Preparatory Quantitative Methods

Tushar Tanwar
Quiz

  sinx/x ,

 x4+200x2 , x3-200x2 , (x- )

 , ,

 ,
 Find asymptotes of f(x)=log(x-2), f(x)= x/(), tan x
 Find points of discontinuity of f(x)=tanx/sinx

 Find intervals of continuity for f(x)=log(x-1/x+2),f(x)=

Differentiation

 Why
  study calculus? Change is all around us, in market trends, etc.
The rate at which any quantity changes is of interest to us, and is
measured by the derivative...
 Differentiation is all about measuring change.
 A derivative is obtained through the process of differentiation.
 Change in linear function
 y = a + bx

 a = intercept, b = the impact of a unit change in x on the level of y.

 The slope of the graph of a function is called the derivative of the function.
Formal definition of derivative

 The
  derivative of a function f at a number a, ( if this limit exists).
 Derivative of a function
 Where the change is x is arbitrarily small i.e.  x  0.
 Derivative is as the rate of change of output with respect to input.
 A function f is differentiable at a if f’ (a)(derivative) exists.
 It is differentiable on an open interval (a,b) [ or (a, ∞) or (- ∞ ,a) or (- ∞ ,
∞)] if it is differentiable at every number in the interval.
 All functions that are differentiable are continuous(Prove?)( discontinuity
implies not differentiable)
Examples
 Use
  the definition to find derivative of
 f(x)=1/x
 f(x)=
 Use the derivative to find
 [Hint: f(a+h)f(a)+hf’(a)]
 Suppose f(3)=12 and f(2.8)=12.6. Approximate f’(3)
Existence of derivative
 The derivative value simply may not exist for few functions

 Kink/Cusp: if a function has a cusp at ‘a’

 f(x)=|x|
 f is not differentiable at 0

 Note: f is continuous at 0 but not differentiable at zero.


 Cliff/jump:
  if a function has a jump at ‘a’

 f is not differentiable at 0
 Note: f is not continuous at 0

 Vertical tangency/infinity at ‘a’

 f is not differentiable at 0
 Note: f is not continuous at 0
Sign of derivative
 If f’(x)>0 then f(x) is an increasing function of x.
 If f’(x)<0 then f(x) is an decreasing function of x.
Prove using definition
  Differentiation of a power function: , e.g.:- x1/3
Differentiation rules

 Differentiation
  of a constant: ,
 Differentiation of a linear function : ,
 Differentiation of a power function: , e.g.:- x1/3
 Sum and difference of differentiable functions
(both exists) Find f’(x) for

 Product
  rule

Ex: Find f(x) = (2x4-3x+5).(x2-+)

 Quotient rule: Assuming


Ex: Find f(x) = ()

Rules

 Chain
  Rule : If y is a function of v, and v is a function of x, then y is a
function of x and
 Find if z=w2-w and w=3x
 Find f’(x) where
1. f(x)=(2x-1)8
2. f(x) =
 If f is differentiable at all x and has an inverse function g(x)=f-1(x), then
g(x) =
Given that the function f(x) = x5 + 3x3 + 2x + 1 has an inverse function g(x),
compute g’(7).
Derivatives

 The
  derivatives of six trigonometric functions
 (1) sin x = cos x (2) cos x = − sin x
 (3) tan x = sec2x (4) cot x = − csc2x
 (5) sec x = sec x tan x (6) csc x = − csc x cot x.

 Find f’(x) where f(x) equals

x5 cos x
sin2 x
sin2 x2

 Theorem:
  For any constant a>0, ax = ax ln a.
 Corollary: ex = ex.
 Find f’(x) where f(x) equals
1. 3
2. -
• Theorem: For x>0, (ln x) = .
 Ex: Find f’(x) where f(x) equals
1. x ln x
2. ln (3x4 + 2x2 – 1)
Examples

 Find
  f’(x) where f(x) equals

 For functions defined implicitly

• Find y’(x) for x2y2 -2x = 4-4y.
• Then, find an equation of the tangent line at the point (2,-2).
 For functions defined parametrically
 x(t)=et , y(t)=tan(t)
 x(t)=t+cos t , y(t)=ln(cos(sin(t)))
L’Hopital rule

 If
  or and and Exists , then =
 Examples:

 )
Mean Value theorem

 If
  a function  is continuous  on the[a b]  , where  , and differentiable on
the (a b)  , then there exists a point  in c in (a b)  such that
 f’(c)
 Applications:
 Assume that f is a continuous, on an open interval with f’(x)=0.
then f is constant in the interval.
 If f’(x)>0 , then f is increasing. If f’(x)<0 , then f is decreasing.
Higher order derivatives

 Higher
  order derivatives
 Let f be a differentiable function, and let f′(x) be its derivative. The
derivative of f′(x) is called the second derivative of f and denoted by f′′(x).
Similarly we have f′′′(x), f′′′′(x).
 denotes a function differentiated n times.
 If f(x) = 3x4 − 2x2 + 1, compute as many derivatives as possible.
 Find y’’(x) implicitly for y 2 + 2e −xy = 6. Then find the value of y’’ at the
point (0, 2).
Examples

 The
  profit, P, of a company that manufactures and sells N units of a certain
product is modeled by the function P(N)=R(N)-C(N). The revenue function,
R(N)=S.N, is the selling price S per unit times the number N of units sold.
The company's cost, C(N)=C0+Cop(N), is a sum of two terms. The first is a
constant C0 describing the initial investment needed to set up production.
The other term, Cop(N), varies depending on how many units the company
produces, and represents the operating costs. Companies care not only
about profit, but also "marginal profit", the rate of change of profit with
respect to N. Assume that S=$50, C0=$75,000, Cop(N)=$50, and that the
company currently sells  N=100 units. Compute the marginal profit at this
rate of production.
Example

 In
  Economics, "physical capital" represents the buildings or machines used
by a business to produce a product. The "marginal product of physical
capital" represents the rate of change of output product with respect to
physical capital (informally, if you increase the size of your factory a little,
how much more product can you create?). A particular model tells us that
the output product Y is given, as a function of capital K, by Y=AKL1-,
where A is a constant, L is units of labor (assumed to be constant), and  is a
constant between 0 and 1. Determine the marginal product of physical
capital predicted by this model.
Increasing and Decreasing function

 A
  function f is increasing on an interval if,
for any u and v in that interval, whenever
u<v, then f(u)< f(v).
 is increasing for x>1

 A function f is decreasing on an interval if,

for any u and v in that interval, whenever
u<v, then f (u)> f (v).
 is decreasing in 0≤x≤2.

 If f '(x) > 0 for a<x<b, then the function is increasing in the interval.
( tangent line has positive slope)
 If f '(x) < 0 for a<x<b, then the function is decreasing in the interval
( tangent line has negative slope)
Examples
Find the intervals where f(x) is increasing or decreasing.
1. f(x) = x2(x-1)
2. f(x) = 2x3+9x2-24x-10
Convexity and concavity
 Let  f  be a function of a single variable defined on an interval.
  f  is concave if every line segment joining two points on its graph is never above
the graph.
 f  is convex if every line segment joining two points on its graph is never below
the graph.

 A twice-differentiable function  f  of a single variable defined on the interval I is

 concave if and only if  f ''(x) ≤ 0 for all x in the interior of I
 convex if and only if  f ''(x) ≥ 0 for all x in the interior of I.

 In management theory, most profit functions are concave and most cost functions
are convex
 Find all intervals where f is concave or convex if (1) f(x) = x 4 − x3 . (2) f(x) = (x-
1)/ x . (3) f(x) = 5x 4 − 3x 5
Maxima and minima

 Differentiation
  can be used to find the maximum and minimum values of a
function.
 If y = f(x), then the function attains a maximum value at in the interval
[a,b], then x [a , b ].
 Any point at which the tangent to the graph is horizontal (=0)is called a
stationary point.

 Minima
 goes from negative through
zero to positive as x increases.
So, if is positive at a stationary point,
then that point must be a minima

 Maxima
 
 goes from positive through zero
to negative as x increases.
So, if is negative at a stationary point,
then that point must be a minima
Unconstrained optimization
 First order condition/ First derivative test : The necessary condition for a
extremum (maximum or minimum) at a point is that the first-order derivative
be zero.
 Second order condition/ Second derivative test
 If the first-order condition is satisfied at x=x0,
 f(x0) is a maximum if f''(x0) < 0
 f(x0) is a minimum if f''(x0) > 0
 Inflexion points
 At inflexion point f''(x ) = 0 (necessary condition but not sufficient)
0
 Check if f(c) exists and f”(c) changes sign at x=c, then the point (c,f(c)) is
an inflection point of the graph of f.

 Find
  all critical points, inflection points, intervals of monotonicity and
concavity for f(x) = x 3 − 3x 2 + 4
 Ex: Classify the critical points of f(x).
1. f(x) = x3-2x+1
2. f(x)=x3−3x2+x - 2 
Application
  Find the optimum points of the profit function P= -Q3-24Q2+2880Q-750
and determine what level of production Q will maximize profit.  
 Given the following total cost function, TC=Q3-24Q2+600Q determine the
level of production that minimizes the average cost, and the level that
minimizes the marginal cost? When does AC=MC? Plot MC and AC curves
         
Profit maximization by firms
 Maximization problem:
Firm seeks to maximize profits by choosing optimal Q.
 Objective function:
The profit function
 Choice variable:
Output level, Q
 First-order condition:
R'(Q) - C'(Q) = 0
 MR = MC
 The firm maximizes profits by producing the output level at which
marginal revenue equals marginal cost.
Second-order condition: Sufficient condition for maximizing profit
function?
Profit maximization
 Demand curve: P(Q) = a - bQ
 Cost function: C(Q) = cQ2 + eQ + F

 Questions
 What is the firm's fixed cost? Variable cost?
 Obtain the firm's revenue R(Q) and marginal revenue (MR) functions.
 Obtain the firm's marginal cost (MC) and average cost (AC) functions.
 Write down the firm's profit function in terms of Q.
 Obtain the first-order derivative of the profit function.
 Obtain the second-order derivative of the profit function.
 Under what conditions is the profit function strictly concave? Assume
these conditions hold.
 Using the first-order condition, obtain the critical value of Q. Call this Q*.
 Using the second-order condition, establish whether the critical value
corresponds to a maximum or minimum.
 Obtain the firm's optimal price. Call this P*.
 What is the relationship between MR and MC at Q*?
Applications

 Elasticity
  =
 Price elasticity of demand
 A demand curve is a function in which quantity demanded is dependent on
a product’s price.
 The price elasticity of demand is defined as the percentage change in
quantity demanded resulting from a one percent change in Price
 e d=

 e  d is negative for a downward sloping demand curve
 –Inelastic demand if | ed |<1 a 1% price cut increases the quantity sold by
less than 1% and total revenue decreases
 –Unit elastic demand if | ed |=1 a 1% price cut increases the quantity sold by
1% and total revenue does not change
 –Elastic demand if | ed |>1 a 1% price cut increases the quantity sold by
more than 1% and total revenue increases

 Find ed of the function Q= aP-b where ed = (point elasticity of demand)

 Find ed for P = 200 – 40ln(Q+1). Calculate the price elasticity of demand
when Q = 20
Partial Differentiation
 Partial differentiation is the method of calculating the derivative of
multivariate function with respect to one of the variables
 Represented by the symbol ∂ - (spell as doh)
 Find all the first- and second-order partial derivatives of the function f(x, y)
= x2 + 3yx, verifying that the two cross-partial derivatives are the same.
 f ( x , y , z ) = 3x3y + 2 y2 zx3 − 7 z2 x
Find ∂f/∂x,∂f/∂y,∂f/∂z,∂2f/∂x2 ,∂2f/∂x∂y,
∂3f/∂x ∂y ∂z
Example
 The Marginal Products of Labour and Capital
 Suppose that the output produced by a firm depends on the amounts of
labour and capital used.
 If the production function is Y (K, L) the partial derivative of Y with respect
to L tells us the marginal product of labour: MPL = ∂Y/ ∂L
 The marginal product of labour is the amount of extra output the firm could
produce if it used one extra unit of labour, keeping capital constant.
 Similarly the marginal product of capital is: MPK = ∂Y/∂K
Example
 For a firm with production function Y (K, L) = 5K1/3L 2/3 :
 (i) Find the marginal product of labour. MPL = ∂Y/ ∂L
 (ii) What is the MPL when K = 64 and L = 125
 (iii) What happens to the marginal product of labour as the number of
workers increases?.
 (iv) What happens to the marginal product of labour as the amount of
capital increases?
 Thank you!