CHAPTER FOUR

DERIVATIVES OF MULTIVARIATE FUNCTIONS

PARTIAL DIFFERENTIATION
The purpose of this sect ion is to show you how to find the derivat ive o f a funct ion wit h
respect to one of the independent variables while the other variable(s) is/are held constant.
Let's consider a funct ion with two variables
Z = f (x, y)
The goal is to different iate the funct ion with respect to one of the variables in quest ion while
keeping the other variable constant.
z
Therefore, the partial derivative of f with respect to x, denoted by or fx, or fx (x, y), is
x
defined by
z f ( x  x, h)  f ( x, y)
 lim , provided the limit exists.
x x0 x

z
Similarly, the partial derivat ive of f with respect to y, denoted by or fy or fy (x,y), is
y
defined by
z f ( x, y  y )  f ( x, y )
 lim , which is the funct ion obtained by differentiat ing f
y y  0 y
with respect to y, treating x as a constant. The process of taking part ial derivat ive is called
partial differentiation.
The above definit ions can easily be extended to funct ions o f three or more variables.

Example1: Find the partial derivat ives fx and fy if Z = f(x,y) = x2 + 2y2 + 3xy

Solution:
To find fx different iate the funct ion with respect to x, treating y as a constant.
z
fx   2x  3 y
x
To find fy different iate the funct ion with respect to y, treating x as a constant.
z
fy   4 y  3x
y

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Example 2. Find the partial derivat ives fx and fy and fx (2,3) and fy (2,3) if
Z = f(x,y) = 3x2 – 2xy2 +1
Solution:
z
fx   6 x  2 y 2 (Treating y as a constant)
x
z
fy   4 xy (Treating x as a constant)
y

fx (2,3) = 6(2) – 2(3)2 = 12 – 18 = -6

fy (2,3) = -4(2) (3) = -24

Note that the partial different iat ion differs fro m the previous discussio n of different iat ion is
that we must ho ld (n – 1) independent variables constant while allowing one variable to vary.
Otherwise no new rules are needed for the computation of partial derivatives.

3x1  2 x2
Example 3: Given Y  , find the partial derivat ives
x1  3x2
2

Solution:
The partial derivat ives can be found by applying the quotient rule.
By treating x2 as a constant

y 3( x1  3x 2 )  2 x1 (3x1  2 x 2 ) 3x1  9 x 2  6 x1  4 x1 x 2
2 2 2

f1   
x1 ( x1  3x 2 ) 2
2
( x1  3x 2 ) 2
2

 3x1  4 x1 x 2  9 x 2
2


( x1  3x 2 ) 2
2

By treating x1 as a constant
y  2( x1  3x 2 )  3(3x1  2 x 2 )  2 x1  6 x 2  9 x1  6 x 2
2 2

f2   
x 2 ( x1  3x 2 ) 2
2
( x1  3x 2 ) 2
2

 x1 (2 x1  9)

( x1  3x 2 ) 2
2

Therefore, students can use the above techniques of part ial differentiation in order to find the
partial derivat ives of any form of funct ions.

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CONCEPT OF DIFFERENTIALS
Given a funct ion y = f (x), then

Change rate of change of 

in y    y with respect to x Change in x
   
 y 
y =   x
 x 
y
If ∆x is small, then y  dy and the difference quotient will turn in to the derivat ive
x
dy/dx. If we denote the infinitesimal changes in x and y, respectively, by dx and dy (in place
of ∆x and ∆y), the ident it y above will beco me
 dy 
dy   dx or dy  f 1 ( x)dx
 dx 
dy and dx are called the differentials of y and x respectively.

Geometric Interpretation of Differentials

The approximat ion of ∆y by its different ial dy has a simple geo metric interpretation.
Y

∆y
ay

X
x x+∆x

Figure 5.2. Approximat ion of ∆y by the different ial dy.

The slope o f the tangent is dy/dx. The different ial dy is the change in the height of the tangent
dy
corresponding to a change fro m x to x + ∆x, i.e., dy  x . On the other hand ∆y is the
dx
change in the height of the curve corresponding to a change in x. Hence, approximat ing ∆y by
the different ial dy is the same as approximating the change in height of a curve by the change

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in height of its tangent. If ∆x is small, this approximat ion will be very close to the actual
change in y.

Example1: Find the different ial dy, given

y  x 3  3x
Solution:
dy
dy  dx or f 1 ( x)dx
dx
dy  (3x 2  3)dx  3( x 2  1)dx
Let's assume that x changes fro m 9 to 9.01, then x = 9 and dx = 0.01. Substituting these
numbers in to the above different ial, we get
dy = 3(92 + 1) (0.01) = 2.46
The actual change in y can be calculated as fo llows:
Before change: y  x 3  3x y = 93 + 3(9) = 756

After change: y  x 3  3x y = (9.01)3 + 3(9.01) = 758.462701

The true change in y is therefore 758.462701 – 756 = 2.462701

Therefore dy = 2.46 is an approximat ion for the true change 2.462701. The error we made in
calculat ion is 2.462701 – 2.46 = 0.002701

Note that the error will be large when change in x is large and it will be small when change in
x is small and beco mes a good approximat ion for the actual change in y.

Example 2. Find the different ial dy for the funct ion

f ( x)  x 2  3 x  5
Solution:
 dy 
dy   dx or f 1 ( x)dx
 dx 
dy  (2 x  3)dx

If x increases from 5 to 5.3, find dy

Subst ituting x = 5 and dx = 5.3 in the above different ial, we get
dy = (2 (5) – 3) (0.3) = 2.1
Again we can calculate the actual change in y for a change in x fro m 5 to 5.3

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 If x = 5 then y = 52 – 3(5) + 5 = 15, before change
If x = 5.3 then y = (5.3)2 – 3(5.3) + 5 = 17.19, after change
Actual or true change in y is therefore 17.19 – 15 = 2.19

Therefore, we approximated the actual change in y i.e. 2.19 as 2.1 by use of the concept of
different ials. We have made an error of 0.09 (2.19 – 2.1), which is very small.

TOTAL DIFFERENTIALS
In the above discussio n you learned how to use the differential of a funct ion to approximate
the change in the function result ing fro m a small change in it s independent variable. Now we
extend this concept of different ial to a funct ion of two or more independent variables.

Let Z be a funct ion of two variables x and y and the function is smooth and different iable
everywhere.
Z = f (x, y)
If ∆x and ∆y denote a small change in x and y respectively then the change in Z is given as
z z
Z  dx  dy
x y

z
The partial derivat ive measures the rate of change of Z with respect to an infinitesima l
x
z
change in x. Similarly measures the rate of change of Z wit h respect to an infinitesima l
y
change in y. Hence the change in Z due to a change in x may be represented by the expressio n
z z
dx and dy for that of a change in y.
x y
Therefore the total change in Z will be equal to the sum of these two partial changes.

z z
dz  dx  dy
x y
The process of finding such a total different ial is called total differentiation.

The more general case of a funct ion of n independent variables can be exemplified by
Z = f (x1, x2, x3, ---, xn).

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The total different ial o f this funct ion can be written as
f f f
dz  dx1  dx2       dxn
x1 x2 xn

or dz  f1dx1  f 2 dx2      f n dxn

This shows dz or the total change in z is the sum o f the n partial changes result ing fro m all
possible sources of change.

Examples 1: Find the total differential o f the functio n Z = 3x2 + xy – 2y3

Solution: Applying the approximat ion formula
z z
dz  dx  dy we get
x y
dz  (6 x  y )dx  ( x  6 y 2 )dy

Example 2: Find the total different ial of the funct ion

x1
y
x1  x2
Solution: Applying the approximation formula
y y
dy  dx1  dx 2 , we obtain
x1 x 2
1( x  x 2 )  x1 (1)   0( x1  x 2 )  x1 (1) 
dy   1  dx1    dx 2
 ( x1  x 2 )  ( x1  x 2 )
2 2
 
 x2    x1 
dy    dx   2 
dx 2
 ( x1  x 2 )   ( x1  x 2 ) 
2 1

 x2   x1 
dy   2 
dx1   2 
dx 2
 1
( x  x 2 )   1
( x  x 2 ) 

RULES OF DIFFERENTIALS
We found the total different ial dy, given a function y = f (x1, x2) by finding the part ia l
derivat ives f1 and f2 and subst itute these in to the equation
dy = f1dx1 + f2dx2
But somet imes it may be more convenient to apply certain rules of different ials.
Let c be a constant and u and v be two funct ions of the variables x1 and x2.

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1. dc  0
2. d (cu n )  cnu n1du
3. d (u  v)  du  dv
4. d (uv)  vdu  udv

 u  vdu  udv
5. d   
v v2

Example1: Find the total different ial o f the funct ion y = 3x12 + x1x22 by applying the above
rules of different ials

Solution:
dy = d(3x12) + d(x1x22) (by rule 3).
= 6x1dx1 + x22 dx1 + x1d(x22) (by rule 2 and rule 4)
= 6x1dx1 + x22dx1 + 2x1x2dx2 (by rule 2)
= (6x1 + x22)dx1 + 2x1x2dx2
The above total different ial can be found direct ly by finding the partial derivat ives
dy = f1dx1 + f2dx2
sin ce
f f
f1   6 x1  x 2 andf 2   2 x1 x 2
2

x1 x 2
dy = (6x1 + x22)dx1 + 2x1x2dx2

Therefore students may use a method, which they think is simpler to find the total differentia l
dy.

Example 2. Find the total differential dy for the funct ion

Solution: Z = f (x, y) = 3x3 –x2y + y + 17

dZ = d(3x3) – d(x2y) + dy + d(17) (by rule 3)
= 9x2 dx – x2dy – yd(x2) + dy ( by rule 1, 2 and 4)
2 2
= 9x dx – x dy – y(2x) dx + dy (by rule 2)

= 9x2dx – 2xydx – x2dy + dy

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 = (9x2 – 2xy) dx – (x2-1) dy

TOTAL DERIVATIVES
Let's consider the fo llowing funct ion
y = f (x, r) and x and r are related, i.e. x = h( r).
The quest ion is how can we find the rate of change of y with respect to r. The concept of total
derivat ive will enable us to answer this quest ion.
In the above funct ion the variable r can affect y in two ways:

1. Direct ly via the funct ion f

 f 
You can use the partial derivat ive   f r  in order to find the direct effect of r on y.
 r 

2. Indirectly, via the funct ion h and then f.

To obtain the total derivat ive, we first different iate y totally, to get the total different ial.

dy = fx dx + frdr
Dividing both sides by dr, we obtain

dy dx dr
 fx  fr
dr dr dr
dy dx dr
 fx  fr ( Since  1)
dr dr dr

dx
where, f x is the indirect effect of r on y and f r is the direct effect of r on y.
dr
dy
Therefore is the total derivative.
dr
The process o f finding the total derivat ive dy/dr is called total differentiation of y with respect
to r.

Example 1: Find the total derivat ive dy/dr given the function
y = f (x, r) = 5x2 – 3r + 1, where x = h(r) = 2r
dy dx
Solution: The total derivat ive  fx  fr
dr dr

8
 dy/dr = 10x (2) + (-3) = 20x – 3. Subst ituting x = 2r, we get
dy/dr = 20 (2r) – 3 = 40r – 3.
Example 2: Find the total derivat ive, dz/dt, for the funct ion
Z = f (x, t) = (x + t) (x - 2t), where x = h (t) = 2 – 7t
Solution:
dz dx f dx f
 fx  ft  . 
dt dt x dt t

f f
 1( x  2t )  ( x  t )(1) ,
dx
 7 ,  1( x  2t )  ( x  t )(2)
x dt t
Therefore,

 1( x  2t )  ( x  t )(1)(7)  1( x  2t )  ( x  t )(2)

dz
dt
dz
 ( x  2t  x  t )(7)  x  2t  2 x  2t
dt
dz
 (2 x  t )(7)  x  4t  14 x  7t  x  4t
dt
dz
 15 x  3t
dt
By Substituti ng x  2  7t , we get
dz
 15(2  7t )  3t  108t  30
dt
Note that in the above examples you can check the results obtained by subst ituting the
funct ion x = h(r) and h (t) in the funct ion y and z respect ively.

DERIVATIVES OF IMPLICIT FUNCTIONS

Explicit versus Implicit Function

An equat ion of the form y = f (x) in which the dependent variable y on the left is expressed
explicit ly by an expressio n on the right invo lving the independent variable is called an explicit
function.

Example1. y = f (x) = 2x – 1
x2 1
Example 2. y  f ( x) 
x3

Example 3. y  f ( x)  1  x 2 are all functions in explicit form.

9
If the above equat ions are written in the form F (y, x) = 0 then the funct ion is called an
implicit function.

If the function y is not written explicit ly in terms of the independent variable x, for instance y-
2x+1 = 0, the funct ion y is said to be in implicit form.

An explic it function can always be transformed in to an implicit funct ion by simply

transposing the f (x) expressio n to the left side of the equals sign, but the converse is not
always possible.

Implicit Differentiation
The direct use of an equat ion that defines a function implicit ly to find the derivative of the
dependent variable with respect to the independent variable is called implicit differentiation.

The importance of implicit differentiation is that there are many equat ions o f the form F (y,
x) = 0 that cannot be solved for y explicit ly.

Therefore, given F (y, x) = 0, if an implicit funct ion y = f (x) exists, then the derivat ive is
dy F dF dF
  x , Fy  0 where Fx  and Fy 
dx Fy dx dy

Generalizing the above for many variables such as F (y, x1, x2, ---, xn) = 0 then the partia l
derivat ives of f are
y F
  i , (i  1,2,3 - --, n) , Fy  0
xi Fy
F F
where Fi  and Fy 
xi y

Example 4: Find dy/dx for the implicit funct ion 3x2 + y – 2 = 0

Solution: The equation takes the form of F (y, x). By applying the above rule, we get

10
dy F F F
  x but Fx   6 x and Fy  1
dx Fy x y
dy 6x
  6 x
dx 1

In this case the implicit funct ion can easily be converted to an explicit form, that is y = 2 –
3x2. Therefore, the student can check or verify the answer obtained above by taking the
derivat ive.
dy
Example 5: Find for the implicit funct ion x2 + y2 – 25 = 0
dx
Solution:
F F
Fx   2 x and Fy   2y
x y
dy F 2x x
Hence  x    , ( y  0)
dx Fy 2y y

5.8 EXAMPLES ON ECONOMIC APPLICATIONS

In this sect ion we will try to see so me of the applicat ions of those concepts in this chapter in
economics. Let us take different examples.

Example1: Suppose the total cost funct ion of a firm is given by

c  3q12  7q1  1.5q1q2  6q2  2q22 .
Then find the marginal costs of the firm’s different products.

Solution:
The marginal cost from the first product is calculated by taking the partial derivat ive of c wit h
respect to q1 .
c
Mc1 =  6q1  1.5q 2  7
q1
The marginal cost from the second product is calculated by taking the partial derivat ive o f c
with respect to q 2 .
c
Mc2 =  1.5q1  4q 2  4
q 2

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Example 2: The demand funct ion for a good is given by Q=700-2p+0.02y, where P is the
price and Y is inco me. If price =25 and Y = 5000, compute
a) the price elast icit y o f demand and
b) the inco me elast icit y o f demand
Solution:
a) The price elasticit y o f demand is calculated by using the fo llowing formula

Q P
Ed p 
P Q
Q
 2 and subst ituting the value of P and Y in to the demand equation
P
we get Q = 700-2(25)+0.02(5000) = 750
Q P 25
Therefore, Ed p  = -2( ) = -0.067
P Q 750
b) Similarly, the inco me elast icit y o f demand can be found by using the formula
Q Y
Ed y  . This measures the percentage change in the demand for a good resulting fro m a
Y Q
certain percentage change in inco me.
Q
 0.02
Y
Q Y 5000
Thus, Ed y  = 0.02( ) = 0.133
Y Q 750

Example 3: The total cost function o f a firm producing two commodit ies x and y is given by
C(x,y)= x 2  0.5xy  y 2 . If init ially x = 100, y = 60, what is the addit ional cost incurred by the
firm if the output of x is increased by 3 unit s.

Solution: Here we use the concept of differentials.

For a very small change in output the different ial is given by
c
dc  dx  (2 x  0.5 y)dx
x
The change in the total cost for a large increment is given by
c
c  x
x

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Therefore, c  (2 x  0.5 y)(3)
c  2(100)  0.5(60)(3)  510
EXTREME VALUES OF A FUNCTION OF TWO VARIABLES
As stated above in this sect ion you will learn how to use the concept of partial derivat ives that
we have discussed in chapter V to find the extreme values of funct ions o f the t ype Z= f (x, y).
Before going to the discussion, let us see how to find the second order partial derivat ives of a
funct ion.

Second Order Partial Derivatives

Let f be a function o f the two variables x and y.
f f
The first partial derivat ives of f denoted by f x or and f y or were discussed in chapter
x y
V. Now we want to find the partial derivat ives of fx and fy. The second order partial deviates
are fxx, fyy, fxy and fyx.

  Z   z
2
  z   2 z
f xx     . f   
x  X  x y  y  y 2
2 yy

  Z   2 Z   Z   2 Z
f xy    , f yx    
y  x  yx x  y  xy

Students can use any one of the notations which they like is convenient.
fxx measures the rate of change of fx with respect to x, while y remains fixed.
fyy denotes the rate of change of fy with respect to y, while x is heed constant.

The other two second order partial derivatives (fxy and fyx) are called the cross or mixed partial
derivatives and each measures the rate of change of one first-order partial derivative with
respect to the other variable.

Now let us see the fo llowing examples on how to find the four second order partia l
derivat ives

Example 1: Find the four second order partial derivat ives of the function
Z = x3 – 2xy + 5y

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Solution:
In order to find the second order partial derivat ives, we have to find first the
first partial derivat ives
Z
fx   3x 2  2 y and
x
Z
fy   2 x  5
y
The partial derivat ives of fx and fy with respect to x and y are
  Z  
f xx     (3x  2 y )  6 x
2

x  x  x
  z  
f yy     (2 x  5)  0
y  y  y

The other two mixed partial derivat ives are

  Z  
f xy     (3x  2 y )  2
2

y  x  y
  Z  
f yx      2 x  5  2
x  y  x
From the above result, the mixed partial derivat ives fxy and fyx are the same.

Young's theorem: As long as the two mixed partial derivat ives are both continuous
fxy = fyx.

Example 2: Z = x3 – 2x2y2 – 4y – 2x + 15
Solution:
z
fx   3x 2  4 xy 2  2
x
z
fy   4 x 2 y  4
y
Therefore, the second order partial derivat ives are:

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   z  
f xx   
x  x  x
 
3x 2  4 xy 2  2  6 x  4 y 3

  z  
f yy    
y  y  y
 
 4 x 2 y  4  4 x 2

  z  
f xy     (3 x  4 xy  2)  8 xy
2 2

y  x  y
  z  
fyx     (4 x 2 y  4)  8 xy
x  y  x
As expected the mixed partial derivat ives (fxy and fyx) are equal

FIRST ORDER NECESSARY CONDITION FOR AN EXTREMUM OF A

FUNCTION WITH TWO VARIABLES
In this sect ion we will see the necessary condit ions for finding the relative extremum o f a
funct ion Z = f (x, y).

The necessary condit io n is to find the values of x and y which make the first partia l
derivat ives of the funct ion Z = f (x, y) zero. That is, fx = fy = 0. These values play a n
important role in finding the relative maxima, minima or saddle points of the funct ion Z = f (x,
y) as we did for funct ions o f one variable in chapter five. To find the crit ical po ints of the
funct ion, set fx = fy = 0 and so lve these equat ions simultaneously for x and y. After this we use
the second order test inorder to know that the solutio ns for the above equat ions corresponds to
the relat ive maximum, relative minimum or saddle points.

SECOND ORDER CONDITION

The sufficient condit ion for finding relative extremum of the funct ion f (x, y) is presented as
fo llo ws.
Let (a, b) is a crit ical po int of the function f (x, y). Then

 f (a , b) is a relat ive maximum if and only if fxx < 0, fyy < 0 and fxx fyy > f2xy
 f (a, b) is a relat ive minimum if and only if fxx > 0, fyy > 0 and fxx fyy > f2xy.
▪ f (a , b) is a saddle point if fxx fyy < f2xy and fxx, fyy have different signs.
▪ f (a , b) is an inflection point if fxx fyy < f2xy and fxx, fyy have the same signs.

The test fails to give informat ion about the behavior of the function if f2xy = fxx fyy.

15
Note that the second order partial derivat ives (fxx, fyy and fxy) should be evaluated at the crit ica l
points (a, b). The necessary and sufficient conditio ns for relat ive extremum are summarized
below.

Conditions Minimum Maximum

- First-Order fx = fy = 0 fx = fy = 0
necessary condit io n
- Second-Order fxx > 0 , fyy > 0 fxx < 0, fyy < 0
sufficient condit ion fxx fyy > f2xy and
fxx fyy > f2xy

Example 3: Find the extreme value(s) of the functio n Z = x2 + y2 +2

Solution:
Step 1: Find the crit ical po ints fro m the first partial derivat ives
z
fx   2x
x
z
fy   2y
y
fx = fy = 0 is the necessary condit ion
2x = 2y = 0
x = 0 and y = 0
The only crit ical po int is (0, 0)
Step 2: Check the Second-Order sufficient condit ions
  z  
f xx     (2 x)  2
x  x  x
  z  
f yy     (2 y )  2
y  y  y
  z  
f xy     (2 x)  0
y  x  y
Evaluat ing the second order partial derivat ives at the crit ical values of the function, we get:
fxx (0, 0) = 2 fyy (0, 0) = 2 fxy (0, 0) = 0

16
Therefore, since fxx > 0, fyy > 0 and fxx fyy > f2xy, the critical values (0 , 0) belongs to the
relat ive minimum value of Z.
Hence Z = 02 + 02 + 2 = 2 is the relat ive minimum.

Example 4: Find the extreme value of the funct ion Z = 2x2 – 3y2.
Solution:
Step 1. The first order partial derivatives are
z z
fx   4x fy   6 y
x y
The necessary condit io n
f x = fy = 0
4x = 0 -6y = 0
x=0 y=0
The crit ical po int is (0, 0)

Step 2. The second-order sufficient condit ion

  z  
f xx     (4 x)  4
x  x  x
  z  
f yy     (6 y )  6
y  y  y
  z  
f xy     (4 x)  0
y  x  y
f xx f yy  24 f 2
xy 0

Therefore, since fxxfyy < f2xy the point (0, 0) belongs to the saddle point.

Example 5: Z = -x2 – y2 + xy + 2x + y

Solution:
Step 1. Find fx and fy

17
 z
fx   2 x  y  2  0
x
z
fy   x  2y 1  0
y
 2 x  y  2      (1)
x  2 y  1        (2)
Solving equations (1) and (2) simultaneously we get x =5/3 and y = 4/3.
That is (5/3, 4/3) is the critical po int

Step 2: Check the second order partial derivat ives

   z    z 
(2 x  y  2)  f xx     2 f yy     2
x x  x  y  y 
  z  
f xy     (2 x  y  2)  1
y  x  y

Evaluat ing the second order partial derivat ives at the crit ical po ints we get
fxx < 0, fyy < 0, fxxfyy = 4 > 0
fxy = 1, f2xy = 1

Therefore, since fxx < 0, fyy < 0 and fxxfyy > f2xy the funct ion Z has a relat ive maximum at
(5/3 , 4/3). At the maximum po int Z = 7/3.

Example 6: Z = x4 – 8x2 + 6y2 – 12y + 3

Solution:
Step 1. Find fx and fy
z
fx   4 x 3  16 x  0
x
z
fy   12 y  12  0
y

Solving the above equat ions, we get x = 0 or 2 or -2 and y = 1. That is (0, 1), (2 , 1) , (-2 ,
1) are the crit ical po ints.

Step 2. The second order partial derivat ives are

18
   z  
f xx     (4 x  16 x)  12 x  16
3 2

x  x  x
  z  
f yy     (12 y  12)  12
y  y  y
  z  
f xy     (4 x  16 x)  0
3

y  x  y

At x = 0, fxx = -16 < 0, fyy = 12 > 0

At x = 2, fxx = 32 > 0, fyy = 12 > 0
At x = -2, fxx = 32 > 0, fyy = 12 > 0
fxy = 0 , f2xy = 0

Therefore, from the above result we have the follo wing conclusio ns:

- At x = 0, fxx < 0, fyy > 0 and fxx fyy < f2xy the point (0 , 1) belongs to the saddle po int
and Z = -3
- At x = 2 , fxx > 0 , fyy > 0 and fxxfyy > f2xy , the point (2 ,1) is the relat ive minimum
and Z = -19
- At x = -2 , fxx > 0 , fyy > 0 and fxxfyy > f2xy , the point (-2 , 1) is also another relat ive
minimum and Z = -19

6.5 ECONOMIC APPLICATIONS

Here let's see the applicat ion o f the above discussions in so lving econo mic problems wit h the
help of the fo llowing examples.
Example on problem of a mult iproduct firm.

Let's consider the fo llowing problems of a firm.

A firm operating under pure co mpet it ion produces two products. Since price o f the products
are exogenous to the firm, the level o f the two products should be determined to get the
maximum pro fit.

Let Q1 and Q2 represent the output level o f the first and second products per unit o f t ime.
Accordingly, the firm's revenue funct ion is as fo llo ws:

19
 R = P1Q1 + P2Q2
Let's assume that P1 = 12 and P2 = 18
R = 12Q1 + 18Q2
The firm's cost funct ion is given by
C = 2Q2 + Q1Q2 + 2Q22
The profit function is therefore
Pr ofit    R  C

  12Q1  18Q2  (2Q1 2  Q1Q2  2Q2 2 )

  12Q1  18Q2  2Q1 2  Q1Q2  2Q2 2
The firm's object ive is to choose the level o f Q1 and Q2 that maximizes its pro fit. Hence as
usual we need to compute the first order partial derivat ives first.

1   12  4Q1  Q2
Q1

2   18  Q1  4Q2
Q2
These are the necessary condit io n for finding the maximum pro fit.
Solving the equations 4Q1+Q2 =12 and Q1+4Q2 =18 simultaneously, we get Q1 = 2 and Q2 = 4

Subst ituting the values o f Q1 and Q2 (i.e. 2 & 4) in to the profit funct ions, the optimal profit
beco mes 48 per unit of time.
Use the second order partial derivat ives to check the result obtained above.
       
 11     4  22     4
Q  Q1  Q2  Q2 
   
 12     1
Q2  Q1 
 11 22  4 ,  12 2  1

Therefore, since 11  0,  22  0 and 11 22  16  12  1, the maximum profit is 48.
2

Example 2:A monopolist sells two products x and y for which the demand funct ions are
x = 25-0.5Px
y = 30-Py
And the combined cost function is x2+2xy+y2+20, and then find

20
a) the profit maximizing level o f output for each product
b) the profit maximizing price for each product
c) the maximum profit

Solution:
a) To find the profit maximizing level o f output, first construct the profit funct ion.
Pr ofit    TRx  TRy  C

But TRx = Pxx and TRy = Pyy and hence Pr ofit    Px x  Py y  C .

From the demand funct ions we have

Px = 50-2x and Py = 30-y
Subst ituting these values in to the profit funct ion, we obtain
  (50  2 x) x  (30  y) y  ( x 2  2 xy  y 2  20)
  50 x  3x 2  30 y  2 y 2  2 xy  20
The first order necessary condit io ns for maximizing profit are
 
  x  50  6 x  2 y  0 and   y  30  4 y  2 x  0
x y
Solving simultaneously we get x =7 and y = 4
Now check the second order conditions
 xx  6,  yy  4and xy  2

Therefore since xx <0, yy 0 and  xxyxy > 2xy profit is maximized at x =7 and y = 4
b) To get the profit maximizing prices subst itute x=7 and y=4 in to the demand funct ions
Px=50-2x and Py=30-y.
Px = 50-2(7) =36 and Py =30-4 =26
c) The maximum profit is therefore obtained by subst ituting the values of x and y in to the
profit funct ion and   215

21
SUMMARY
This sect ion tries to summarize so me of the important points on the chapter.
Extreme values of a function wit h two variables: Z = f (x, y)
Partial derivat ives:
Z Z
fx  , fy 
x x
Second order partial derivat ives: fxx, fyy, fxy, fyx
  Z   z
2
  z   2 z
f xx     . f   
x  X  x y  y  y 2
2 yy

  Z   2 Z   Z   2 Z
f xy     , f yx    
x  y  xy y  x  yx

Cross (mixed) partial derivat ives: fxy, fyx

Young’s theorem: fxy = fyx
The necessary and sufficient condit ions for relat ive extremum:

Condit ions Minimum Maximum

-First-Order fx = fy = 0 fx = fy = 0
necessary
condit ion
-Second-Order fxx > 0 , fyy > 0 fxx < 0 , fyy < 0
sufficient condit ion and fxx fyy > f2xy and
fxx fyy > f2xy

FINDING STATIONARY VALUES

Here we will learn how to find the stationary values of a function wit h constraints by the
method of subst itution and eliminat ion. To illustrate this let us consider the fo llowing utilit y
funct ion of a consumer.

Example 1: Find the stationary value of the utilit y funct ion

U = x1x2 + 2x1

22
If we were to find the free extremum, with out constraint, then the consumer can purchase any
amount of x1 and x2. In realit y the consumer has a fixed budget to be spend on the two goods
x1 and x2. And the consumer’s object ive is to maximize his sat isfact ion subject to such a
limited inco me. The total amount of mo ney to be spent on these two goods is birr 60. Assume
that the market price of x1 and x2 per unit are birr 4 and 2 respect ively. Then the budget
constraint can be expressed by the fo llowing linear equation.

4x1 + 2x2 = 60

Therefore, the problem of the consumer is to maximize U subject to the above constraint.
i.e. Max U = x1x2 + 2x1
Subject to: 4x1 + 2 x2 = 60

The technique of substitution and eliminat ion to solve such a problem invo lves reducing the
funct ion to one variable. We so lve the constraint equat ion for one o f the variables and the n
subst itute the result ing expressio n in to the objective funct ion (the funct ion to be optimized).
Here is a procedure of the method.
From the constraint equation, x2 = 30-2x1.

Subst ituting this in to the funct ion to be optimized, we get

U = x1 (30-2x1) + 2x1 = 32x1-2x12

Now we have got a utilit y funct ion of one variable only. The next step is to find the crit ica l
values by the method learned in unit 6.

Taking the first derivatives and setting the result ing expressio n equal to zero, we get
dU
 32  4 x1  0  x1  8
dx1

Since x2  30  2 x1 the value o f x1 is 14

d 2U
The second order derivat ive is equal to –4< 0.
dx 2
Hence x1 = 8 corresponds to the maximum o f U. The stationary value of the funct ion is then
obtained by subst ituting the values of x1 and x2 in to the object ive function.
U = 8(14) + 2(8)=128.

23
Example 2: Find the extreme value of the function
Z = xy subject to the constraint x + y =1
Solution: using the procedure learned in example 1 above so lves the problem.

From the constraint equat ion x  y  1, y  1  x. Subst ituting this value of y in to the object ive

funct ion z  x1  x   x  x 2 . Next find the crit ical values.

dz 1
 1  2 x Setting this to zero we get 1  2 x  0  x 
dx 2
y  1   Since y  1  x 
1 1
2 2
The extreme value of the funct ion is then found by subst ituting the value of x and y in to the
object ive function z  xy
_
1 1 1
i.e. z    (Note that this value is the maximum value of the function since
2 2 4
d 2z
 2  0 )
dx 2

The problem o f using the subst itution and eliminat ion method in so lving constrained
optimizat ion arises when we have a co mplicated constrained funct ion or when there are
several constraints to consider. In such cases so lving the constraint equation for one of the
variables is difficult or even impossible. In the next sect ion we will learn another method
called Lagrange multiplier method.

LAGRANGE - MULTIPLIER METHOD

The object ive of this section is to aware students with the method of Lagrange mult iplier
method. This method allows you to introduce a third variable and so lve the optimizat ion
problems with constraint without solving the constraint equation for one of the variables.
In order to use this method we need to follow the following procedures.
Suppose z  f ( x, y) and g ( x, y) are funct ions whose first order partial derivat ives exist. Now
given an object ive funct ion z  f ( x, y) subject to the constraint g ( x, y)  c where c is a
constant, construct a Lagrangian funct ion by introducing a new variable λ (the Greek letter
lambda) i.e.

z  f ( x, y)  λ [c  g ( x, y)]

24
The necessary condit io n for stationary values of z is then to find the partial derivat ives of
z with respect to x, y and λ and so lve them simultaneously.

z
zx   f x  g x  0
x
z
zy   f y  g y  0
y
z
z   c  g ( x, y )  0


f f g g
Where f x = , f y  , gx  and g y 
x y x y

Then the crit ical values found from the above equations will correspond to the stationar y
values of z .

Example 1: To illustrate the above procedure let us take example 1 in sect ion 7.1.
The problem is to maximize u  x1 x2  2x1 subject to the constraint 4 x1  2 x2  60 .
Solution:
The Lagrangian funct ion is constructed as fo llows:
L  x1 x2  2 x1   (60  4 x1  2 x2 )
The Greek letter λ (lambda) is called Lagrange (undetermined) mult iplier.
Now considering L as a funct ion o f three variables, i.e. L  f ( x1 , x2 ,  ) the first order
necessary condit io n for free extremum will consist of the set of simultaneous equations.

L
L1   x 2  2  4  0 1
x1

L2 
L
 x1  2  0 2
x 2
L
L   60  4 x1  2 x 2  0 3


From 1 and 2 above, we have

x2  2 x
  and 1  
4 2

25
 x 2  2 x1
  2 x2  4  4 x1  2 x2  4 x1  4
4 2
Taking this and equat ion 3 above and so lving simult aneously we have
2 x 2  4 x1  4
2 x 2  4 x1  60
 8 x1  64  x1  8

Subst ituting the value of x1 in to either of the above equations we get 2 x2  48  4

From this x2  14 and the value of λ = 4.

Subst ituting the values o f x1 and x 2 in to the objective funct ion u  x1 x2  2x1 we get
u  128 .
Example 2: Find the extremum o f z  xy subject to the constraint x  y  4

Solution:
First construct the Lagrangian funct ion, L  xy   (4  x  y)

For a stationary value of z , it is necessary that

Lx  y    0 1
Ly  x    0 2 
L  4  x  y  0 3
By substituting one in to the other or by using some other method it is possible to solve the
above equat ions.
From 1 y  
From 2 x x y

Subst ituting this in to equation 3 above we get

4 x x  0 (Since x  y )
4  2 x  0  x  2 and y  2

The extremum or stationary value of z can be found by subst ituting the value of x and y
in to the objective funct ion
z  xy  2  2  4

Example 3: Find the stationary value of the function z  20 x 3 2 y subject to the constraint
x  y  60

26
Solution:
The Lagrangian funct ion is L  20 x 3 2 y   (60  x  y)
Taking the partial derivat ives of L with respect to x , y and λ, we get
3
1
L x  20 x 2 y    0
3
2
3
1
L y  20 x    0
2
2 
L  60  x  y  0 3
1 1
From 1 ,
3
20x 2 y    30 x 2 y   4
2
3
From 2 , 20x 2   5
From 4 and 5
3
1 3 3 1
20 x 2
2 22 2
30 x  20 x  y 
2 2
1
 x y x
2
3 3
30 x
Subst ituting this expressio n in to equation 3 above, you get
2
60  x  x0
3
3x  2 x 5
60   x
3 3
180
x  36
5

and y
2
36  24
3

The stationary value of z is therefore, z  2036 2 24  103680 .

3

Note that the above examples on constrained optimizat ion problems are so lved wit hout
finding the value of λ; so met imes it may be necessary to find the value o f λ. But what is the
meaning of λ (the Lagrange mult iplier)

Let z is the extremum value of the funct ion z  f ( x, y) subject to the constraint g ( x, y)  c .
The Lagrange mult iplier λ is the rate of change o f z with respect to c . That is,

27
 dz

dc

This means that  is approximately equal to the change in z result ing fro m a 1-unit increase
in c . It measures the sensit ivit y of z to changes in the constraint.

ECONOMIC APPLICATIONS

This sect ion tries to show the applicat ion o f Lagrange mult iplier method in so lving econo mic
problems. Below are some examples illustrating its use.
Example 1: A consumer has birr 600 to spend on two commodit ies, the first of which costs
birr 20 per unit and the second one costs birr 30 per unit. Suppose that the utilit y derived by
the consumer fro m x units o f the first commodit y and y unit s of the second co mmodit y is

given by the Cobb-Douglas utilit y function u( x, y)  10 x 0.6 y 0.4 . How many units of each
commodit y should the consumer buy to maximize utilit y?

Solution:

Max u( x, y)  10 x 0.6 y 0.4

Subject to: 20 x  30 y  600
The Lagrangian funct ion is
L  10 x 0.6 y 0.4   (600  20 x  30 y)
The first order necessary condit io ns are:
Lx  (0.6)10 x 0.4 y 0.4  20  0 1

L y  (0.4)10 x 0.6 y 0.6  30  0 2

L  600  20 x  30 y  0 3
From equat ion 1 and 2

6 x 0.4 y 0.4
(0.6)10 x 0.4 y 0.4  20    4
20

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 4 x 0.6 y 0.6
(0.4)10 x y 0.6 0.6
 30    5
30
From the above expressio ns
6 x 0.4 y 0.4 4 x 0.6 y 0.6

20 30
Solving for one of the variables we get

x . Substituting this in to equation 3

4
y
9
4
600  20 x  30( x)  0  x  18
9
4 4
y  x  (18)  8
9 9
Therefore, to maximize ut ilit y, the consumer should buy 18 units o f co mmodit y x and 8 unit s
of co mmodit y y . (Assume that the crit ical values we found are extremum that we are looking
for).

Example 2: The relat ionship between inputs and outputs of a firm is given by the Cobb-
Douglas production as fo llows:
Q  50l 0.8 k 0.2
Where l is the number of units o f labor and k is the number of units o f capital required to
produce Q levels o f output. Each unit of labor costs birr 40 and each unit o f capital costs birr
80. The producer has birr 400,000 to spend on the two inputs
a) Find the amount of labor and capital that maximize production.
b) What is the maximum production?

Solution:
a)The problem is stated mathemat ically as
Max Q  50l 0.8 k 0.2
Subject to: 40l  80k  400000
The Lagrangian funct ion is
L  50l 0.8 k 0.2   (400000  40l  80k )
The first order necessary condit io ns are:

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 L
Ll   (0.8)50l  0.2 k 0.2  40  0 1
l
L
Lk   (0.2)50l 0.8 k  0.8  80  0 2 
k
L
L   400000  40l  80k  0 3

From equat ions 1 and 2

(0.8)50l 0.2 k 0.2 (0.2)50l 0.8 k 0.8

  8k  l
40 80
Subst ituting the value of l in to equation 3 above
400,000  40(8k )  80k  0
400,000  320k  80k  400k  k  1000 units
l  8k  8(1000)  8000 units.

b) To find the maximum production subst itute the values of l and k in to the objective
funct ion i.e. Q  50l 0.8 k 0.2

Q  50(8000) 0.8 (1000) 0.2  263,902 Units.

SUMMARY
The important points on this chapter are summarized as fo llows:
- Optimizat ion wit h constraints: finding the maximum or minimum value of the
funct ion given so me constraints or limit ing factors.
- Stationary value: the extremum or optimal value of a funct ion.
- Subst itution and eliminat ion method:
- Method of Lagrange mult ipliers:
To find the relat ive extremum of f ( x, y)
Subject to a constraint g ( x, y)  c
Lagrange funct ion: L  f ( x, y)  [c  g ( x, y)]
Then so lve the first order necessary condit ions.

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 Lx  f x  g x  0
L y  f y  g y  0
L  c  g ( x, y )  0
dz
Lagrange mult iplier,   is a measure of the change in z result ing fro m a 1-unit increase
dc
in c , where z is the optimal value of f ( x, y) subject to g ( x, y)  c
-Cobb Douglas utilit y and Production Funct ion.
U  Ax  y b - Utilit y function, where
U is the total ut ilit y and x and y are the quant it ies of commodit y x and y consumed.

Y  Al  k b Production funct ion, where

Y is level o f output and
l and k are the amount of labor and capital used to produce output Y .

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