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ECON 1540 Functions of Several Variables P1

The document discusses functions of two variables, emphasizing their relevance in economics where multiple variables influence outcomes. It covers concepts such as partial derivatives, geometric representations, and level curves, highlighting their applications in economic models like Cobb-Douglas functions and indifference curves. Additionally, it explains the implications of homogeneity in functions and the importance of understanding domains and restrictions in multivariable functions.

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1 views

ECON 1540 Functions of Several Variables P1

The document discusses functions of two variables, emphasizing their relevance in economics where multiple variables influence outcomes. It covers concepts such as partial derivatives, geometric representations, and level curves, highlighting their applications in economic models like Cobb-Douglas functions and indifference curves. Additionally, it explains the implications of homogeneity in functions and the importance of understanding domains and restrictions in multivariable functions.

Uploaded by

defaucets
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Functions of two variables.

Partial derivatives with two variables.


Geometric representation.
Surfaces and distance.

Why Functions of Several Variables?


ECON 1530 focused on single variable functions (ie. y = f(x))
Economics often involves multiple variables and choices.
1540 generalizes 1530 concepts to functions of two or more variables.
z = f(x,y) ← z is the dependent variable. x and y are independent. z depends on x and y.

a) Functions of Two Variables


A function of two variables x and y with domain D assigns a number f(x,y) to each (x,y) pair
(point) in D.

Understanding R^2 and the Domain


What is R^2?
R is the set of all real numbers. It forms a 1-dimensional number line.
R^2: Defined as R^2 = {(x,y) | x E R, y E R }
It is the set of all ordered pairs of real numbers.
*R is one dimension which is represented by the real number line.
Figure: Unrestricted Domain

Geometrical Interpretation: R^2 represents the standard two-dimensional plane.

R^3 with R^2 Domain


A function of two variables x and y with domain D assigns a number f(x,y) to each point in D.
The domain of a function is the set of valid inputs.
For f(x,y) the domain is always a subset of R^2.
Example: f(x,y) = x^2 + y^2 has domain R^2 (no restrictions).
If constraints exist (eg. x >= 0) the domain is a restricted subset of R^2.
Identify the restrictions on the domain for
2
𝑓(𝑥, 𝑦) = 𝑥𝑦 ⇒ 𝑥 ≥ 0
2(𝑧1+𝑧2)
𝑔(𝑧1, 𝑧2) = 𝑧1−𝑧2
⇒ 𝑧1 ≠ 𝑧2
2 3
𝑣 +𝑤 2 2
ℎ(𝑣, 𝑤) = 2 2
⇒𝑣 −𝑤 > 0
𝑣 −𝑤

a) Cobbs-Douglas Function

1/3 2/3 1/3 1/3 2/3 2/3 1/3 2/3


𝐹(2𝑘, 2𝐿) = 𝐴(2𝐾) (2𝐿) = 𝐴2 𝐾 2 𝐿 = 2𝐴𝐾 𝐿 = 2𝑌
More on Cobbs-Douglas

Example of a homogenous function of degree a + b.


𝑎 𝑏 𝑎 𝑎 𝑏 𝑏 𝑎+𝑏 𝑎 𝑏 𝑎+𝑏
𝐹(𝑡𝑥, 𝑡𝑦) = 𝐴(𝑡𝑥) (𝑡𝑦) = 𝐴𝑡 𝑥 𝑡 𝑥 = 𝑡 𝐴𝑥 𝑥 = 𝑡 𝐹(𝑥, 𝑦)
Implications:
𝑎+𝑏
Increasing inputs by a factor of t scales output by 𝑡
If a + b = 1, the function is homogenous of degree 1 (constant returns to scale).
If a + b < 1, diminishing returns to scale.
If a + b > 1, increasing returns to scale.

b) Partial Derivatives with Two Variables


Analogy: Recall from ECON 1000 “All else the same.”
Compute the rate of change with respect to (w.r.t) x, holding y constant.
This is called the partial derivative.

← Treat “y” as a constant.


𝑑𝑧 2
𝑑𝑥
= 3𝑥 + 0

5/3
𝑑𝑧 −2 5/3 𝐴𝑦
𝑑𝑥
=− 𝐴𝑥 𝑦 =− 2
𝑥

2/3
𝑑𝑧 5 −1 5/3−1 5𝐴𝑦
𝑑𝑦
= ( 3 )𝐴𝑥 𝑦 = 3𝑥
Economic Example with Partial Derivatives

1.08
𝑑𝑥 −2.5 1.08 1.5𝐴𝑟
𝑑𝑝
=− 1. 5𝐴𝑝 𝑟 =− 2.5 ← Changes in “p” will always result in a negative number
𝑝
for x.
0.08
𝑑𝑥 −1.5 0.08 1.08𝐴𝑟
𝑑𝑟
= 1. 08𝐴𝑝 𝑟 = 1.5 ← Changes in “p” will always result in a positive number for
𝑝
x.
Approximation of a Function’s Value:
𝐴𝑝𝑝𝑟𝑜𝑥𝑖𝑚𝑎𝑡𝑖𝑜𝑛 ≈ 𝐹𝑢𝑛𝑐𝑡𝑖𝑜𝑛'𝑠 𝑇𝑟𝑢𝑒 𝑉𝑎𝑙𝑢𝑒
∂𝑓(𝑥,𝑦)
𝑑𝑥
≈ 𝑓(𝑥 + 1, 𝑦) − 𝑓(𝑥, 𝑦)
∂𝑓(𝑥,𝑦)
𝑑𝑦
≈ 𝑓(𝑥, 𝑦 + 1) − 𝑓(𝑥, 𝑦)
Derivatives are the most accurate when the change in x or y is small.

Higher-Order Partial Derivatives


Eg. The second derivative is the derivative of the derivative of f(x).
With two variables, there will be a total of four second derivatives.

which can be written concisely as


𝑓𝑥𝑥 , 𝑓𝑥𝑦 , 𝑓𝑦𝑥 , 𝑓𝑦𝑦 .
2 2
∂𝑓 ∂𝑓
Similar to the off-diagonal of a symmetric matrix. ∂𝑥∂𝑦
= ∂𝑦∂𝑥
↔ 𝑓𝑥𝑦 = 𝑓𝑦𝑥
Partial derivatives of the third, fourth, and higher orders can be written analogously.
4
∂𝑧 4
3 = 𝑧𝑦𝑦𝑦𝑥
∂𝑥∂𝑦

2 2
𝑓𝑥 = 3𝑥 𝑦 + 2𝑥𝑦 + 1
3 2
𝑓𝑦 = 𝑥 + 2𝑥 𝑦 + 2𝑦
2
𝑓𝑥𝑥 = 6𝑥𝑦 + 2𝑦
2
𝑓𝑦𝑦 = 2𝑥 + 2
2 2
𝑓𝑥𝑦 = 3𝑥 + 4𝑥𝑦 ↔ 𝑓𝑦𝑥 = 3𝑥 + 4𝑥𝑦
With partial derivatives, only allow one variable to change. Treat other variables as
constants. Take every combination of partial derivatives. Warning: the following are not
2
∂𝑧 2 ∂𝑧 2
equivalent: ( ∂𝑥 ) ≠ 2 since ∂ is a derivative notation – not a power.
∂𝑥

c) Geometric Representation of Multivariate Functions


2
For y = f(x) (single variable), the graph is (x, f(x)) in ℜ
For z = f(x,y) (two variables), the graph is the surface.
3
{(x,y,z) | z = f(x,y)} ⊂ ℜ
We can visualize such surfaces in 3D plots.

x,y form the plane (plain) and z is the height of the plane. Equations are planes that intersect
to determine solutions. 3D images are challenging to draw and analyze so level curves used.

Level Curves (Contour Plots)


Level curves can represent 3 dimensions in a 2D graph.
-​ Fix the dependent variable, z, at some constant value: For example, let for z = xy, let
z = 4. Graph all possible pairs of x, y that satisfy z = 4.
The set of all points (x,y) in R^2 satisfying this equation is called its graph.

Eg. z = x^2 + y^2 Graph all combinations of x,y such that z equals 32.
32 = x^2 + y^2
32 - x^2 = y^2
2 1/2 2 1/2
(32 − 𝑥 ) = (𝑦 )
2
± 32 − 𝑥 = 𝑦
Examples of Level Curves in Economics
Eg. Indifference Curves – a level curve for a multivariate utility function. Compute the
equation for the level curve at placeholder 𝑈0. Good y is on the y-axis and good x is on the
𝑎 𝑏
x-axis. 𝑈(𝑥, 𝑦) = 𝑥 𝑦 , 𝑎, 𝑏 > 0, 𝑥, 𝑦 > 0.
𝑎 𝑏 𝑈0 𝑏 𝑈0 1/𝑏 𝑏 1/𝑏 𝑈0 1/𝑏
𝑈0 = 𝑥 𝑦 ⇒ 𝑎 =𝑦 ⇒( 𝑎 ) = (𝑦 ) ⇒( 𝑎 ) =𝑦
𝑥 𝑥 𝑥

An isoquant shows all combinations of capital and labor


that can produce output 𝑌0.

Figure: Indifference Curves are Level Curves for different values of 𝑈0

Examples of Level Sets and Curves


General Examples: A condition like xy = 3 represents a level set of a larger function.
Topographic maps are analogous: level curves show points with the same “height.”
Economic Applications – Budget planes/hyperplanes, production and utility surfaces;
iso-cost lines, isoquants, and indifference curves.

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