du du dx dx

dy dy dy du
Then apply the chain rule to get as = . = 4u (3) = 12u
dx dx du dx

dy
Since Y is regarded as a function of x, should be expressed in terms of x.
dx

dy dy
To do this, substitute the value of u in = 12u to get = 12u = 12((3x -1)) = 36 x -12
dx dx

dy
If Y = x 2 − 1 ,find
dx

Solution

Let u = x 2 − 1  y = u1/2

dy dy du 1 x
The = . = .2 x =
dx du dx 2 u x −1
2

Implicit Differentiation and Related Rates

Suppose you have an equation that defines y implicitly as a function of x and you want to find
the derivative. For instance, you may be interested in the slope of a line that is tangent to the graph
of the equation at a particular point. One approach might be to solve the equation for y explicitly
and then differentiate using the techniques you already know. Unfortunately, it is not always
possible to find y explicitly. For example, there is no obvious way to solve for y in the equation
x 2 y + 2 y 3 = 3x + 2 y . There is a simple technique based on the chain rule that you can use to find
dy
without first solving for y explicitly. This technique, known as implicit differentiation, consists
dx
of differentiating both sides of the given (defining) equation with respect to x and then solving
dy
algebraically for .
dx

Here is an example illustrating the technique.

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

dy
Find if x 2 y + y 2 = x3
dx

Solution

dy dy dy
 2 xy + x 2 + 2y = 3 x 2  3 x 2 − 2 xy = (2 xy + 2 y )
dx dx dx
dy 3 x − 2 xy
2
 =
dx 2 xy + 2 y

Suppose the output at a certain factory is Q = 2 x3 + x2 y + y3 units, where x the number of hours
of skilled labor used is and y is the number of hours of unskilled labor. The current labor force
consists of 30 hours of skilled labor and 20 hours of unskilled labor. Use calculus to estimate the
change in unskilled labor y that should be made to offset a 1-hour increase in skilled labor y so
that output will be maintained at its current level.

Solution

The current level of output is the value of Q when x = 30 and y = 20 . That is,

Q = 2(30)3 + (30)2 (20) + (20)3 = 80,000 units

If output is to be maintained at this level, the relationship between skilled labor x and unskilled
labor y is given by the equation

80000 = 2x3 + x2 y + y3 which defines y implicitly as a function of x .

The goal is to estimate the change in y that corresponds to a 1-unit increase in x when x and y
are related by this equation. The change in y caused by a 1-unit increase in x can be approximated

dy
by the derivative . To find this derivative, use implicit differentiation.
dx

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

The goal is to estimate the change in y that corresponds to a 1-unit increase in x when x and y are
related by this equation. The change in y caused by a 1-unit increase in x can be approximated by
dy
the derivative . To find this derivative, use implicit differentiation.
dx

dy dy dy
0 = 6 x2 + x2 + y ( x2 ) + 3 y 2
dx dx dx
dy dy
0 = 6 x2 + x2 + 2 xy + 3 y 2
dx dx
6 x 2 + 2 xy
− ( x 2 + 3 y 2 ) = 6 x 2 + 2 xy 
dy dy
=− 2
dx dx ( x + 3y2 )
Now evaluate this derivative when x = 30 and y = 20 to conclude that

dy 6(20) 2 + 2(20)(30)
change in y = =−  −3.14 hours (this is called the marginal rate of
dx x =30
y = 20
( (30)2 + 3(20)2 )
technical substitution (MRTS).)

That is, to maintain the current level of output, unskilled labor should be decreased by
approximately 3.14 hours to offset a 1-hour increase in skilled labor.

Related Rates

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

In certain practical problems, x and y are related by an equation and can be regarded as functions
of a third variable t, which often represents time. Then implicit differentiation can be used to relate
dx dy
to . This kind of problem is said to involve related rates.
dt dt

Example

1. The manager of a company determines that when q hundred units of a particular

commodity are produced, the total cost of production is C thousand dollars, where
C 2 − 3q3 = 4, 275 . When 1,500 units are being produced, the level of production is
increasing at the rate of 20 units per week. What is the total cost at this time and at what
rate is it changing?

Solution
dC dq
We want to find when q = 15 (1500 units) and = 0.2 (20 units per week with q measured
dq dt
in hundreds of units). Differentiating the equation C 2 − 3q3 = 4, 275 implicitly with respect to
time, we get
dC  dq  dC 2 dq dC 9q 2 dq
2C − 3 3q 2 =0 so that 2C = 9q and =
dt  dt  dt dt dt 2C dt

When q = 15, the cos3t C satisfies C 2 − 3(15)3 = 4275  C = 120

dq dC
and by sabstituting q = 15, C = 120, and = 0.2 into the formula for , we get
dt dt
dC  9(15) 2 
= 0.2 = 1.6875 dollars per week.
dt  2(120) 
To summarize, the cost of producing 1,500 units is $120,000 (C=120) and at this level of
production, total cost is increasing at the rate of $1,687.50 per week.
2. When the price of a certain commodity is p dollars per unit, the manufacturer is willing

to supply x thousand units, where x 2 − 2 x p − p 2 = 31 . How fast is the supply changing

when the price is $9 per unit and is increasing at the rate of 20 cents per week?

Solution

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

dp dx
We know that when p = 9, = 0.20. We are asked to find at this time. First, note that when
dt dt
p = 9 , we have

x 2 − 2 x 9 − 92 = 31  x 2 − 6 x − 112 = 0
 ( x + 8 )( x − 14 ) = 0
 x = 14 (x = −8 has no practical value)

Next, we differentiate both sides of the supply equation implicitly with respect to time to obtain

dx 1
22 = 14   (0.20) + 18(0.20)
dt 3
1
14   (0.20) + 18(0.20)
=  
dx 3
 0.206
dt 22

dx 1
22 = 14   (0.20) + 18(0.20)
dt 3
1
14   (0.20) + 18(0.20)
=  
dx 3
 0.206
dt 22

Since the supply is given in terms of thousands of units, it follows that the supply is increasing at
the rate of 0.206(1,000) = 206 units per week.

3.4. Derivatives of Logarithmic and Exponential Functions

3.4.1. Derivatives of Logarithmic Functions
dy 1
If y = log ex = ln x, then = .
dx x
If the function is stated to any base than e ,it is possible to transform it to the natural logarithm
form and apply the above formula. For example, if you are given:
ln x
y = log ax =
ln a
dy 1 1 1
= = .log ea
dx ln a x x

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

d log ea 1
Therefore, =
dx x ln a
d log ua 1
If u = f ( x) , then using the chain rule, = .u '( x) .
dx u ln a
dy
Examples: Find for each of the following functions
dx

a. y = x 3 + 3ln x d. y = ln 3 x

b. y = log 4
( x +1)
3

e. x ln y = 4
c. y = ln x 4
Solution
dy d ln x 3
a. = 3x 2 + 3 =3x 2 +
dx dx x
ln u
b. let u = x3 + 1  y = log u4 =
ln 4
dy dy du 1  d ln y du  1 1 2 3x 2
= . =  . = . .3x =
dx du dx ln 4  du dx  ln 4 u ( 3x2 + 1) ln 4
c. let u = x 4  y = ln u
dy dy du 1 3 4 x3 4
= . = .4 x = 4 =
dx du dx u x x
[

d . Let 3 x = u  y = ln u
dy dy du 1 3 1 3 1
Therefore, = . = . = . =
dx du dx u 2 x 3 x 2 x 2x
4
e. ln y =
x
d ln y dy −4
 . = (Differentiating both sides w.r.t.X and applying the chain rule)
dy dx x 2

dy −4 y −4e x
4
1 dy −4
4
 = 2  = 2 = 2
(since y = e x )
y dx x dx x x
Derivatives of Exponential Functions

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The function y = f ( x) = a x with a  0 ,and and a  1 is said to be an exponential function with

dy
base a. Then can easily be found by changing it to the logarithmic function.
dx
y = f ( x) = a x  ln y = x ln a
d ln y dy 1 dy dy
. = ln a  = ln a  = a x ln a
dx dx y dx dx
dy
If y = f ( x) = a x , then f '( x) = = a x log ea = a x ln a
dx

da x
Thus, = a x ln a
dx

If y = au ( x ) , using the chain rule,

dau ( x )
= u '( x)a u ( x ) ln a
dx
The exponential function e x is a unique function with special behaviour.

de x
That is, = ex
dx
However, in case we have e f ( x ) , we can use the chain rule to evaluate its derivative. That is

de f ( x )
= f '( x)e f ( x )
dx
Examples
Differentiate the following functions
x3 +1
a. f ( x) = x e b. g ( x) = x c. f ( x) = e x
2
2 x

e +2
Solution
a. Using the product rule, we find
f '( x) = ( x 2 ) ' e x + ( e x ) ' x 2
= (2 x) e x + x 2 e x
= xe x ( x + 2)

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b. Using the quotient rule:

( x3 ) '(e x + 2) − x 3 (e x + 2) (3 x 2 )(e x + 2) − x 3 e x x 2 (3e x + xe x + 6)
g '( x) = = =
(e x + 2) 2 (e x + 2) 2 (e x + 2) 2
c. f '( x) = e x +1 ( x 2 + 1) ' = 2 xe x +1
2 2

3.5. Higher Order Derivatives

In the previous sections, you learned the definition and different ways of computing f ' ( x ) called
the first derivative for y=f(x). In this section, you will learn the concept of second derivative, third
derivative and so on.

dy
The derivative of a function y = f(x), denoted as f '( x ) or , is said to be the first derivative of
dx
the function f.

Since the first derivative, f ( x ) , is a function, you can find its derivative. The derivative of the
first derivative is said to be the second derivative of the function f and denoted by

'' d2y
f ( x) or
dx 2

Since the second derivative is again a function, you can find its derivative. The derivative of the
second derivative is said to be the third derivative of the function f and denoted by
d3y
f ''' ( x) or f 3 ( x) or
dx3 to indicate that f(x) has been differentiated three times with respect to x.

This process may continue to get the fourth derivative denoted as

d4 y d5 y
f 4 (x) or , the fifth derivative, denoted as f 5
(x) or and so on.
dx 4 dx 5

dny
Generally, the nth-derivative of the function f is denoted by f n ( x)or to indicate that this
dx n
function is found by n successive operations of differentiations, starting with the function f.

Example

Find the first, second and third derivative of the function f(x) = 2x3-4x2 +6x =5

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Solution

The first derivative is f ' ( x ) = 6x2-8x+6,

d
The second derivative if f '' ( x ) = (6 x 2 − 8 x + 6) = 12 x − 8,
dx

d
The third derivative is f ''' ( x) = f 3 ( x) = (12 x − 8) = 12
dx

3.6. The sign of the Derivative

If a function is increasing, it has positive slope which implies that f '( x) is positive. If a function
is decreasing, it has negative slope and negative first derivative. If the point is an extreme pint
(either maximum or minimum point), there is zero slope or undefined slope at that point and f '( x)
is zero or undefined.
In summary for y = f ( x)

dy
➢ If  0, f ( x) is decreasing
dx
dy
➢ If  0, f ( x) is increasing
dx
dy
➢ If = 0, f ( x) has extrema value at this value of x
dx
Procedure for Using the Derivative to Determine Intervals of Increase and Decrease for a
Function f.
Step 1. Find all values of x for which f '( x) = 0 or f '( x) is not continuous, and mark these
numbers on a number line. This divides the line into a number of open intervals.
Step 2. Choose a test number c from each interval a  x  b determined in step 1 and evaluate
f '(c) . Then,
If f '(c)  0 , the graph of f(x) is increasing (graph rising) on a  x  b .

If f ''(c)  0 , the graph of f(x) is decreasing (graph falling) a  x  b .

[

Example

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Find the intervals of increase and decrease for the function

f ( x) = 2 x3 + 3x2 − 12 x − 7
Solution
The derivative of f ( x) is

f '( x) = 6 x2 + 6 x − 12 = 6( x + 2)( x − 1) which is continuous everywhere with

f '( x) = 0 where x = −2 and x = 1 . The numbers -2 and 1 divide the x axis into three open
intervals; namely, x  −2, −2  x  1, and x  1 . Choose a test number c from each of these
intervals; say, c = −3 from x  −2 , c = 0 from −2  x  1, and x = 2 from x  1 . Then evaluate
f '( x) for each test number: f '(−3) = 24  0 f '(0) = −12  0 f '(2) = 24  0
These results are summarized in the following table.
Intervals of Increase and Decrease for f ( x) = 2 x3 + 3x 2 − 12 x − 7

Find the intervals of increase and decrease for the function

x2
f ( x) =
x−2
Solution
The function is defined for x  2 , and its derivative is

( x − 2 )( 2 x ) − x 2 (1) x( x − 4)
f '( x) = =
( x − 2) ( x − 2)
2 2

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which is discontinuous at x = 2 and has f ( x) at x = 0 and x = 4 . Thus, there are four intervals

on which the sign of f '( x) does not change: namely, x = 2 , 0  x  2 ,

2  x  4 , and x  4 . Choosing test numbers in these intervals (say, -2, 1, 3, and 5, respectively),
we find that
5 5
f '(−1) = 0 f '(1) = −3  0 f '(3) = −3  0 f '(5) = 0
9 9
We conclude that f(x) is increasing (graph rising) for x  0 and for x  4 and that it is decreasing
(graph falling) for 0  x  2 and for 2  x  4 . These results are summarized in the arrow
diagram displayed below [the dashed vertical line indicates that f(x) is not defined at x = 2 ].

Testing for Concavity

Knowing the range over which the function increasing, decreasing, and achieving relative extrema
point is important to draw graphs of functions but they are not all about. A given function increases
over a range but it can increase at an increasing rate, a constant rate or at a decreasing rate. Thus,
we have to see the concavity of graphs to add this dimension.

A given function is concave up (changes at increasing rate) if the function lays above all its tangent
lines. A given function is concave down (changes at a decreasing rate) if the function lies below
its tangent line. Look at the following diagram.

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Second Derivative Procedure for Determining Intervals of Concavity for a Function f

Step 1. Find all values of x for which f ''( x) = 0 or f ''( x) does not exist, and mark these
numbers on a number line. This divides the line into a number of open intervals.
Step 2. Choose a test number c from each interval a  x  b determined in step 1 and evaluate
f ''( x) . Then,
If f ''(c)  0 , the graph of f(x) is concave upward on a  x  b .

If f ''(c)  0 , the graph of f(x) is concave downward on a  x  b .

Example
Determine intervals of concavity for the function
f ( x) = 2 x6 − 5x4 + 7 x − 3
Solution
We find that
f '( x) = 12 x5 − 20 x3 + 7
and f ''( x) = 60 x4 − 60 x2 = 60 x2 ( x2 − 1) = 60 x2 ( x − 1)( x + 1)

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

The second derivative f ''( x) is continuous for all x and f ''( x) = 0 for x = 0 , x = 1 , and

x = −1. These numbers divide the x axis into four intervals on which f ( x) does not change sign;
namely, x  −1, − 1  x  0, 0  x  1, and x  1. Evaluating f ''( x) at test numbers in each of

1 1
these intervals (say, at x = −2, x = − , x = , and x = 5 , and respectively), we find that
2 2
 1 45 1 45
f ''(−2) = 720  0 f ''  −  = −  0 f ''   = − f ''(5) = 36000  0
 2 4 2 4
Thus, the graph of f(x) is concave up for x  −1 and for x  1 and concave down for −1  x  0
and for 0  x  1 , as indicated in this concavity diagram.

Inflection Points: An inflection point (or point of inflection) is a point ( c, f (c) ) on the graph

of a function f where the concavity changes. At such a point, either f ''(c) = 0 or

f ''(c) does not exist.

Procedure for Finding the Inflection Points for a Function f

Step 1. Compute f ''( x) and determine all points in the domain of f whether either f ''(c) = 0

or f ''( x) does not exist.

Step 2. For each number f ''(c)  0 found in step 1, determine the sign of f ( x) to the left and

to the right of x = c ; that is, for x  c and for x  c . If f ''(c)  0 on one side of x = c and

f ''(c)  0 on the other side, then ( c, f (c) ) is an inflection point for f.

Example
Find all inflection points of the given functions.
1
a. f ( x) = 3x − 5x − 1
5 4
b. f ( x ) = x 3
c. f ( x) = x4

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

Solution
a. Note that f ( x) exists for all x and that

f '( x) = 15 x 4 − 20 x3
f ''( x) = 60 x3 − 60 x 2 = 60 x 2 ( x − 1)
Thus, f ''( x) is continuous for all x and f ''( x) = 0 when x = 0 and x = 1 . Testing the sign of

1
f ''( x) on each side of x = 0 and x = 1 (say, at x = −1, , and 2 ) ,we get
2
1 15
f ''(−1) = −120  0 f ''   = −  0 f ''(2) = 240  0 which leads to the
2 2
concavity pattern shown in this diagram:

b. Note that f ( x) exists for all x and that

−2 −5
1 2
f '( x) = x 3 and f ''( x) = − x 3 . It follows that f ''( x) never be 0 but does not
3 9
exist x = 0 .
Testing the sign of f ''( x) on each side of x = 0 ,we obtain the results displayed in this concavity
diagram:

1 15
f ''(−1) = −120  0 f ''   = −  0 f ''(2) = 240  0 which leads to the
2 2
concavity pattern shown in this diagram:

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

1
Note: The curve f ( x ) = x has a point of inflection at x = 0 but f ''( x) does not exist.
3

c. Note that f ( x) exists for all x and that

f '( x) = 4 x3 and f ''( x) = 12 x2 . It follows that f ''( x) = 0 at x = 0 .

Testing the sign of f ''( x) on each side of x = 0 ,we obtain the following results.

f ''(−1) = 12  0 and f '' (1) = 12  0 which shows that the concavity has never

changed. Thus, x = 0 is not an inflection point.

Note: The curve f ( x) = x4 has no point of inflection at x = 0 even though f ''( x) exists.
Remark: A function can have an inflection point only where it is continuous. In particular, if
f(c) is not defined, there cannot be an inflection point corresponding to x = c even if f(x)
1
changes sign at x = c . For example, f ( x) = has no inflection point at x=0 even if it changes
x
its sign at x=0.

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3.7. Free (unconstrained) Optimization: Maximization and Minimization

This section shows how to locate and identify extreme values of a continuous function from its
derivative. Once we can do this, we can solve a variety of optimization problems in which we
find the optimal (best) way to do something in a given situation.
DEFINITIONS: Absolute Maximum, Absolute Minimum
Let ƒ be a function with domain D. Then ƒ has an absolute maximum value on D at a point c
if f ( x)  f (c) for all x in D and an absolute minimum value on D at c if

f ( x)  f (c) for all x in D .

Absolute maximum and minimum values are called absolute extrema (plural of the Latin
extremum). Absolute extrema are also called global extrema, to distinguish them from local
extrema defined below.
Local (Relative) Extreme Values
The following Figure shows a graph with five points where a function has extreme values on its
domain [a,b]. The function’s absolute minimum occurs at a even though at e the function’s value
is smaller than at any other point nearby. The curve rises to the left and falls to the right around c,
making ƒ(c)a maximum locally. The function attains its absolute maximum at d.

DEFINITIONS: Local (Relative) Extreme Values

A function ƒ has a local maximum value at an interior point c of its domain if f ( x)  f (c) for
all x in some open interval containing c . A function ƒ has a local maximum value at an interior
point c of its domain if f ( x)  f (c) for all x in some open interval containing c .

Finding Extrema

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The next theorem explains why we usually need to investigate only a few values to find a
function’s extrema.

The First Derivative Test for Absolute Extrema:

If ƒ has a local maximum or minimum value at an interior point c of its domain, and if f '( x) is

defined at c , then f '(c) = 0 .

[[

[[

The Second Derivative Test for Absolute Extrema: Suppose that f ( x) is continuous on an

interval I where x = c the only critical number and that is f '(c) = 0 . Then

if f ''(c)  0 the absolute minimum of f(x) on I is f (c)

if f ''(c)  0 the absolute maximum of f(x) on I is f (c)

However, if f ''(c) = 0 or if f ''(c) does not exist, the test is inconclusive and f may have a
relative maximum, a relative minimum, or no relative extremum at all at x = c .
[

DEFINITION: Critical Point

An interior point of the domain of a function ƒ where f '( x) is zero or undefined is a critical point
of ƒ.
Example
Find the critical points of f ( x) = 2 x3 3x2 − 12 x − 7 and use the second derivative test to
classify each critical point as a relative maximum or minimum.
Solution
Since the first derivative
f '( x) = 6 x2 + 6 x − 12 = 6( x + 2)( x − 1) is zero when x = −2 and x = 1 , the
corresponding points ( −2,13) and (1, −14 ) are the critical points of f . To test these points,

compute the second derivative f ''( x) = 12 x + 6 and evaluate it at x = −2 and x = 1 . Since

f "(−2) = −18  0 it follows that the critical point ( −2,13) is a relative maximum, and since

f "(1) = 18  0 it follows that the critical point (1, −14 ) is a relative minimum.
3.8. Economic Application of Derivatives

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3.8.1. The Marginal Concepts in Economics

Engineers use the terms velocity and acceleration to refer to the derivatives of functions describing
motion. Economists, too, have a specialized vocabulary for rates of change and derivatives. They
call them marginals.

Given a total function y = f ( x) (which may be total cost function, total revenue function, total
product function, total utility function, total tax function etc.), its marginal value function can be
obtained as

dy
mf ( x ) = f ' ( x) =
dx

3.8.2. Elasticities
An increase in the unit price of a commodity will result in decreased demand, but the sensitivity
or responsiveness of demand to a change in price varies from one product to another. For instance,
the demand for products such as soap, flashlight batteries, or salt will not be much affected by a
small percentage change in unit price, while a comparable percentage change in the price of airline
tickets or home loans can affect demand dramatically. Sensitivity of demand is commonly
measured by the ratio of the percentage rate of change in quantity demanded to the percentage rate
of change in price. This is approximately the same as the change in demand produced by a 1%
change in unit price.
100Q '( x)
Note that the percentage rate of change of a quantity Q(x) is given by .In particular, if
Q( x )
dq
100
 percenatge rate of  dp
the demand function is differentiable, then change of demand q  = and
  q

dp
100
 percenatge rate of  dp 100
change of p = = . Thus, sensitivity to change in price is measured by the
  p p
ratio

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dq
100
dp
Percentage rate of change in q q dq p
= = . which, in economics, is called
Percentage rate of change in p dp dp q
100
dp
p
the price elasticity of demand.
dq
NB: Since demand q decreases as the unit price p increases, we have  0 .Therefore, since
dp
q  0 and p  0 , it follows that the price elasticity of demand will be negative: that is,
dq p
E ( p) = .  0.
dp q
Example
Suppose the demand q and price p for a certain commodity are related by the linear equation
q = 240 − 2 p ( for 0  p  120 ).
a. Express the elasticity of demand as a function of p .
b. Calculate the elasticity of demand when the price is p = 100 . Interpret your answer.
c. At what price is the elasticity of demand equal to −1 ? What is the economic significance
of this price?
Solution
dq p p −2 p −p
a. The elasticity of demand is E ( p) = . = (−2). = =
dp q q 240 − 2 p 120 − p
b. When p = 100 , the elasticity of demand is

−100
E (100) = = −5
120 − 100
That is, when the price is p = 100 , a 1% increase in price will produce a decrease in demand of
approximately 5%.
c. The elasticity of demand will be equal to -1 when
−p
−1 =  120 − p = p  p = 60
120 − p

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At this price, a 1% increase in price will result in a decrease in demand of approximately the same
percentage.

Example
The manager of a bookstore determines that when a certain new paperback novel is priced at p

dollars per copy, the daily demand will be q = 300 − p 2 copies, where 0  p  300 .
a. Determine where the demand is elastic, inelastic, and of unit elasticity with respect to price.
b. Interpret the results of part (a) in terms of the behavior of total revenue as a function of
price.
Solution
a. The elasticity of demand is
p −2 p 2
E ( p) = ( −2 p ) = and since 0  p  300 ,
300 − p 2 300 − p 2

2 p2
E ( p) =
300 − p 2

The demand is of unit elasticity when E ( p) = 1 ; that is, when

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2 p2
= 1  2 p 2 = 300 − p 2
300 − p 2

3 p 2 = 300  p = 10

If 0  p  10 ,then demand is inelastic. Likewise, if 10  p  300 , then demand is

elastic.
b. The total revenue, R = p.q , increases when demand is inelastic; that is, when 0  p  10
. For this range of prices, a specified percentage increase in price results in a smaller
percentage decrease in demand, so the bookstore will take in more money for each increase

in price up to $10 per copy. However, for the price range 10  p  300 the demand is
elastic, so the revenue is decreasing. If the book is priced in this range, a specified
percentage increase in price results in a larger percentage decrease in demand. Thus, if the
bookstore increases the price beyond $10 per copy, it will lose revenue.
Optimization: Unconstrained (Free) Optimization
1. Given TVC = 18x − 15x 2 + 4 x3 , find
a. Marginal cost function
b. Point of diminishing returns
c. The point at which stage II of production begins.
Solution
dTVC
a. MC = = 18 − 30 x + 12 x 2
dx
b. At the point of diminishing returns MP is maximum and MC is minimum. Thus at this
dMC 30
point = −30 x + 24 x = 0  x = = 1.25
dx 24
c. At the point where stage II begins when AP is maximum and AVC is minimum. Thus,
TVC
AVC = = 18 − 15 x + 4 x 2
x
dAVC 15
= −15 + 8 x = 0  x = = 1.875
x 8

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2. A manufacturer estimates that when q thousand units of a particular commodity are

produced each month, the total cost will be C(q) = 0.4q2 + 3q + 40 thousand dollars, and

all q units can be sold at a price of p(q) = 22.2 − 1.2q dollars per unit.
a. Determine the level of production that results in maximum profit. What is the
maximum profit?
C (q)
b. At what level of production is the average cost per unit AC ( q ) = minimized?
q
c. At what level of production is the average cost equal to the marginal cost C '( x) ?
Solution
a. Total revenue is R(q) = qp( x) = q(22.2 − 1.2q) = −1.2q 2 + 22.2q thousand dollars, so

the profit is  (q) = R(q) − C(q) = −1.2q 2 + 22.2q − (0.4q 2 + 3q + 40)

 (q) = −1.6q2 + 19.2q − 40

19.2
 '(q) = −3.2q + 19.2 = 0  q = = 6.
3.2
Since  ''(q) = −3.2  0, profit function has maximum value at q = 6.

3. A bus company will charter a bus that holds 50 people to groups of 35 or more. If a group
contains exactly 35 people, each person pays $60. In large groups, everybody’s fare is
reduced by $1 for each person in excess of 35. Determine the size of the group for which
the bus company’s revenue will be greatest.
Solution
Let R denote the bus company’s revenue. Then,
R = (Number of people in the group)(Fare per person)
You could let x denote the total number of people in the group, but it is slightly more convenient
to let x denote the number of people in excess of 35. Then, Number of people in the group = 35 + x
and fare per person = 60 − x so the revenue function is R( x) = (35 + x)(60 − x) . Since x
represents the number of people in excess of 35 but less than 50, you want to maximize R(x) for a
positive integer x in the interval 0  x  15 .However, to use the methods of calculus, consider the
continuous function R( x) = (35 + x)(60 − x) defined on the entire interval 0  x  15 .

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The derivative is R '( x) = (1)(60 − x) + (35 + x)(−1) = 25 − 2 x which is zero when x = 12.5 . It

follows that the optimal integer value of x is either x = 12 or x = 13 . Since R (12 ) = 2,256 and

R (13) = 2,256 you can conclude that the bus company’s revenue will be greatest when the group
contains either 12 or 13 people in excess of 35; that is, for groups of 47 or 48. The revenue in either
case will be $2,256.
4. A bicycle manufacturer buys 6,000 tires a year from a distributor. The ordering fee is $20
per shipment, the storage cost is 96 cents per tire per year, and each tire costs $21. Suppose
that the tires are used at a constant rate throughout the year and that each shipment arrives
just as the preceding shipment is being used up. How many tires should the manufacturer
order each time to minimize cost?
Solution
The goal is to minimize the total cost, which can be written as
Total cos t = storage cos t + ordering cos t + purchase cos t
Let x denote the number of tires in each shipment and C ( x) the corresponding total cost in dollars.

Then, Ordering cost = ( ordering cost per shipment )( number of shipments )

Since 6,000 tires are ordered during the year and each shipment contains x tires, the number of
6000  6000  120000
shipments is and so Ordering cos t = 20  =
x  x  x
Purchase cos t = (total number of tires ordered )(cos t per tire)
= 6,000(21) = 126,000
Storage cos t = (average number of tires stored )( storage cos t per tire)
x
= (0.96) = 0.48x
2
Putting it all together, the total cost is
120000
C ( x) = 0.48 x + + 126000 and the goal is to find the absolute
storage x cos t of
cos t purchase
ordering
cos t

minimum of C(x) on the interval 0  x  6000

120000 120000
C '( x) = 0.48 + 2
which is zero when x 2 = = 250000 or x = 500
x 0.48
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CHAPTER FOUR
DIFFERENTIAL CALCULUS OF MULTIVARIABLE FUNCTIONS

4.1. Partial Derivatives

In many problems involving functions of two variables, the goal is to find the rate of change of the
function with respect to one of its variables when the other is held constant. That is, the goal is to
differentiate the function with respect to the particular variable in question while keeping the other
variable fixed. This process is known as partial differentiation, and the resulting derivative is said
to be a partial derivative of the function.

For example, suppose a manufacturer finds that Q( x, y) = 5x2 + 7 xy units of a certain

commodity will be produced when x skilled workers and y unskilled workers are employed. Then
if the number of unskilled workers remains fixed, the production rate with respect to the number
of skilled workers is found by differentiating Q(x, y) with respect to x while holding y constant.
We call this the partial derivative of Q with respect to x and denote it by Qx ( x, y ) ; thus,

Qx ( x, y ) = 10 x + 7 y
Similarly, if the number of skilled workers remains fixed, the production rate with respect to the
number of unskilled workers is given by the partial derivative of Q with respect to y , which is

obtained by differentiating Q( x, y) with respect to y , holding x constant; that is, by

Qy ( x, y) = 7 x

Partial Derivatives: Suppose z = f ( x, y) . The partial derivative of z with respect to x is denoted by

z
or f x ( x, y) and is the function obtained by differentiating z with respect to x treating
x
z
y as a constant. The partial derivative of z with respect to y is denoted by or f y ( x, y) and is the
y
function obtained by differentiating z with respect to y treating x as a constant.

Example

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2y
1. Find the partial derivatives f x and f y if f ( x, y) = x 2 + 2 xy 2 + .
3x

Solution

2 yx −1
To simplify the computation, begin by rewriting the function as f ( x, y ) = x + 2 xy +
2 2

To compute f x , think of f as a function of x and differentiate the sum term by term, treating y

2y
as a constant to get f x ( x, y ) = 2 x + 2 y 2 − . To compute f y , think of f as a function of y and
3x 2
2
differentiate term by term, treating x as a constant to get f y ( x, y) = 4 xy −
3x
−2 xy
2. Find the partial derivatives f x and f y if f ( x, y ) = xe

Solution
−2 xy
From the product rule, f x ( x, y) = e + x(−2 ye−2 xy ) = e−2 xy (1 + −2 zy) and from the constant

multiple rule, f y ( x, y ) = x( −2 xe −2 xy ) = −2 x 2 e −2 xy .

4.1.1. Higher Order Partial Derivatives

Partial derivatives can themselves be differentiated. The resulting functions are called second-
order partial derivatives. Here is a summary of the definition and notation for the four possible
second-order partial derivatives of a function of two variables.

Second-Order Partial Derivatives: If z = f ( x, y) , the partial derivative of f x with respect to

 2 z   z 
x is f xx = ( f x ) or 2 =  
x x  x 
2 z   z 
The partial derivative of f x with respect to y is f xy = ( f x ) y or =  
xy y  x 

2 z   z 
The partial derivative of f y with respect to x is f yx = ( f y ) x or =  
yx x  y 

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 2 z   z 
The partial derivative of f y with respect to y is f yx = ( f y ) y or =  
y 2 x  y 

Examples

Compute the four second-order partial derivatives of the function

f ( x, y) = xy3 + 5xy 2 + 2 x + 1

Solution

Since f x = y + 5 y + 2 it follows that f xx = 0 and f xy = 3 y 2 + 10 y

3 2

Since f y = 3 xy + 10 xy it follows that f yy = 6 xy + 10 x and f yx = 3 y + 10 y

2 2

Note that f xy = f yx . This means you will get the same answer if you first differentiate f(x, y) with

respect to x and then differentiate the resulting function with respect to y as you would if you
performed the differentiation in the reverse order.

4.2. Differentials and Total Derivatives

Differentials and Derivatives

Given a function y = f ( x) , a specific x will call forth a corresponding y , and we can use the
y
difference quotient to represent the rate of change of y with respect to x . Since it is true that
x

 y  y
y =   x . The magnitude of y can be found, once the rate of change and the
 x  x
variation in x are known.

y
When x is infinitesimal, y will also be infinitesimal, and the difference quotient will turn
x
dy  y   dy 
into the derivative . Thus, y =   x =   dx = dy . Symbols of dy and dx are called
dx  x   dx 
differential of y and x , respectively.

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Example

Given y = 3x2 + 7 x − 5 , find dy .

dy
The derivative of the function is = 6 x + 7 ; thus the desired differential dy = (6 x + 7)dx .
dx

4.2.1. Total Differentials

The concept of differentials can easily be extended to a function of two or more independent
variables. Consider a saving function S = f (Y , i) where S is savings, Y is national income and

i is interest rate. The partial derivative SY (Y , i) measures the rate of change of S with respect to
an infinitesimal change in Y (or it signifies the marginal propensity to save). As a result, the

 S 
change in S due to change in Y may be represented by   dY . By the same token, the change
 Y 
 S 
in S due to infinitesimal change in i can be denoted as   di . The change in S will be then
 i 
 S   S 
equal to dS =   dY +   di . The expression dS , being the same of the changes from both
 Y   i 
sources, is called the total differential of the saving function. The more general case of a function
of n independent variables can be exemplified by, say, a utility function in the general form
U = f ( x1 , x2 , x3 ,..., xn )
The total differential of this function can be written as
U U U U
dU = dx1 + dx2 + dx3 + ... + dxn
x1 x2 x3 xn
Example
Find the total differential, given:
2x1 x2
a. z = 3x2 + xy − 2 y3 b. y =
x1 + x2
Solution
z z
a. dz = dx + dy  dz = ( 6 x + y ) dx + ( x − 6 y 2 ) dy
x y

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z z
b. dy = dx1 + dx2 . Applying the quotient rule gives us,
x1 x2

 2 x ( x + x ) − 2 x x (1)   2 x ( x + x ) − 2 x x (1) 
dy =  2 1 2 1 2
 dx +  1 1 2 1 2
 dx2
 ( x + x )
2
 1
 ( x + x )
2

 1 2   1 2 
Rules of Differentials
Let k be a constant and u and v be two functions of the variables x1 and x2 . Then the following

rules are valid:

Rule I: dk = 0 (constant function rule)
Rule II: d (cu n ) = cnu n−1 (power function rule)

Rule III: d (u  v) = du  dv (sum-difference rule)

Rule IV: d ( uv ) = vdu + udv (product rule)

u 1
Rule V: d   = ( vdu − udv ) (quotient rule)
v v2
Example 1 Find the total differential dy of the function

y = 5x12 + 3x2
The straightforward method calls for the evaluation of the partial derivatives f1 = 10 x1 and

f 2 = 3 , which will then enable us to write dy = f1dx1 + f 2 dx2 = 10dx1 + 3dx2 .

Example 2 Find the total differential of the function

y = 3x12 + x1 x22

Since f1 = 6 x1 + x2 and f 2 = 2 x1 x2 , the desired differential is

2

dy = (6 x1 + x22 )dx1 + (2 x1 x2 )dx2

Exercise: Find the total differential of the following functions
x1 + x2 x1
a. y= c. y =
2 x12 x1 + x2
2x1 x2
b. z = 3x2 + xy − 4 y3 d. y =
x1 + x2

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4.2.2. Total Derivatives

How to find the rate of change of f ( x, w) with respect to w , when x and w are related? The
answer for this question lies on the concept of total derivatives. Unlike a partial derivative, a total
derivative does not require the argument x to remain constant as w varies, and can thus allow
for the postulated relationship between the two variables.

Finding the Total Derivatives

To carry discussion in a more general framework, let us consider any function

y = f ( x, w) where x = g (w) with three variables y, x, and w related to one

another as in Figure above. In this figure, it is clearly seen that w can affect y through two
channels: (1) indirectly, via the function g and then f (the straight arrows), and (2) directly, via
the function f (the curved arrow). Whereas the partial derivative f w is adequate for expressing
the direct effect alone, a total derivative is needed to express both effects jointly.

To obtain this total derivative, we first differentiate y totally, to get the total differential
dy = f x dx + f w dw . When both sides of this equation is divided by the differential dw , the result
is

dy dx dw y dx y  dw 
= fx + fw = +  dw = 1
dw dw dw x dw w
measures the indirect measures the direct
effect of w on y effect of w on y

dy
The process of finding the total derivative is referred to as total differentiation of y with
dw
respect to w.

Examples

dy
Find the total derivative , given the function
dw

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Calculus for Economists Compiled by: Habtamu Adane AAU: Department of Economics

a. y = f ( x, w) = 3x − w2 where x = g (w) = 2w2 + w + 4

 x1 = g ( w)
b. y = f ( x, w) = 3x − w where 
2

 x2 = h( w)

Solution

dy dx dw dy
= fx + fw  = 3(4w + 1) + (−2w) = 10w + 3
dw dw dw dw

The situation of total derivative is only slightly more complicated when we have

 x = g ( w)
y = f ( x, w) = 3x − w2 where  1 . This time, variable w can affect y through
 2
x = h ( w)
three channels: (1) indirectly, via the function g and then f, (2) again indirectly, via the
function h and then f, and (3) directly via f.

dy
Then the total derivative , is given by:
dw

dy dx dx dw
= f1 1 + f 2 2 + f w
dw dw dw dw

Example

Let the production function be Q = Q( K , L, t ) where, aside from the two inputs K and L, there is
the third variable t, denoting time. The presence of the t argument indicates that the production
function can shift over time in reflection of technological changes. Since capital and labor, too,
can change over time, we may write K = K (t ) and L(t )

Then the rate of change of output with respect to time can be expressed, in line with the total
dQ Q dK Q dL Q
derivative formula as = + +
dt K dt L dt t

dz
For example, find , given: z = x2 − 8xy − y3 , where x = 3t and y = 1 − t
dt

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Solution

dz dx dy dz Q
= fx + fy + ft  = (2 x − 8 y)(3) + (−8 x − 3 y 2 )(−1) +
dt dt dt dt t

4.3. Partial Derivative of Implicit Functions

If the equation F ( y, x1 , x2 ,..., xm ) = 0 can be solved for y , we can explicitly write out the function

y = f ( x1 , x2 ,..., xm ) , and find its derivatives by the methods learned before. But what if
F ( y, x1 , x2 ,..., xm ) = 0 , cannot be solved for y explicitly? In this case, if under the terms of the
implicit-function theorem an implicit function is known to exist, we can still obtain the desired
derivatives without having to solve for y first. The concept of total differentials can also enable us
to find the derivatives of implicit functions.

The total differential of the function F ( y, x1 , x2 ,..., xm ) = 0 is given by

Fy dy + F1dx1 + F2 dx2 + ... + Fm dxm = 0

Suppose that only y and x1 are allowed to vary (only dy and dx1 are not set equal to zero). Then,

the above equation reduces to for Fy dy + F1dx1 = 0 . Upon dividing through by dx1 , and solving

dy dy y F
for , we get  =− x
dx1 dx1 other variables constatnt
x1 Fy

By similar means, we can derive all other partial derivatives of implicit function f. Generally, given
F ( y, x1 , x2 ,..., xm ) = 0 , if an implicit function y = f ( x1 , x2 ,..., xm ) exists, then the partial
derivatives of f are

y F
=− i (i = 1, 2,3,..., m)
xi Fy

dy
Example 1: Find for the function F ( x, y) = y − 3x4 .
dx

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dy F
= − x = 12 x3
dx Fy

dy
Example 2: Find for the function F ( x, y) = x 2 + y 2 − 9 .
dx

dy x
Fx = 2 x and Fy = 2 y  = − (y  0)
dx y

y
Example 3: Find for the function F ( x, y, w) = y3 x 2 + w2 + yxw − 3 = 0 .
x

y F 2 y 3 x + yw
=− x =− 2 2 .
x Fy 3 y x + xw

4.4. Optimization of Multivariable Functions

4.4.1. Unconstrained Optimization

Suppose a manufacturer produces two DVD player models, the deluxe and the standard, and that
the total cost of producing x units of the deluxe and y units of the standard is given by the function

C ( x, y) . How would you find the level of production x = a and y = b that results in minimal
cost? Or perhaps the output of a certain production process is given by Q( L, K ) , where K and L
measure capital and labor expenditure, respectively. What levels of expenditure K 0 and L0 result

in maximum output?

Definition

The function f (x , y ) has a local maximum at the point ( x0 , y0 ) if f ( x , y )  f ( x0 , y0 ) for all

points f (x , y ) sufficiently close to ( x0 , y0 ) except ( x0 , y0 ) itself. On the other hand a function

f (x, y ) has a local minimum at the point ( x0 , y0 ) if f ( x , y )  f ( x0 , y0 ) if for all points

(x, y ) sufficiently close ( x0 , y0 )

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If f (x, y ) has local maximum or local minimum at the point ( x0 , y0 ) , it is necessary that

f x ( x0 , y0 ) = f y ( x0 , y0 ) = 0 where f x and f y are partial derivatives.

A critical point of a smooth function f (x, y ) is a point ( x0 , y0 ) at which

f x ( x0 , y0 ) = f y ( x0 , y0 ) = 0 .

Example

Find the critical points of the function

f (x , y ) = x 3 + x 2 y + x − y

Solution

f ( x , y )
fx = = 3x 2 + 2 xy + 1 = 0.....................(1)
x

f ( x , y )
fy = = x 2 − 1 = 0 .................................... ( 2 )
y

From (2), you get x 2 = 1, x =  1 = 1 or − 1. Then substitute these values for x in (1) and find
the respective valves of y . That is,

when x = 1, 3 (1) + 2 (1) y + 1 = 0

2

3 + 2y + 1 = 0
2y = − 4
y = −2

when x = − 1, 3 ( −1) + 2 ( −1) y + 1 = 0

2

3− 2y + 1 = 0

−2y + 4 = 0

− 2y = − 4

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y=2

Therefore, (-1, 2) and (1, -2) are critical points.

Test for Optimization

Let ( x0 , y0 ) be a critical point of the function Z = f (x , y ) for which f x (x 0 , y0 ) = f y (x 0 , y0 ) = 0

, then

( ) ( ) ( ) f ( x, y ) has local
2
a. If f xx x0 y0  0, f yy x0 y0  0, and f xx . f yy − f xy  0 , then

maximum at ( x0 , y0 ) .

f xx ( x0 y0 )  0, f yy ( x0 y0 )  0, and f xx . f yy − ( f xy )  0 ,then f ( x, y ) has local

2
b. If

minimum at f ( x0 , y0 )
( )  0, then ( x0, y0 ) is not a local extremum point of f (x, y ) but it is
2
c. If f xx . f yy − f xy

a saddle point if f xx and f yy have different signs or an inflection point if f xx and f yy have

the same sign.

Generally, the test for relative maximum and minimum of y = f ( x, y ) can be summarized as

follows.

Relative Maximum Relative minimum

1. f x ( x0 , y0 ) = f y ( x0 , y0 ) = 0 1. f x ( x0 , y0 ) = f y ( x0 , y0 ) = 0

f xx ( x0 y0 )  0, f yy ( x0 y0 )  0, f xx ( x0 y0 )  0, f yy ( x0 y0 )  0,
2. 2.
and f xx . f yy − ( f xy )  0 and f xx . f yy − ( f xy )  0
2 2

Example 1

Find the local extremum of the function f (x, y ) = x 2 + 2 xy + 2 y 2 + 2 x − 2 y

Solution

f x = 2x + 2 y + 2 = 0

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f y = 2x + 4 y − 2 = 0

Then by solving these two equation simultaneously you get x = −3 and y = 2 .Thus, (− 3, 2) is a
critical point.

To check whether it is local maximum, minimum, saddle or inflections point, you need additional
information on the signs of second order partials.

f xx = 2
f yy = 4
f xy = f yx = 2

( f xx ) ( f yy )− ( f xy )2 = (2(4) ) − 22 = 8 − 4 = 6  0 . Moreover since both f xx and f yy are positive the

critical point (-3, 2) represents local minimum point and f (− 3 , 2) is a local minimum value of the
function.

Example 2

For the firm producing two goods x and y, the profit function is given as

 = 160 x − 2 xy − 2 y 2 + 120y − 18 − 3x 2

Then find the level of x and y that can maximize the profit.

Solution

First find the first order partials and equate them to zero to get the critical points.


= 160 − 2 y − 6 x = 0
x


= − 2 x − 4 y + 120 = 0
y

And rearrange the above equations as

6 x + 2 y = 160
2 x + 4 y = 120

Then by solving these equations simultaneously you get x = 20 and y = 20 .Thus,

x = 20 and y = 20 , ( x, y) = (20,20) will be the critical point.

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To check whether this critical point is a maximum or a minimum, apply the second derivative test
as follows.

 2  2
= − 6  0 and = − 4  0 , so it satisfies the condition for maximization.
x 2 y 2

Therefore, the profit will be maximum when the firm produces 20 units of x and 20 units of y .

Exercise

Find the critical points and test whether the function has relative maximum or minimum point for
the following function

a. Z = 2 y 3 − x 3 + 14x − 54 y + 12

b. Z = 3x 2 − xy + 2 y 2 − 4 x − 7 y + 12

c. Z = 60x + 34 y − 4 xy − 6 x 2 − 3 y 2 + 5

d. Z = x 2 + xy + 2 y 2 + 3

e. Z = − x 2 + xy − y 2 + 2 x + y
4.4.2. Constrained Optimization-the Method of Lagrange Composite Function

In many applied problems, a function of two variables is to be optimized subject to a restriction or

constraint on the variables. For example, an editor, constrained to stay within a fixed budget of
$60,000, may wish to decide how to divide this money between development and promotion in
order to maximize the future sales of a new book. If x denotes the amount of money allocated to
development, y the amount allocated to promotion, and f ( x, y) the corresponding number of

books that will be sold, the editor would like to maximize the sales function f ( x, y) subject to
the budgetary constraint that x + y = 60,000 .

For a geometric interpretation of the process of optimizing a function of two variables subject to a
constraint, think of the function itself as a surface in three dimensional space and of the constraint
(which is an equation involving x and y ) as a curve in the xy plane. When you find the maximum
or minimum of the function subject to the given constraint, you are restricting your attention to the
portion of the surface that lies directly above the constraint curve. The highest point on this portion

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of the surface is the constrained maximum, and the lowest point is the constrained minimum. The
situation is illustrated in Figure below.

A more versatile technique of solving constrained optimization is called the method of Lagrange
multipliers, in which the introduction of a third variable (the multiplier) enables you to solve
constrained optimization problems without first solving the constraint equation for one of the
variables. More specifically, the method of Lagrange multipliers uses the fact that any relative
extremum of the function f ( x, y) subject to the constraint g ( x, y) = k must occur at a critical

point (a, b) of the function where  is a new variable (the Lagrange multiplier) is. To find the
critical points of F, compute its partial derivatives

Fx = f x −  g x Fy = f y −  g y F = −( g − k )

and solve the equations Fx = 0, Fy = 0 and F = 0 simultaneously, as follows:

Fx = f x −  g x = 0 or f x =  g x
Fy = f y −  g y = 0 or f y =  g y
F = −( g − k ) = 0 or g = k

Finally, evaluate f (a, b) at each critical point (a, b) of F .

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NOTE: The method of Lagrange multipliers tells you only that any constrained extrema must occur
at critical points of the function F ( x, y) . The method cannot be used to show that constrained

extrema exist or to determine whether any particular critical point (a, b) corresponds to a
constrained maximum, a minimum, or neither. However, for the functions considered in this text,
you can assume that if f has a constrained maximum (minimum) value, it will be given by the
largest (smallest) of the critical values (a, b) .

Example 1

The highway department is planning to build a picnic area for motorists along a major highway. It
is to be rectangular with an area of 5,000 square yards and is to be fenced off on the three sides
not adjacent to the highway. What is the least amount of fencing that will be needed to complete
the job?

Solution

Label the sides of the picnic area as indicated in Figure below and

let f denote the amount of fencing required. Then,

f ( x, y) = x + 2 y

The goal is to minimize f given the requirement that the area must be 5,000 square yards; that is,
subject to the constraint g ( x, y) = xy = 5000 . Find the partial derivatives

f x = 1 f y = 2 g x = y and g y = x

and obtain the three Lagrange equations

1= y 2 = x and xy = 5000

1 2
From the first and second equations you get  = and  = which implies that
y x

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1 2
= or x = 2 y
y x

Now substitute x = 2 y into the third Lagrange equation to get

2 y 2 = 5000  y = 50 and x = 100 . Thus, x = 100 and y = 50 are the values

that minimize the function f ( x, y) = x + 2 y subject to the constraint xy = 5000 . The optimal
picnic area is 100 yards wide (along the highway), extends 50 yards back from the road, and
requires 100 + 50 + 50 = 200 yards of fencing.

Example 2

Find the critical points and values of f ( x, y) = x2 + y 2 subject to g ( x, y) = 2 x + 3 y − 4 .

Solution

F ( x, y,  ) = x2 + y 2 +  (2 x + 2 y − 4) = x2 + y 2 + 2 x + 2 y − 4

F
= 2 x + 2 = 0   = − x (1)
x
F 2
= 2 y + 3 = 0   = − y (2)
y 3
F
= 2x + 3y − 4 = 0 (3)


2
From (1) and (2), we have x = y and substituting it into (4) results in
3

2 4
2( y ) + 3 y = 4  y + 3 y = 4
3 3
12 8
y= and x =
13 13
2 2
 8 12   8   12  16
The optimum value is f  ,  =   +   =
 13 13   13   13  13

4.5. Economic Application of Partial Derivatives

Some of the Economic applications of partial derivatives are mentioned below.

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1. Allocation of Resources

An important class of problems in business and economics involves determining an optimal

allocation of resources subject to a constraint on those resources. Here is an example in which
production is maximized subject to a cost constraint.

Example*

A manufacturer has $600,000 to spend on the production of a certain product and determines that
if x units of labor and y units of capital are allocated to production, then P units will be produced,
where P is given by the Cobb-Douglas production function

P( x, y) = 120 x4/5 y1/5

Suppose each unit of labor costs $3,000 and each unit of capital costs $5,000. How many units of
labor and capital should be allocated in order to maximize production?

Solution

The cost of capital is 3000x and the cost of labor is 5000 y , so the total cost of resources is

g ( x, y) = 3000 x + 5000 y = 600000 . The goal is to maximize the production function

P( x, y) = 120 x4/5 y1/5 subject to the cost constraint g ( x, y) = 3000 x + 5000 y = 600000 . The
Lagrange composite function is

F ( x, y,  ) = 120 x 4/5 y1/5 +  ( 3000 x + 5000 y − 600000 )

The corresponding Lagrange equations are

F
= 96 x −1/5 y1/5 = 3000 (1)
x
F
= 24 x 4/5 y −4/5 = 5000 (2)
x
F
= 3000 x + 5000 y = 600000 (3)


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Solving for  in the first two equations, we get

 = 0.032x−1/5 y1/5 = 0.0048x4/5 y −4/5 (4)

Multiplying both sides of (4) by x1/5 y 4/5 to obtain

0.032 x−1/5 y1/5  x1/5 y 4/5 = 0.0048x4/5 y −4/5  x1/5 y 4/5

0.032 y = 0.0048 x  y = 0.15 x (5)

Substituting (5) into the cost constraint equation (3), we get

3000 x + 5000(0.15 x) = 600000

Thus, x = 160 and y = 24 . That is, to maximize production, the manufacturer should allocate
160 units to capital and 24 units to labor. If this is done,

P( x, y) = 120(160)4/5 (24)1/5  13,138 units

Figure Showing Optimal Production Curve and Cost Constraint

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2. Substitute and Complementary Commodities, and Cross Price Elasticity

Two commodities are said to be substitute commodities if an increase in the demand for either
results in a decrease in demand for the other. Substitute commodities are competitive, like butter
and margarine.

On the other hand, two commodities are said to be complementary commodities if a decrease in
the demand of either results in a decrease in the demand of the other. An example is provided by
digital cameras and recording disks. If consumers buy fewer digital cameras, they will likely buy
fewer recording disks, too.

We can use partial derivatives to obtain criteria for determining whether two commodities are
substitute or complementary. Suppose D1 ( P1 , P2 ) units of the first commodity and D2 ( P1 , P2 ) of
the second are demanded when the unit prices of the commodities are P1 and P2 , respectively. It
is reasonable to expect demand to decrease with increasing price, so

D1 D2
0 and 0
P1 P2

For substitute commodities, the demand for each commodity increases with respect to the price of
the other, so

D1 D1
0 and 0
P2 P2

However, for complementary commodities, the demand for each decreases with respect to the price
of the other, and

D1 D1
0 and 0
P2 P2

Note: Cross-price elasticity of demand is given by

% in Quantity demanded of x Qx p y

 x, y = =
% in price of y p y Qx

Cross price elasticity of demand (  x, y ) measures the responsiveness of quantity demanded

of good X, when there is a change in the price of some other good Y. When price cross-elasticity

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is positive, the goods are deemed substitutes, when the price cross elasticity is negative, the goods
are complements, and when the price-cross elasticity is zero, the goods are unrelated.

Example

Suppose the demand function for flour in a certain community is given by

10
D1 ( P1 , P2 ) = 500 + − 5P2
P1 + 2

while the corresponding demand for bread is given by

7
D2 ( P1 , P2 ) = 400 − 2 P1 +
P2 + 3

where P1 is the dollar price of a pound of flour and P2 is the price of a loaf of bread.

a. Determine whether flour and bread are substitute or complementary commodities or

neither.
b. How demand for bread responds for the change in price of flour at p1 = 10 and p2 = 10 ?

Solution

a. We find that

D1 D2
= −5  0 and = −2  0 . Since both partial derivatives are negative for all P1 and P2
P2 P1
, it follows that flour and bread are complementary commodities.

D2 P −2 P1 −2(10) −20

b.  D2 , D1 = = = = = −0.05  0
P1 D2 7 7 380.54
400 − 2 P1 + 400 − 2(10) +
P2 + 3 (10) + 3
which implies that the two goods are complementary.
3. Marginal Analysis

In economics, the term marginal analysis refers to the practice of using a derivative to estimate
the change in the value of a function resulting from a 1-unit increase in one of its variables. In
Chapter 3, you saw some examples of marginal analysis involving ordinary derivatives of

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functions of one variable. Here is an example of how partial derivatives can be used in a similar
fashion.

Example 1

It is estimated that the weekly output of a certain plant is given by the function
Q( x, y) = 1200x + 500 y + x2 y − x3 − y 2 units, where x is the number of skilled workers and y
the number of unskilled workers employed at the plant. Currently the workforce consists of 30
skilled workers and 60 unskilled workers. Use marginal analysis to estimate the change in the
weekly output that will result from the addition of 1 more skilled worker if the number of unskilled
workers is not changed. What is the marginal product of unskilled labor keeping skilled labor
constant?

Solution

The partial derivative Qx ( x, y) = 1200 + 2 xy − 3x is the rate of change of output with respect to
2

the number of skilled workers. For any values of x and y , this is an approximation of the number
of additional units that will be produced each week if the number of skilled workers is increased
from x to x + 1while the number of unskilled workers is kept fixed at y . In particular, if the
workforce is increased from 30 skilled and 60 unskilled workers to 31 skilled and 60 unskilled
workers, the resulting change in output is approximately

Qx ( x, y) = 1200 + 2(30)(60) − 3(30) 2 = 2100 units

The partial derivative Qy ( x, y ) = 500 + x − 2 x is the rate of change of output with respect to the
2

number of unskilled workers. For any values of x and y , this is an approximation of the number
of additional units that will be produced each week if the number of unskilled workers is increased
from y to y + 1 while the number of skilled workers is kept fixed at x . In particular, if the
workforce is increased from 30 skilled and 60 unskilled workers to 30 skilled and 61 unskilled
workers, the resulting change in output is approximately

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Qy ( x, y ) = 500 + (30) 2 − 2(60) = 1280 units

Example 2

A manufacturer estimates that the monthly output at a certain factory is given by the Cobb-Douglas
function Q( L, K ) = 50L0.6 K 0.4 where K is the capital expenditure in units of $1,000 and L is the
size of the labor force, measured in worker-hours.

a. Find the marginal productivity of capital QK and the marginal productivity of labor QL

when the capital expenditure is $750,000, and the level of labor is 991 worker-hours.
b. Should the manufacturer consider adding capital or increasing the labor level in order to
increase output?

Solution

−0.4
a. QL ( L, K ) = 50(0.6) L K 0.4 = 30L−0.4 K 0.4 and QK ( L, K ) = 50(0.4) L0.6 K −0.6 = 20L0.6 K −0.6
[

So with K = 750 and L = 991

QK (991,750) = 20(991)0.6 (750)−0.6  23.64 and

QL ( L, K ) = 30(991)−0.4 (750)0.4  26.84

b. From part (a), you see that an increase in 1 unit of capital (that is, $1,000) results in an
increase in output of 23.64 units, which is less than the 26.84 unit increase in output that
results from a unit increase in the labor level. Therefore, the manufacturer should increase
the labor level by 1 worker-hour (from 991 worker-hours to 992) to increase output as
quickly as possible from the current level.
4. Analysis of Marginal Rate of Technical Substitution

 K 
The slope of an isoquant  −  indicates how the quantity of one input can be traded off
 L 
against the quantity of the other, while output is held constant. The absolute value of the slope
of an isoquant is called marginal rate of technical substitution (MRTS). The MRTS shows the
amount by which the quantity of one input can be reduced when one extra unit of another input

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is used, so that output remains constant. MRTS of labor for capital, denoted as MRTSL, K

shows the amount by which the input of capital can be reduced when one extra unit of labor is
used, so that output remains constant.

MRTSL,K (the slope of isoquant) can also be given by the ratio of marginal products of factors.
That is,

K MPL Q / L
MRTS L , K = − = =
L MPK Q / K

This can be shown algebraically as follows:

Let the production function is given as:

Where Q- is output
Q = f ( L, K )
L- is unit of labor employed
K-is the amount of capital employed.

Given this production function, the equation of a specific isoquant can be obtained by equating

the production function with a given level of output, say Q .

Q = f ( L, K )

Total differential of Q measures the total change in Q that happens as a result of a

simultaneous change in L and K. i.e.

Q Q
.dL + .dK = dQ
L k

But since Q is constant, dQ is zero (d Q =0)

Q Q Q Q
So, .dL + dK = 0 (But, = MPL and = MPK )
L k L k

Thus, the above equation can be written as:

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MPL − dK
=
MPk dL

Therefore, the slope of an isoquant can be given as the ratio of marginal products of inputs.

Elasticity of substitution

MRTS as a measure of the degree of substitutability of factors has a serious defect. It depends on
the units of measurement of factors. A better measure of the ease of factor substitution is provided
by the elasticity of substitution, δ. The elasticity of substitution is defined as

K
d 
L
K K K K L
%   %   d 
= L = L = L =  LK
%MRTS  MPL   MPL   MPL  MPK
%   d  d 
 MPK   MPK   MPK  MPL
 MPL 
 
 MPK 

5. Utility Analysis

The main objective of rational consumer is maximization of his utility given his limited income
and market prices of goods and services. Mathematically, the aim of the consumer can be written
as

max U = f ( x, y, z )
S .t
I = Px . x + p y y + pz . z where U is total utilily and I is consumer limted income
Px , Py ,and Pz are per unit price of good x, y,and z respectivelly
The main interest here is to find the consumer equilibrium (i.e., the consumption level that gives
maximum utility to the consumer). This is in fact means that maximizing the above constrained
utility function through the Lagrange Multiplier method. To do this the first step is to find the
critical points for the corresponding Lagrange Multiplier function through first order derivative
test as follows.

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 −

Let F ( x, y, z,  ) = U ( x, y, z ) −   px , x + p y . y + pz . Z − I  be the Lagrange Multiplier
 
function, then find the first order partial derivatives and equating them to zero to get the critical
points.

F U
= −  . px = 0
x x

F U
= − . p y = 0
y y

F U
= −  . pz = 0
z z

F  −

= −  px . x + p y . y + pz . z − I  = 0
  

U U U
But = U x , = U y ,and =  U z . So the above equations can be re- arranged
x y z
as

MU x = . Px

MU y =  . Py
MU z =  . Pz

And from these equations you can derive the first condition for maximization as

MU x MU y MU z
= = =
Px Py Pz

The second order condition for maximization from the second order derivative test will be

2 F 2 F 2 F
 0, 2  0 and 0
x 2 y z 2

2 F 2 U 2 U
Moreover, =  0 and is slope of MU x
x 2 x 2 x 2

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2 F 2 U 2 U
=  0 and is slope of MU y
y 2 y 2 y 2
2 F 2 U 2 U
=  0 and is slope of MU z
z 2 z 2 z 2

Therefore, at equilibrium the marginal utilities of each commodity must be positive and decline.

Example**

Find the levels of x and y that can maximize the utility given by

Max U = x 0.6 y 0.25

S. t
8x + 5 y = 680

Solution

F ( x, y ,  ) = x 0.6 y 0.25 −  ( 8 x + 5 y − 680 )

F
= 0.6 x −0.4 y 0.25 − 8 = 0
x
F
= 0.25 x0.6 y −.075 − 5  = 0
y
F
= − (8 x + 5 y − 680 ) = 0

0.6 x −0.4 y 0.25 = 8 .........................................(1)
0.25 x 0.6 y −0.75 = 5..........................................( 2 )
Then divide equation (1) by (2), to get
0.6 x −0.4 y 0.25 8
0.6 −0.75
=
0.25 x y 5
60 y 8
=
25 x 5

y 8 25 40 x 60
=  = and = = 1.5  x = 1.5 y.
x 5 60 60 y 40
Substitute x = 1.5 y on budget line equation as

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8 (1.5 y ) + 5 y = 680 and x = 1.5 y + 1.5 ( 40 )

12 y + 5 y = 680 x = 60 units
17 y = 680
y = 40 units

2 F
= − 0.4 ( 0.6 ) x −0.4 −1 y 0.25
Moreover, x 2
= − 0.24 x −1.4 y 0.25  0 at x = 60 and y = 40

2 F
= − 0.75 ( 0.25) x 0.6 y −0.75−1
y 2

= − 0.1875 x 0.6 y −1.75  0 at x = 60 and y = 40

Therefore, x = 60 units and y = 40 units are utility maximization combinations.

6. Profit Analysis

Profit maximization of the firm is achieved in two ways:

A) Maximization of output subject to a cost constraint.

B). Minimization of cost for a given level of output.

A) Maximization of output subject to a cost constraint

In this situation cost is given or remaining constant. Mathematically, it can be represented as

Max Q = f (L, K )
S .t
C = w L + rK

Here also, you can use the method of Lagrange Multiplier to find the level of input combination
that can maximize the profit of the firm.

Let F ( L, K ,  ) = f ( L, k ) −  ( w L + r k − C ) be the Lagrange Multiplier function, then

find the first order partial derivatives and equating them to zero to get the critical points.

F f
= − w = 0
L L

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F f
= − r = 0
K K
F
= − ( w L + rk − C ) = 0


f f
But the expressions and are the marginal products of labor and capital respectively and
L K
thus the first two of the above equations can be re-arranged as

MPL = w and MPK =  r

If you solve these equations for  , you will get the expression the first condition for maximization
MPL MPK
as = =
w r

The second condition for maximization will be

2F 2 f 2 f
=  0, and = slope of MPL
L2 L2 L2
2F 2 f 2 f
=  0, and = slope of MPK
K 2 K 2 K 2

Therefore, at equilibrium,

i) The ratio of marginal product to the price of the input must be equal for all inputs.
MPL MPK MPL MPK
That is, = or =
w r PL PK
ii) ii) Each marginal product must be positive but declining

B) Minimization of cost for a given level of output

In this case output is given or remaining constant and the problem can written mathematically as

Min C = w.L + r. k

S. t
−
Q = f (L, k )

Let F ( L, K ,  ) = wL + rK −  f ( ( L, K ) − Q ) be the Lagrange function.

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First apply the first order test on the Lagrange function, F, to get the first order condition for
maximization.

F f
= W − . =0
L L
F f
= r − . =0
K K
F
= − ( f ( L, K ) − Q ) = 0


Using the marginal product notations, the first two of the above equations can written as

w = .MPL and r = .MPk

If you solve these equations for  , you will get the expression

w r 1 MPL MPk
= = Or = = as the first condition for maximization.
MPL MPK  W r

2 F 2 f
The second order condition for V to maximized will be = −  . 2  0 which imply that
L2 L
2 f
 0 or the slope of MPL must be negative
L2

 2V 2 f  f 2
= −  .  0 which imply that  0 or the slope of MPK must be negative
K 2
K 2
K 2

Therefore, at equilibrium,

i) The ratio of marginal product to the price of the input must be equal for all inputs. That
MPL MPK MPL MPK
is, = or =
w r PL PK
ii) Each marginal product must be positive but declining

Example

A firm can produce its product at two of its plants. The cost of manufacturing x units at the first
plant and y units at the second plant is given by the joint cost function

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C (x , y ) = x 2 + 2 y 2 + 5 xy + 700 .

If the firm has a supply order of 500 units, how many units should be produced at each plant to
minimize the total cost?

Solution

Min C = x 2 + 2 y 2 + 5xy + 700

Subject to x + y = 500

Let F ( x, y,  ) = x 2 + 2 y 2 + 5 xy + 700 −  ( x + y − 500) be the Lagrange function, then the

first order conditions will be

F
= 2x + 5 y −  = 0
x

F
= 5x + 4 y −  = 0
y

F
= − ( x + y − 500 ) = 0


Then rearrange the first two equations as

2x + 5 y = 
5x + 4 y = 

Again solve these equations simultaneously to get y = 3 x and substitute it in the supply order
constraint function as follows to get the critical point.

x + 3 x = 500

4 x = 500

x = 125 and y = 3(125) = 375

2 F 2 F
Moreover, = 2  0 and =40
x 2 y 2

Therefore, x = 125 units and y = 375 units are cost minimizing levels of output.

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The Significance of the Lagrange Multiplier 

Usually, solving a constrained optimization problem by the method of Lagrange multipliers does
not require actually finding a numerical value for the Lagrange multiplier  . In some problems,
however, you may want to compute  , which has this useful interpretation.

The Lagrange Multiplier as a Rate: Suppose M is the maximum (or minimum) value of f ( x, y)

, subject to the constraint g ( x, y) = k . The Lagrange multiplier  is the rate of change of M with

dM
respect to k. That is,  = .
dk

Hence,   change in M resulting from a 1-unit increase in k .

Example

Reconsider Example* in Section 4.5. Suppose the manufacturer is given an extra $1,000 to spend
on capital and labor for the production of the commodity in Example*; that is, a total of $601,000.
Estimate the effect on the maximum production level.

Solution

In Example*, we found the maximum value M of the production function P( x, y) = 120 x 4/5 y1/5
subject to the cost constraint 3000x + 5000x = 60000 by solving the three Lagrange equations

96 x−1/5 y1/5 = 3000 24x 4/5 y −4/5 =5000 and 3x + 5 y = 600 to obtain

x = 160 and y = 24 and the maximum production level

P(160,24) = 120(160)4/5 (24)1/5 = 13138 units

The multiplier  can be found by substituting these values of x and y into either the first or second
Lagrange equation. Using the first equation, we find that

 = 0.032 x−1/5 y1/5 = 0.032(160)−1/5 (24)1/5  0.0219

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This means that the maximum production with the new cost constraint increases by approximately
0.0219 units for each $1 increase in the constraint. Since the constraint increases by $1,000, the
maximum production increases by approximately

(0.0219)(1000) = 21.9 units

That is, to 13138 + 21.9 = 13159.9 units

NOTE: A problem like Example*, where production is maximized subject to a cost constraint, is
called a fixed budget problem. In the context of such a problem, the Lagrange multiplier  is
called the marginal productivity of money. Similarly, the multiplier in a utility problem like that
in Example** is called the marginal utility of money.

Exercise

1. . Find the values of the function that can optimize the following functions
a. Z = 4 x 2 − 2 xy + 6 y 2 subject to x + y = 72

b. Z= 4 x 2 − 3x + 5 xy − 8 y + 2 y 2 subject to x = 2 y

c. Z= − 5 x 2 + 7 x + 10xy + 9 y − 2 y 2 subject to y = 2 x
2. When x thousand dollars are spent on labor and y thousand on equipment, the output of

a certain factory is Q units, where Q( x, y) = 60 x1/3 y 2/3 . Suppose $120,000 is available for
labor and equipment.
a. How should the money be allocated between labor and equipment to generate the
largest possible output?
b. Use the Lagrange multiplier  to estimate the change in the maximum output of the
factory that will result if the money available for labor and equipment is increased to
$121,000.
7. Partial Elasticities

Like any other function, the saving function, the utility function, the production function, and the
consumption function can all be expected to give rise to elasticity measures similar to that defined
in Chapter 3 (elasticity of demand). For instance, given the saving function S = f (Y , i) , the partial
S Y S i
elasticities of saving may be written as  S ,Y = and  S ,i = .
Y S i S

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For the utility function, the n partial elasticities can be concisely denoted as follows:
S xi
U ,i =
xi S

CHAPTER FIVE
5. INTEGRATION
5.1. The Concept of Integration

Up to this time, we have been concerned with finding the derivative of a function. However, there
are some problems in economics that require us to come up with the original function given its
rate of change. These problems are common in the area of social welfare, distribution of income
of a country etc. The technique of finding out the original function based on its derivative is known
as integration or antiderivative.
Antidifferentiation: A function F ( x) is said to be an antiderivative of f ( x) if F '( x) = f ( x)

for every x in the domain of f ( x) . The process of finding antiderivatives is called

antidifferentiation or indefinite integration.

Example

1 3
Verify that F ( x) = x + 5 x + 2 is an antiderivative of f ( x) = x2 + 5 .
3

Solution

F ( x) is an antiderivative of f ( x) if and only if F '( x) = f ( x) . Differentiate F ( x) and you will find

1 2
that F '( x) = (3x ) + 5 = x + 5 = f ( x) as required.
2

5.2. Properties of Integration

The General Antiderivative of a Function

A function has more than one antiderivatives. For example, one antiderivative of the function

f ( x) = 3x 2 is F ( x) = x3 , since F '( x) = 3x2 = f ( x) but so are x3 + 10, x3 − 6 and x3 +  , since

d 3 d 3 d 3
( x + 10) = 3x 2 ( x − 6) = 3x 2 and ( x +  ) = 3x2
dx dx dx
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In general, if F is one antiderivative of f , then so is any function of the form

G '( x) = [ F ( x) + C ]' = F '( x) + C ' sum rule for derivatives
= F '( x) + 0 derivative of a constant is 0
= f ( x) since F is an antiderivative of f

Conversely, it can be shown that if F and G are both antiderivatives of f , then

G( x) = F ( x) + C , for some constant C. To summarize:

Fundamental Property of Antiderivatives: If F ( x ) is an antiderivative of the continuous

function f ( x ) then any other antiderivative of f ( x ) has the form G ( x ) = F ( x ) + C
for some constant C.

The Indefinite Integral: You have just seen that if F ( x ) is one antiderivative of the continuous
function f ( x ) , then all such antiderivatives may be characterized by F ( x ) + C for constant C . The
family of all antiderivatives of f ( x ) is written

 f ( x)dx = F ( x) + C
and is called the indefinite integral of f ( x ) . The integral is “indefinite” because it involves a
constant C that can take on any value. In the context of the indefinite integral

 f ( x)dx = F ( x) + C , the integral symbol is  , the function f ( x ) is called the integrand, C is

the constant of integration, and dx is a differential that specifies x as the variable of integration.
These features are displayed in this diagram for the indefinite integral of f ( x) = 3x 2 :

For any differentiable function F, we have

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 F '( x)dx = F ( x) + C
dF
since by definition, F ( x ) is an antiderivative of F '( x ) . Equivalently,  dx dx = F ( x) + C .

It is useful to remember that if you have performed an indefinite integration calculation that leads
you to believe that  f ( x)dx = G( x) + C , then you can check your calculation by differentiating

G ( x) :

If G '( x) = f ( x) , then the integration  f ( x)dx = G( x) + C is correct, but if G '( x ) is anything

other than f ( x ) , you’ve made a mistake.

5.3. Techniques of Integration

The relationship between differentiation and antidifferentiation we have seen above enables us to
establish these integration rules by “reversing” analogous differentiation rules. In this section, we
will briefly discuss the rules of integration which shall refer to increasingly from time to time while
we are dealing with the techniques of integration.

a. The constant rule: Given constant K and C,  Kdx = Kx + C

Example: Evaluate the following integrations

1.  4dx = 4 x + C
2.  −6dx = −6 x + C
b. Constant Multiple Rule: for  K ( f ( x)dx = K  ( f ( x)dx
Example:

1.  10 xdx = 10  xdx
2.  5 x10 dx = 5 x10 dx
3.  −8 x 7 dx = −8 x 7 dx

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c. Sum or Difference Rule: For  ( f ( x)  g ( x) ) dx = f ( x)dx  g ( x)dx

Example:

 ( 4 x + 3x − 5) dx =  4 x dx +  3xdx −  5dx
2 2
1.
2.  ( 2 x − 8 x − 2 x + 7 ) dx =  2 x dx −  8x dx −  2 xdx +  7dx
3 2 3 8

x n +1
 x dx = + C for n  −1
n
d. Simple Power Rule:
n +1

Example:

 x1+1  3 2
1.  3xdx = 3 xdx = 3  +C = x +C
1+1 2
1 x −3+1 x −2
2.  3 =  x −3 dx = +C = − +C
x dx −3 + 1 2
1
+1 3
x2 2 2
 xdx =  x dx = +C = x +C
1/2
3. 1
2
+1 3

4 x3 3x 2
4.  ( 4 x − 3 x + 4 )dx = 4  x dx − 3 xdx +  4dx =
2 2
− + 4x + C
3 2
−1
x +1
1 3 1
x 1 2
5.  dx =  dx +  dx =  x 2 dx +  x 2 dx = x 2 + 2 x 2 + C
x x x 3

Since all the functions that we have come up with after integration have unknown C term, all the
integrations that involve C are known as indefinite integral. Sometimes, when initial conditions
are given, the particular solution can be calculated.

1
Example: Given x 2
dx and f (1) = 2 , find f ( x )

Solution

1 −1
f ( x) =  2
dx = + C . But f (1) = −1 + C = 2  C = 3
x x

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−1
Thus, f ( x) = +3
x

e. Integration of Logarithmic & Exponential Functions

Like what we have done in relation to the derivative of non-algebraic functions, here we will
present the integration of the logarithmic functions first accompanied by the integration of
exponential functions. Concerning the integration of logarithmic functions, let’s begin with
example. The general power rule of integration applies only when n  −1; i.e.

But, the following formula applies when n  −1. That is,

du
u
−1
dx = ln u + C
dx

We use absolute value to protect it from being negative & the whole logarithm undefined. This
d ln x 1
formula is a direct result of the fact that = .
dx x

1
 x dx =  x
−1
Thus, dx = ln x + C

d ln u du 1
Similarly, when u is a function of x , =
dx dx u

1 du
Therefore,  u dx dx = ln u + C
Example: Evaluate the indefinite integral of the following.

−1
a.  ( 4 x + 1) 4dx
 ( x − 1) ( x − 6x + 1)
2 −1
b. dx
x 4 − 2 x3 + 4 x 2 − 7 x − 1
c.  x2 − 2x
dx

Solution

du −1
a. Let 4 x + 1 = u so that = 4  du = 4dx . Thus,  u du = ln u + C = ln 4 x + 1 + C
dx
b. Let u ( x) = x 2 − 6 x + 1

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du
= 2 x − 6 x = 2( x − 3)
dx
1
( x − 3) dx = du
2

 ( x − 3) ( x
− 6 x + 1) dx =  u −1du
2 1
Thus,
2
1 1
=  u −1 du = ln u + C
2 2
1
= x2 − 6x + 1 + C
2

x 4 − 2 x3 + 4 x 2 − 7 x − 1  x −1 
c.  dx =   ( x 2 + 4 ) + 2 dx
x − 2x
2
 x − 2x 
x 4 − 2 x3 + 4 x 2 − 7 x − 1  x −1 
 dx =   ( x 2 + 4 ) + 2 dx
x − 2x
2
 x − 2x 
x −1
=  ( x 2 + ) dx +  2 dx
x − 2x
 −1  1  
= x3 + 4 x +   ( x 2 − 2 x )   ( 2 ) ( x − 1) dx
1
3  2 
=
1 3
3
1
(
x + 4 x + ln x 2 − 2 x + C
2
)
1
= x3 + 4 x + ln x 2 − 2 x + C
3

The second type of non-algebraic function we saw was exponential functions.

a kx
The integral of an exponential function is  a dx = kx
+C
k ln a

Example

64 x
 6 dx = +C
4x
a.
4 ln 6
22 x
 2 dx = +C
2x
b.
2 ln 2

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de x dekx
In relation to exponential function, we have seen that = e x and = ke x .
dx dx

1 x
Thus,  e x dx = e x + C and e
kx
dx = e +C .
k
deu
Moreover, we have seen that when u is a function of x , that is, u = f ( x) , = u '( x)eu , thus
dx
 e u '( x)dx = e +C .
u u

Example: Evaluate the indefinite integral of the following

 2e dx = 2 e dx = 2e +C
x x x
a.

1
e dx = e5 x + C
5x
b.
5
5.3.1. Integration by Substitution

The majority of functions that occur in practical situations can be differentiated by applying rules
and formulas such as those you learned in Chapter 3. Integration, however, is at least as much an
art as a science, and many integrals that appear deceptively simple may actually require a special
technique or clever insight. For example, we easily find that
x8
 x dx = + C by applying the power rule, but suppose we wish to compute
7

 ( x + 6)
12
dx

We could proceed by expanding the integrand ( x2 + 6) and then integrating term by term, but
12

the algebra involved in this approach is daunting. Instead, we make the change of variable

1
u = x + 1 so that du = 2dx or dx = du
2

Then, by substituting these quantities into the given integral, we get

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1  1 1 u13
+ C = ( x2 + 6) + C
1
 ( x + 6)
12
dx =  u12  du  =  u12 du =
13

2  2 2 13 26

The change of variable procedure we have just demonstrated is called integration by substitution,
and it amounts to reversing the chain rule for differentiation. To see why, consider an integral that
can be written as

 f ( x)dx =  g (u( x))u '( x)dx

Suppose G is an antiderivative of g , so that G ' = g . Then, according to the chain rule

d
[G (u ( x))] = G '(u ( x))u '( x ) = g (u ( x ))u '( x )
dx

Example: Evaluate the following indefinite integral

3
 2 x( x + 1) dx
2
a.

du
Let x 2 + 1 = u and = 2 x  du = 2 xdx
dx
Then we get

 2 x( x + 1) dx =  ( x + 1) ( 2 xdx )
3 3
2 2

=  u du
3

1
= u4 + C
4
= ( x 2 + 1) + C
1 4

4
x
b. Find  x − 1 dx
Solution
Following our guidelines, we substitute for the denominator of the integrand, so that
u = x -1 and du = dx . Since u = x -1, we also have x = u + 1. Thus,

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x u +1
 x − 1 dx =  u
du

 1
=  1 + du
 u
= u + ln u + C
= x − 1 + ln x − 1 + C

x e
3 x4 + 2
c. Find dx

Solution
If the integrand of an integral contains an exponential function, it is often useful to substitute for
the exponent. In this case, we choose u = x 4 + 2 so that du = 4 x 3 dx and

x e dx =  e x
3 x4 + 2 4
+2
( x 3 dx )
1 
=  eu  du  since du = 4 x 3 dx
4 
1 u
= e +C
4
1 4
= e x +2 + C
4

d. Find  4 x + 8dx

Solution
1
We choose u = 4x + 8 and obtain du = 4dx so that dx = dx
4
Then the integral becomes
1 
 4 x + 8dx =  u  du 
4 
3
1 1 1u 2
=  u 2 du = +C
4 4 3
2
1
= ( 4 x + 8) 2 + C
3

6
x 2 + 3x + 5
e. Find  dx
x +1
Solution
Suppose we simply divide the denominator into the numerator:

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x+2
x + 1 x 2 + 3x + 5
− x( x + 1)
2x + 5
−2( x + 1)
3
x 2 + 3x + 5 3
That is, = x+2+
x +1 x +1
3
We can integrate x + 2 directly using the power rule. For the term , we use the substitution
x +1
u = x + 2 ; du = dx :
x 2 + 3x + 5  3  3
 x + 1 dx =   x + 2 + x + 1dx =  xdx +  2dx +  u du
x2 x2
= + 2 x + 3ln u + C = + 2 x + 3ln x + 1 + C
2 2

1
f. Find 1+ e −x
dx

1 1 1 ex
Solution: Note that = = x =
1 + e− x 1 e + 1 ex + 1
1+ x
e ex

Now, if you substitute u = e x + 1 with du = e x dx into the given integral, you get

1 ex 1
 1 + e− x =  e x + 1 dx =  e x + 1 (e dx)
x
dx

1
=  du = ln u + C = ln e x + 1 + C
u
5.3.2. Integration by Part

Integration by parts is a technique of integration based on the product rule for differentiation. In
particular, if u ( x ) and v ( x ) are both differentiable functions of x , then

d dv du
 u ( x )v ( x )  = u ( x ) + v ( x )
dx dx dx

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dv d du
So that u ( x) =  u ( x )v ( x )  − v ( x )
dx dx dx

Integrating both sides of this equation with respect to x , we obtain

dv d du
 [u( x) dx ]dx =  dx u( x)v( x) dx −  [v( x) dx ]dx
du
= u ( x )v ( x ) −  [ v ( x ) ]dx
dx

d
since u ( x)v( x) is an antiderivative of u ( x)v( x) . Moreover, we can write this integral formula
dx
dv du
in the more compact form  udv = uv −  vdu since dv = dx and du = dx
dx dx

The equation  udv = uv −  vdu is called the integration by parts formula. The great value of

this formula is that if we can find functions u and v so that a given integral  f ( x)dx can be
expressed in the form  f ( x)dx =  udv , then we have

 f ( x)dx =  udv = uv −  vdu

and the given integral is effectively exchanged for the integral  vdu . If the integral  vdu is easier

to compute than  udv , the exchange facilitates finding  f ( x)dx .

Example

x
2
a. Find ln xdx

Our strategy is to express  x 2 ln xdx as  udv by choosing u and v so that  vdu is easier to evaluate
1
than  udv . This strategy supports that we choose u = ln x and dv = x 2 dx since du = dx is a
x
simpler expression than ln x , while v can be obtained by the relatively easy integration

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1 3
v =  x 2 dx = x
3

Substituting this choice for u and v into the integration by parts formula, we obtain

 1   1  1 
x ln xdx =  (ln x) ( x 2 dx) = (ln x)  x 3  −   x 3  dx 
2

u dv u  3   3  x 
v v du

1 1 1 11 
= x3 ln x −  x 2 dx = x 3 ln x −  x 3  + C
3 2 3 33 
1 1
= x3 ln x − x 3 + C
3 9

 xe
2x
b. Find dx

Solution

1 2x
Let u = x  du = dx and dv = e 2 x dx so that v =  e 2 x dx = e . Directly inserting in to the
2
formula, we obtain
1  1 
 xe dx = x  e 2 x  −   e 2 x  dx
2x

2  2 
1 1
=  x −  e2 x + C
2 2
c. Find  ln xdx
Solution
1
Let u = ln x  du = dx and dv = dx  v = x .
x
1
Then  ln xdx = x ln x −  x. dx = x ln x − x + C
x
Sometimes we have to use integration by parts more than once.

Example

 x e dx
2 x
d. Evaluate

Solution: with u = x 2 , du = 2 xdx, dv = e x dx, and v = e x , we have

 x e dx = x e − 2 xe x dx
2 x 2 x

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The new integral is less complicated than the original because the exponent on x is reduced by
one. To evaluate the integral on the right, we integrate by parts again with

u = x  du = dx, and dv = e x dx  v = e x

Then  xe x dx = xe x −  e x dx =xe x − e x . Hence,

 x e dx = x e − 2 xe x dx
2 x 2 x

= x 2 e x − 2 xee + 2e x + C

3
c. Find  4 x( x + 1) dx

Solution

As a general rule, consider first the simpler function for u and the more complicated function for
dv .

1
By letting u = 4 x and dv = ( x + 1)3 , then du = 4dx and v =  ( x + 1) dx = ( x + 1) . Substituting
3 4

4
these values into the formula, we get

1  1 4
 4 x( x + 1) dx = ( 4 x )  4 ( x + 1)  −   4 ( x + 1) (4)dx
3 4

1
= x ( x + 1) − ( x + 1) + C
4 5

5.3.3. Integration by Partial Fraction

This section shows how to express a rational function (a quotient of polynomials) as a sum of
simpler fractions, called partial fractions, which are easily integrated. For instance, the rational
5x − 3 5x − 3 2 3
function can be rewritten by 2 = + , which can be verified
x − 2x − 3
2
x − 2x − 3 x + 1 x − 3
algebraically by placing the fractions on the right side over a common denominator ( x + 1)( x − 3) .
5x − 3
To integrate the rational function on the left side of our previous expression, we simply
x − 2x − 3
2

sum the integrals of the fractions on the right side:

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5x − 3 2 3
 ( x + 1)( x − 3) =  x + 1 dx +  x − 3 dx
= 2ln x + 1 + 3ln x − 3 + C

The method for rewriting rational functions as a sum of simpler fractions is called the method of
partial fractions. In the case of the above example, it consists of finding constants A and B such
5x − 3 A B A B
that = + . We call the fractions and partial fractions because their
x − 2x − 3 x + 1 x − 3
2
x +1 x−3
denominators are only part of the original denominator x 2 − 2 x − 3 . We call A and B undetermined
coefficients until proper values for them have been found.

To find A and B, we first clear fractions, obtaining

5 x − 3 = A( x − 3) + B( x + 1) = ( A + B) x − 3 A + B

This will be an identity in x if and only if the coefficients of like powers of x on the two sides are
equal:
A + B = 5, − 3 A + B = −3

Solving these equations simultaneously gives A = 2 and B = 3 .

x2 + 4 x + 1
Evaluate  ( x − 1)( x + 1)( x + 3)dx
Solution: The partial fraction decomposition has the form
x2 + 4x + 1 A B C
= + + .
( x − 1)( x + 1)( x + 3) ( x − 1) ( x + 1) ( x + 3)
To find the values of the undetermined coefficients A, B, and C we clear fractions and get
x 2 + 4 x + 1 = A( x + 1)( x + 3) + B( x − 1)( x + 3) + C ( x − 1)( x + 1)
= ( A + B + C ) x 2 + (4 A + 2 B) x + (3 A − 3B − C )
The polynomials on both sides of the above equation are identical, so we equate coefficients of
like powers of x obtaining
Coefficient of x 2 : A + B + C = 1
Coefficient of x1: 4 A + 2B = 4
Coefficient of x : 0
3 A - 3B - C = 1
Solving the above systems of equation simultaneously, we get

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3 1 −1
A= , B = and C=
4 2 4
Hence, we have
x2 + 4 x + 1 3 1 1 1 1 1 
 ( x − 1)( x + 1)( x + 3)dx =   4 x − 1 + 2 x + 1 − 4 x + 3 dx
3 1 1
= ln x − 1 + ln x + 1 − ln x + 3 + C
4 2 4
6x + 7
Evaluate  ( x + 2) 2
dx

Solution: First we express the integrand as a sum of partial fractions with undetermined
coefficients.
6x + 7 A B
= +
( x + 2)
2
( x + 2 ) ( x + 2 )2
6x + 7 = A ( x + 2) + B multiply both sides by ( x + 2 )
2

=Ax + 2 A + B
Equating coefficients of corresponding powers of x gives
A = 6 and 2 A + B = 12 + B = 7 or B = -5
6x + 7 6 5
 ( x + 2) 2
dx =  −
x + 2 ( x + 2 )2
dx
Therefore,
= 6 ln x + 2 − 5 ( x + 2 ) + C
−1

2 x3 − 4 x 2 − x − 3
Evaluate1  x 2 − x − 3 dx
Solution: First we divide the denominator into the numerator to get a polynomial plus a proper
fraction.
2x
x − x − 3 2x − 4x − x − 3
2 3 2

2 x3 − 4 x 2 − 6 x
5x − 3
Then we write the improper fraction as a polynomial plus a proper fraction.

1
Such type of fraction is known as an improper fraction

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2 x3 − 4 x 2 − x − 3 5x − 3
= 2x + 2
x − x−3
2
x − x−3
We found the partial fraction decomposition of the fraction on the right in the opening example,
so
2 x3 − 4 x 2 − x − 3 5x − 3
 x2 − x − 3 dx =  2 xdx +  x2 − x − 3 dx
2 3
=  2 xdx +  dx +  dx
x +1 x−3
= x 2 + 2 ln x + 1 + 3ln x − 3 + C

5.4. The Definite Integral

The Definite Integral: Let f ( x ) be a function that is continuous on the interval a  x  b .

b−a
Subdivide the interval a  x  b into n equal parts, each of width x = , and choose a
n
number xk from the k th subinterval for k = 1, 2,3,..., n. Form sum
 f ( x1 ) + f ( x2 ) + f ( x3 ) + ... + f ( xn ) x called Riemann sum.
b
Then the definite integral of f on the interval a  x  b , denoted by  f ( x)dx, is the limit of the
a

Riemann sum as n → + ; that is,

b

 f ( x)dx = lim  f ( x ) + f ( x ) + f ( x ) + ... + f ( x ) x

a
n →+
1 2 3 n

The function f(x) is called the integrand, and the numbers a and b are called the lower and upper
limits of integration, respectively. The process of finding a definite integral is called definite
integration.

 f ( x)dx
b
The symbol a
f ( x) dx used for the definite integral is essentially the same as the symbol

for the indefinite integral, even though the definite integral is a specific number while the indefinite
b

integral is a family of functions, the antiderivatives of f .  f ( x)dx is the net change of an anti-
a

derivative of f(x) over the interval.

The Fundamental Theorem of Calculus: If the function f ( x ) is continuous over an interval
a  x  b , then we have

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b
 f ( x)dx = F ( x) a = F (b) − F (a ) where F ( x ) is any antiderivative of f ( x ) on a  x  b
b
a

.
Example: Evaluate the definite integrals of the following
3
3  x4   34  14  81 1
 x dx =  + C  =  + C  −  + C  = − = 20
3
1.
1
4 1  4  4  4 4
20
1  1  1 
20
1
2.  xdx =  x 2 + C  =  (20)2 + C  −  (0)2 + C  = 100
0
2 4 0 4  4 
5.4.1. Properties of Definite Integral

Here are the basic properties of definite integrals which we often refer to in dealing with analytical
and empirical problems involving definite integrals and related issues. The properties are
intuitively attracting and seem convincing though their proof is overlooked for advanced courses
or your investigation through further readings.

This list of rules can be used to simplify the computation of definite integrals.

5.4.2. Integral and Area under the Curve

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One of the most important applications of definite integral is the calculation of area under a
curve.

Example: Use the fundamental theorem of calculus to find the area of the region under the line
y = 2 x + 1 over the interval 1  x  3 .

Solution: since f ( x) = 2 x + 1 satisfies f ( x)  0 on the interval 1  x  3 , the area is given by the

3
definite integral A =  ( 2 x + 1) dx . Since an antiderivative of f ( x) = 2 x + 1 is F ( x) = x 2 + x , the
1

fundamental theorem of calculus tells us that

3
A =  ( 2 x + 1) dx = x 2 + x = 32 + 3 − 12 + 1 = 10
3

1
1

Area between Two Curves

In certain practical applications, you may find it useful to represent a quantity of interest in terms
of area between two curves. First, suppose that f and g are continuous, nonnegative [that is,
f ( x)  0 and g ( x )  0 ], and satisfy f ( x)  g ( x) on the interval a  x  b , as shown in Figure
below.

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Figure 5.1: Area of R = are of R1 − are of R2

Then, to find the area of the region R between the curves y = f ( x) and y = g ( x) over the
interval a  x  b , we simply subtract the area under the lower curve y = g ( x) (Figure 5.1c)
from the area under the upper curve y = f ( x) (Figure 5.9b), so that

Area of R =  are under y = f ( x)  −  are under y = g ( x) 

b b b
=  f ( x)dx −  g ( x)dx =   f ( x) − g ( x)  dx
a a a

Example: Find the area of the region R enclosed by the curves y = x3 and y = x 2 .

Solution: To find the points where the curves intersect, solve the equations simultaneously as
follows:
x3 = x 2
x3 − x 2 = 0
x 2 ( x − 1) = 0  x = 1, 0

The corresponding points (0, 0) and (1, 1) are the only points of intersection. The region R enclosed
by the two curves is bounded above by y = x 2 and below by y = x3 , over the interval 0  x  1 . The
area of this region is given by the integral

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1 1
1 1 1
A =   x 2 − x3  dx = x 3 − x 4 =
0
3 4 0 12

In certain applications, you may need to find the area A between the two curves y = f ( x) and
y = g ( x) over an interval a  x  b , where f ( x)  g ( x) for a  x  c but g ( x)  f ( x) for

c  x  b . In this case, we have

c b
A=   f ( x) − g ( x) dx
a
+   g ( x) − f ( x) dx
c

f ( x )  g ( x ) on a  x  c f ( x )  g ( x ) on c  x  b

Example: Find the area of the region enclosed by the line y = 4 x and the curve y = x3 + 3x 2 .

Solution: To find where the line and curve intersect, solve the equations simultaneously as
follows:

x3 + 3x 2 = 4 x
x3 + 3x 2 − 4 = 0
x ( x 2 + 3x − 4 ) = 0
x ( x − 1)( x + 4 ) = 0  x = 0,1, −4

The corresponding points of intersection are (0, 0), (1, 4), and (-4, -16). Over the interval
−4  x  0 , the curve is above the line, so x3 + 3 x 2  4 x , and the region enclosed by the curve and
line has area

0 0

A1 =  ( x3 + 3x 2 ) − 4 x dx = x 4 + x 3 − 2 x 2
1
−4
4 −4

1  1 
=  (0) 4 + (0)3 − 2(0) 2  −  ( −4) 4 + ( −4) 3 − 2( −4) 2  = 32
4  4 

Over the interval 0  x  1 , the line is above the curve and the enclosed region has area

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0 1

−4 4 x − ( x + 3x )dx = 2 x − 4 x − x 0

1 4
A2 = 3 2 2 3

 1   1  3
=  2(1) 2 − (1) 4 − (1)3  −  2(0) 2 − (0) 4 − (0)3  =
 4   4  4

Therefore, the total area enclosed by the line and the curve is given by the sum

3
A = A1 + A2 = 32 + = 32.75
4
5.4.3. Improper Integrals
A definite integral with infinity for either an upper or lower limit of integration is called an
improper integral.
 b


a
f ( x)dx and 
−
f ( x)dx

are improper integrals because  is not a number and cannot be substituted for x in F ( x ) . They
can, however, be defined as the limit of other integrals, as shown below:
b b b b


a
f ( x)dx = lim  f ( x)dx and
b →
a

−
f ( x)dx = lim  f ( x)dx
a →−
a

If the limit in either case exists, the improper integral is said to converge and the integral has a
definite value. If the limit does not exists, the improper integral is said to diverge and is
meaningless.
Example: Evaluate the following improper integrals
 
3 6
a. 1 x2 dx b.  x dx
1

Solution

 −3   −3 (−3)   −3 
b b
3 3
a.  2 dx = lim  2 =lim   = lim  −  = lim  + 3 = 3
1 x
b → x
1 b →  x 1 b →  b 1  b→  b 
 b
6 6
b.  dx = lim =lim 6ln x 1 = lim 6ln b − 6ln 1  = lim 6ln b  since ln 1 = 0
b

1
x b→ x
1
b→ b→ b→

As b → ,6ln b →  . The improper integral diverges and has no definite value.

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5.5. Economic Applications of Integrals

In this section, we examine several important applications of definite integration to business and
economics, such as consumers’ willingness to spend, and consumers’ and producers’ surplus,
derivation of total function from marginals and income inequality to mention some among many.
We begin by showing how integration can be used to measure the value of an asset.

5.5.1. Consumers’ and Producers’ Surplus

In a competitive economy, the total amount that consumers actually spend on a commodity is
usually less than the total amount they would have been willing to spend. Suppose the market price
of a particular commodity has been fixed at p0 and consumers will buy q0 units at that price.

Market conditions determine that p0 = D(q0 ) , where D(q0 ) is the demand function for the

commodity. Then the difference between the consumers’ willingness to pay for q0 units and the

amount they actually pay, p0 q0 , represents a perceived advantage to the consumer that economists

call consumers’ surplus. That is,

Consumers '  total amount consumers  actual consumer 

 Surplus  =  would be willing to spend  − exp enditure 
     

Consumers’ surplus CS is the area of the region between the demand curve p = D ( q ) and the
horizontal line p = p0 and hence is equal to the definite integral

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q0 q0 q0 q0 q0

CS =   D(q) − p dq =  D(q)dq −  p dq =  D(q)dq − p q =  D(q)dq − p0 q0

q0
0 0 0 0
0 0 0 0 0

Producers’ surplus is the other side of the coin from consumers’ surplus. Recall that the supply
function p = S (q ) gives the price per unit that producers are willing to accept in order to supply
q units to the marketplace. However, any producer who is willing to accept less than p0 = S (q0 )

dollars for q0 units gains from the fact that the price is p0 . Then producers’ surplus is the difference

between what producers would be willing to accept for supplying q0 units and the price they

actually receive. Reasoning as we did with consumers’ surplus, we obtain the following formula
for producers’ surplus.

Example: A tire manufacturer estimates that q (thousand) radial tires will be purchased
(demanded) by wholesalers when the price is p = D(q) = −0.1q 2 + 90 dollars per tire, and the

same number of tires will be supplied when the price is p = S (q) = 0.2q 2 + q + 50 dollars per tire.

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a. Find the equilibrium price (where supply equals demand) and the quantity supplied and
demanded at that price.
b. Determine the consumers’ and producers’ surplus at the equilibrium price.

Solution

a. Since supply equals demand at equilibrium, we have

−1  (1)2 − 4(0.3)(−40) −1  49 −1  7
q= = =
2(0.3) 0.6 0.6
6 −8
q= = 10, and q = (reject since q cannot be negative)
0.6 0.6

And p = −0.1(10)2 + 90 = 80 dollars per tire. Thus, equilibrium occurs at a price of $80 per tire,
and then 10,000 tires are supplied and demanded.

b. Using p0 = 80 and q 0 = 10 , we find that the consumers’ surplus is

10
CS =  ( −0.1q + 90 )dq − (80)(10)
2

0
10
−0.1q 3
= + 90q − 800  866.67 − 800 = $66.67 thousands
3 0

The producers’ surplus is

10
PS = (80)(10) −  ( 0.2q 2 + q + 50 )dq
0
10
 q3 q 2 
= (80)(10) −  0.2 + + 50q   = 800 − 616.67 = $183.33 thousands
 3 2 0
5.5.2. Total Function Derivation from Marginal Functions
Given a total function (e.g., a total cost function, total product, total revenue function, total profit
function), the process of differentiation can yield the marginal function (e.g., MC, MP, MR,

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marginal profit function). Because the process of integration is the opposite of differentiation, it
should enable us, conversely, to infer the total function from a given marginal function.

Example

1. If the marginal cost (Mc) of a firm is given by an equation C ' (Q ) = − 4Q 3 + 6Q − 80 and

the fixed cost of production is 90 Birr, we can get the total cost of production that can be
computed from MC function by integrating it

 MdQ = TC

TC =  (− 4 Q + 6Q − 80 dx)
3

=  − 4Q dx +  6QdQ +  − 80dx
TC = − Q 3 + 3Q 2 − 80 Q + C Since C is the fixed cost, it can be replaced by 90.

Therefore, the total cost equation is given as: TC = − Q 3 + 3Q 2 − 80 Q + 90

2. Suppose that the marginal profit for a company is  '( x) = 100 + 50 x − 3 x3 . Find the total
profit function if profit is zero when nothing is sold.

Solution

Total profit is given by

 =  100 + 50 x − 3x 2 dx = 100 x + 25 x 2 − x3 + C

= 100 x + 25 x 2 − x3 since  (0)=0  C=0

−1
3. If the marginal propensity to save (MPS) as a function of income is S '(Y ) = 0.3 − 0.1Y 2
,
and if the aggregate saving S is nil when income is 81, find the saving function S(Y).

Solution: Since MPS is the derivative of S function, the problem now calls for the integration of
S '(Y ) :

( )dY = 0.3Y − 0.2Y

1
−1
S (Y ) =  S '(Y )dY =  0.3 − 0.1Y 2 2
+C

To find the specific value of the constant C,

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1
0 = 0.3(81) − 0.2(81) 2 + C  C = −22.5 . Hence, the desired function is

1
S (Y ) = 0.3Y − 0.2Y 2 − 22.5

5.5.3. Income Inequality

While no country has been able to achieve equal distribution of income, a desirable goal in the
eyes of many political scientists is to reduce the in-qualities that exist. Area also plays an important
role in the study of Lorentz curves, a device used by both economists and sociologists to measure
the percentage of a society’s wealth that is possessed by a given percentage of its people. To be
more specific, the Lorentz curve for a particular society’s economy is the graph of the function
L(x), which denotes the fraction of total annual national income earned by the lowest-paid 100x%
of the wage-earners in the society, for 0  x  1 . For instance, if the lowest-paid 30% of all wage-
earners receive 23% of the society’s total income, then L(0.3) = 0.23 . Note that L(x) is an
increasing function on the interval 0  x  1 and has these properties:
1. 0  L( x)  1 because L(x) is a percentage
2. L (0) = 0 because no wages are earned when no wage-earners are employed
3. L(1) = 1 because 100% of wages are earned by 100% of the wage-earners
L( x )  1 because the lowest-paid 100x% of wage-earners cannot receive
4.
more than 100x% of total income

A typical Lorentz curve is shown in Figure 5.2a

Figure 5.2: Lorenz curve y = L ( x ) and its Gini index.

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The line y = x represents the ideal case corresponding to complete equality in the distribution of
income (wage-earners with the lowest 100x% of income receive 100x% of the society’s wealth).
The closer a particular Lorentz curve is to this line, the more equitable the distribution of wealth
in the corresponding society. We represent the total deviation of the actual distribution of wealth
in the society from complete equality by the area of the region R1 between the Lorentz curve

y = L ( x ) and the line y = x . The ratio of this area to the area of the region R2 under the complete

equality line y = x over 0  x  1 is used as a measure of the inequality in the distribution of

wealth in the society. This ratio, called the Gini index, denoted GI (also called the index of income
inequality), may be computed by the formula

area of R1 area between y = L( x) and y = x

GI = =
area of R 2 area between y = x and 0  x  1
1 1

  x − L( x) dx   x − L( x) dx 1
= 0
1
= 0
= 2  x − L( x)  dx
1
 xdx
0
2
0

The Gini index always lies between 0 and 1. An index of 0 corresponds to total equity in the
distribution of income, while an index of 1 corresponds to total inequity (all income belongs to 0%
of the population). The smaller the index, the more equitable the distribution of income, and the
larger the index, the more the wealth is concentrated in only a few hands.

Example

1. A governmental agency determines that the Lorentz curves for the distribution of income
for dentists and contractors in a certain state are given by the functions

L1 ( x) = x1.7 and L2 ( x) = 0.8x2 + 0.2x respectively. For which profession is the distribution of
income more fairly distributed?

Solution

The respective Gini indices are

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1
1
 x 2 x 2.7 
G1 = 2 ( x − x )dx = 2  −
1.7
 = 0.2593
0  2 2.7  0
1
1
 0.8 x 2 0.8 x3 
G2 = 2  x − ( 0.8 x + 0.2 x ) dx = 2 
 2
 − = 0.2667
0  2 3  0

Since the Gini index for dentists is smaller, it follows that in this state, the incomes of dentists are
more evenly distributed than those of contractors.

2. Find the Gini index for the given Lorentz curve.

a. L( x) = x3

b. L( x) = x 2

Solution

1
1
 x4  1 
a. GI = 2 x dx = 2   = 2  − 0  = 0.5
3

0  4 0 4 
1
1
 x3  1 
b. GI = 2 x dx = 2   = 2  − 0  = 0.67
2

0  3 0 3 

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CHAPTER SIX

6. LINEAR DIFFERENTIAL AND DIFFERENCE EQUATIONS

In earlier chapters much of the economic analysis used has been comparative statics. This entails
the comparison of different (static) equilibrium situations, with no mention of the mechanism by
which price and quantity adjust to their new equilibrium values. The branch of economics that
looks at how variables adjust between equilibrium values is known as ‘dynamics’, and this chapter
gives an introduction to some simple dynamic economic models.

The ways in which markets adjust over time vary tremendously. In commodity exchanges, prices
are changed by the minute and adjustments to new equilibrium prices are almost instantaneous. In
other markets the adjustment process may be a slow trial and error process over several years, in
some cases so slow that price and quantity hardly ever reach their proper equilibrium values
because supply and demand schedules shift before equilibrium has been reached. There is therefore
no one economic model that can explain the dynamic adjustment process in all markets.

This chapter provides a simple introduction to the dynamics of economic systems. There are two
ways of dealing with dynamics: differential equations in which the dynamic adjustment process
between equilibria is seen a process of continual adjustment and difference equations in the
dynamic adjustment process between equilibria is seen as a step-by-step process.

In Section 6.1 we consider the case when time is a continuous variable taking all possible values
in a certain interval. This describes the situation in which variables change from one moment to
the next. For example, the prices of certain commodities, such as oil, effectively change
instantaneously and are not fixed on a seasonal basis. We express this time dependence using the
usual function notation, P(t). It is appropriate to model the rate of change of P with respect to t
using the derivative, P′(t). Equations that involve the derivatives of an unknown function are called
differential equations and a method is described for solving such equations.

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In Section 6.2 we consider the case when time, t , is a discrete variable taking whole number
values. This describes the situation in which variables change only after fixed periods. For
example, the prices of certain agricultural products change from one season to the next but are
fixed throughout each season. We express this time dependence using an obvious subscript
notation. The price during the first period is denoted by p1 , the price during the second period is

p2 , and so on. Equations that relate the price in one period, Pt, to that of the previous period, Pt−1,

are called difference equations and a method is described for the solution of such equations.

6.1. First-Order-Linear Differential Equations: Continuous Time

Definitions and Concepts

A differential equation is an equation which expresses an explicit or implicit relationship between

a function y = f (t ) and one or more of its derivatives or differentials. Examples of differential
equations include

dy
= 5t + 7 y ' = 12 y and y ''- 4 y '+ 9 = 0
dt

Equations involving a single independent variable, such as those above, are called ordinary
differential equation (ODE). The solution or integral of a differential equation is any equation,
without derivative or differential, which is defined over an interval and satisfies the differential
equation for all the values of the independent variable(s) in the interval.

Example: Solve y ''(t ) = 7

Solution: to solve this

 y ''(t ) = y '(t ) =  7dt = 7t +c1

7
 y '(t ) = y(t ) =  ( 7t + c ) dt = 2 t + c1t + c
2
1

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This is called a general solution which indicates that when c is unspecified, a differential equation
has an indefinite number of possible solutions. If c can be specified, the differential equation has
a particular or definite solution which alone of all possible solutions is relevant.

The order of a differential equation is the order of the highest derivative in the equation. The degree
of a differential equation is the highest power to which the derivative of the highest order is raised.

Example

dy
1. = 2 x + 10 first-order, first degree
dt
3
 dy 
2.   − 4t 5 = 0 first-order, third degree
 dt 
4
d 2 y  dy 
3. 2 +   + x3 = 0 second-order, first degree
dt  dt 
9 4
 d2 y   d3 y 
4.  2  +  3  = 60 y third-order, fouth degree
 dt   dt 

General Formula for First-Order Linear Differential Equations

dy
For a first-order linear differential equation, and y must be of the first degree, and no product
dt
 dy 
of y   may occur. For such an equation
 dt 

dy
+ ay = b
dt

where a and b may be constants or functions of time, the formula for a general solution is

y(t ) = Ae− at if b = 0 [General solution]

or
y(t ) = y(0)e− at [specific solution] (a)

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b
y (t ) = Ae− at + if b  0 & a  0 [General solution]
a
or
 b b
y (t ) =  y (0) −  e − at + [specific solution] (b)
 a a

where A is an arbitrary constant. A solution (b) is composed of two parts: Ae − at is called the
b
complementary function, and is called particular integral. The particular integral y p equals the
a
intertemporal equilibrium level of y (t ) ; the complementary function yc represents the deviation

from the equilibrium. For y (t ) to be dynamically stable, yc must approach zero as t approaches

infinity (that is, a in e − at must be negative).

Example: Find the general solution for the following differential equations

dy dy
a. + 4 y = 12 d. = 2; y (0) = 5
dt dt
dy dy
b. + 3t 2 y = t 2 e. − 2 y = 0; y (0) = 9
dt dt
dy dy
c. + 2 y = 6; y (0) = 10 f. 2 + 4 y = 6; y (0) = 4
dt dt

Solution

a. Since a = 4 and b = 12 , substituting in (a) gives

12
y (t ) = Ae −4t + = Ae −4t + 3
4

−4t
As t → , yc = Ae → 0 and y(t ) approaches y p = 3 , the intertemporal equilibrium level

implying that y (t ) is dynamically stable.

b. In the equation, a = 3t 2 and b = t 2 . Substituting it into the general solution formula, we get
t2 1
y (t ) = Ae − (3t + = Ae −3t +
2 3
)t
2
(time path of y (t ) )
3t 3

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1
As t → , yc = Ae −3t → 0 and y p →
3
. The equilibrium is dynamically stable.
3

c. Substituting a = 2, b = 6 and y0 = 10 into the specific formula, we get

 6 6
y(t ) = 10 −  e−2t + = 7e−2t + 3
 2 2

As t → , yc = 7e−2t → 0 and y p → 3 . The equilibrium is dynamically stable.

d. The general solution when a = 0 is given by y (t ) = A + bt and the specific solution is

y (t ) = y0 + bt . Accordingly, solution for a differential equation under question is

y (t ) = 5 + 2t .

e. y (t ) = 9e 2t and it is not dynamically stable.

dy dy
f. 2 + 4y = 6  + 2 y = 3 . Solving the equation yields
dt dt
 3 3 5 3
y(t ) = 4 −  e−2t + = e−2t +
 2 2 2 2

5 −2 t
As t → , y p = e → 0 and yc → 3 / 2 . The equilibrium is dynamically stable.
2

6.2. First-Order-Linear Difference Equations: Discrete Time

Definitions and Concepts

A difference equation expresses a relationship between a dependent variable and a lagged

independent variable (or variables) which changes at discrete intervals of time, for example,
I t = f (Yt −1 ) , where I and Y are measured at the end of each year. The order of a difference

equation is determined by the greatest number of periods lagged. A first-order difference equation
expresses a time lag of one period; a second-order, two periods; etc. the change in y as t changes
from t to t + 1 is called the first difference of y . It is written as

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y
= yt = yt +1 − yt
t

dy
where  is an operator replacing that is used in to measure continuous change in differential
dt
equations. The solution of difference equation defines y for every value of t and does not contain
a difference equations.

Example: Each of the following is a difference equation of the order indicated.

I t = a (Yt −1 − Yt − 2 ) order two

Qs = a + bpt −1 order one
yt +3 − 9 yt + 2 + 2 yt +1 + 6 yt = 8 order three
yt = yt oder one
 yt +1 - yt = yt  yt +1 = 2 yt

Given that the initial value of y is y0 , in the difference equation

yt +1 = byt (a)

the solution is found as follows:

By successive substitutions of t = 0,1, 2,3, etc. in (a), we get

y1 = by0 y3 = by2 = b(b 2 y0 ) = b3 y0

y2 = by1 = b(by0 ) = b 2 y0 y 4 = by3 = b(b3 y0 ) = b 4 y

Thus, for any period t,

yt = bt y0 .

Given a first-order difference equation which is linear (i.e., all the variables are raised to the first
power and there are no cross products),

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yt = byt −1 + a

where a and b are constants, the general formula for a definite solution is

 a  t a
yt =  y0 − b + where b  1 (b)
 1− b  1− b
yt = y0 + at where b = 1 (c)

a
If no initial condition is given, an arbitrary constant A is used for y0 − in (b) and for y0 in
1− b
(b). This is called a general solution.

The stability condition depends on the base b . If b  1 , the time path will explode and move

farther and farther away from equilibrium; if b  1 , the time path will be damped and move toward

equilibrium. If b  0 , the time path will oscillate between positive and negative values; if b  0 ,
the time path will be non-oscillating.

Example: Solve the difference equations given below

a. yt = −7 yt −1 + 16 and y0 = 5.

b. yt = 6 yt −1

c. xt + 3xt −1 + 8 = 0 and y0 = 16

−1
d. yt = yt −1 + 60 and y0 = 8
4

Solution

a. In the equation, b = −7 and a = 16 . Since b  1 , it is solved by using (b), as follows:

 16  16
yt =  5 −  (−7) +
t
= 3(−7)t + 2 (the time path is oscillating and unstable)
 1+ 7  1+ 7

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b. Since a = 0 and b = 6 , we have yt = ( y0 − 0 )( 6 ) + 0 = A ( 6 ) where A, as generally used

t t

unspecified constant, replaces y0 .

c. Rearranging xt + 3xt −1 + 8 = 0 to get xt = −3xt −1 − 8 . Thus, b = −3 and a = −8 and

substituting in the formula, we obtain
 16  8
yt = 16 +  ( −3) − = 18 ( −3) − 2 (the time path is oscillating and unstable)
t t

 1+ 3  1+ 3

 
 60   1 
t
60  1
t

d. yt =  8 −  −  + = −40  −  + 48 (the time path is oscillating and stable)

 1 + 1   4  1 + 1  4
 4 4
6.3. Economic Applications of Linear Differential and Difference Equations
6.3.1. Economic Applications of Linear Differential Equations

Differential equations serve many functions in economics. They are used to determine the
conditions for dynamic stability in microeconomic models of market equilibria and to trace the
time path growth under various conditions in macroeconomics. Given the growth rate of a
function, differential equations enable the economist to find the function whose growth is
described; from point elasticity, they enable the economist to estimate the demand function.

Example: Dynamics of Market Price

Suppose that, for a particular commodity, the demand and supply functions are as follows

Qd =  −  p ( ,   0)
Qs = − +  p ( ,   0

At equilibrium,  −  p = − +  p   +  = (  +  ) p

 +
p= (= some positive constant)
 +

If p (0) = p , the market will clearly be already in equilibrium, and no dynamic analysis will be
needed. However, if p (0)  p , p is attainable only after a due process of adjustment, during

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which not only price change over time but Qd and Qs , being functions of P, must change over

time as well. In this regard, the price and quantity variables can all be taken as functions of time.

The rate of change in price is a function of excess demand. That is, if demand is larger than what
is required by suppliers, market price increases and if it is lower than what is needed by suppliers
price will decrease. Hence, without any complexity, we can model the rate of change in price as
follows.

dp
= m ( Qd − Qs ) where m  0 & represents adjustment coefficient
dt
dp
= m ( −  p +  −  p ) = m ( +  ) − m (  +  ) p
dt
dp
+ m (  +  ) p = m ( +  ) (similar with differential equation presented before)
dt

Applying the solution formula to the above equation, the time path of price is given as

  +   − m (  + ) t  + 
p (t ) =  p(0) − +
 +  
e
  +
=  p0 − p  e − at + p (a = m(  +  ))

Note that the model is dynamically stable if a = m(  +  )  0 .

6.3.2. Economic Applications First-Order Linear Difference Equations

1. Lagged Income Determination Model

Assume that consumption is a function of the previous period’s income so that

Ct = C0 + cYt −1 Yt = Ct + I t where I t = I 0

Thus, Yt = C0 + cYt −1 + I 0 and rearranging it, we obtain

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 Yt = cYt −1 + C0 + I 0 where b = c and a = C0 + I 0 . Substituting these values in the solution

formula, since the marginal propensity to consume c cannot be equal 1, and assuming
Yt = Y0 at t = 0 ,

 C +I  C +I
Yt = Y0 − 0 0  ct + 0 0
 1− c  1− c

Since 0  MPC  1, c  1 the time path will converge. The equilibrium is stable, and as

C0 + I 0
t → , Yt → , which is the intertemporal equilibrium level of income.
1− c

Example: Given Yt = Ct + I t , Ct = 200 + 0.9Yt −1 ,It =100,and Y0 =4500 . Find time path of Yt .

Solving for Yt ,

Yt = 200 + 0.9Yt −1 + 100 = 0.9Yt −1 + 300

 300  300
Yt =  4500 −  (0.9)t + = 1500(0.9)t + 3000 (dynamically stable path)
 1 − 0.9  1 − 0.9

2. The Cobweb Model

For many products, such as agricultural commodities, which are planted a year before marketing,
current supply depends on last year’s price. This poses interesting stability question. If

Qdt =  +  pt and Qst =  +  pt −1

at equilibrium,  +  pt =  +  pt −1   pt =  pt −1 +  − 

  −
pt = pt −1 +
 


Since   0 and   0 under normal demand and supply conditions,  1 . Hence,


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 ( −  )  ( −  )
     t 
pt =  p0 −   +
     
1− 1−
   
t
  −     −
=  p0 − +
  −       − 

  −
When the model is in equilibrium, pt = pt −1 . Substituting pe for pt & pt −1 in pt = pt −1 + ,
 
we get

 −
pe = and substituting it in solution for pt ,
 −

t
 
pt =  p0 − pe    + pe
 


For the equilibrium to be stable,  1 which implies that    . In other words, the supply

curve must be flatter than the demand curve for stability.

Example: Given Qdt = 86 − 0.8 pt and Qst = −10 + 0.2 pt −1 , the market price pt for any time period

and the equilibrium price pe can be found as follows. At equilibrium,

86 − 0.8 pt = −10 + 0.2 pt −1  pt = −0.25 pt −1 + 120

 120  120
Thus, pt =  p0 − ( −0.25) + = ( p0 − 96 )( −0.25) + 96 & pe = 96
t t

 
1 + 0.25  1 + 0.25

Since b = −0.25 , which is negative and less than 1, the time path oscillates and converges. The
equilibrium is stable, and pt will converge to pe = 96 as t →  .

Exercise

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Given demand and supply for the cobweb as follows, find the intertemporal equilibrium price, and
determine whether the equilibrium is stable:

a. Qdt = 18 − 3 pt and Qst = −3 + 4 pt −1

b. Qdt = 22 − 3 pt and Qst = −2 + pt −1

c. Qdt = 19 − 6 pt and Qst = −5 + 6 pt −1

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