3.1.

Functions of several variables

3.2. Partial derivatives
Definition
3.3. Marginal functions and elasticity
Graph
3.4. Unconstrained optimization
3.5 Constrained Optimization

FUNCTIONS OF SEVERAL VARIABLES

MSc. Nguyễn Hoàng Huy Tú

November 4, 2024

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Definition
3.3. Marginal functions and elasticity
Graph
3.4. Unconstrained optimization
3.5 Constrained Optimization

Functions of two variables

Defintion
A function f, of two variables, is a rule that assigns to each pair of
numbers, (x, y), the unique number z.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Definition
3.3. Marginal functions and elasticity
Graph
3.4. Unconstrained optimization
3.5 Constrained Optimization

Example
Let
z = f(x, y) = xy + 2y.
Then
Substituting x = 3 and y = 4 gives

z = f(3, 4) = 3 × 4 + 2 × 4 = 20.

Substituting x = 4 and y = 3 gives

z = f(4, 3) = 4 × 3 + 2 × 3 = 18.

Note that: in general we must be careful to write down the correct

ordering of the variables.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Definition
3.3. Marginal functions and elasticity
Graph
3.4. Unconstrained optimization
3.5 Constrained Optimization

Graph
Let z = f(x, y) be a function of two variables. Then

G = {(x, y, z = f(x, y)) ∈ R3 : (x, y) ∈ D}

is called the graph of the function f. In three-dimensional space, a

graph can be thought of a surface.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Definition
3.3. Marginal functions and elasticity
Graph
3.4. Unconstrained optimization
3.5 Constrained Optimization

Exercise
Ex 1: If z = f(x, y) = 2x2 y + 3x. Evaluate f(2, 3), f(3, 2), f(0, 2), and
f(3, 0). Are there any (x, y) for which f(x, y) = f(y, x)?

Ex 2: A company makes two sizes of cardboard boxes: small and

medium. It costs $2.50 to make a small box, $4.00 for a medium box.
a. Express the cost of making x small boxes, y medium boxes as a
function of two variables C = f(x, y).
b. Evaluate f(3000, 4000) and interpret it.

Ex 3: Let
1 2
z = f(x, y) = x 3 y 3
Assume x and y both increase by 25%. Determine the percentage
change in z.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Partial derivatives
Definition
The partial derivative of z = f(x, y) with respect to x is written as

δz δf
or or fx
δx δx
and is found by differentiating f with respect to x, with y held constant.

Definition
The partial derivative of z = f(x, y) with respect to y is written as

δz δf
or or fy
δy δy

and is found by differentiating f with respect to y, with x held constant.

Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Rule for finding partial derivatives

Rule
Given a function z = f(x, y).

To find fx , regard y as a constant, f is a single variable function in

terms of x, and then differentiate z = f(x, y) with respect to x.

To find fy , regard x as a constant, f is a single variable function in

terms of y, and then differentiate z = f(x, y) with respect to y.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Example
Let
f(x, y) = 3x2 y + xy.
Then
fx = 6xy + y.
fy = 3x2 + x.
Let
z = x2 y3 − 10x.
Then
δz
= 2xy3 − 10.
δx
δz
= 3x2 y2 .
δy

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Second-order partial derivatives

Definition
For a function z = f(x, y), there are four second-order partial
derivatives. We write
δ2z δ2f
or or fxx .
δx2 δx2
for the function obtained by differentiating twice with respect to x,

δ2z δ2f
or or fyy .
δy2 δy2

for the function obtained by differentiating twice with respect to y,

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Second-order partial derivatives

Definition
We write
δ2z δ2f
or or fxy .
δyδx δyδx
for the function obtained by differentiating first with respect to x and
then with respect to y,

δ2z δ2f
or or fyx .
δxδy δxδy

for the function obtained by differentiating first with respect to y and

then with respect to x.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Exercise

Ex 1: Find expressions for all first- and second-order partial

derivatives of the following functions. In each case verify that
fxy = fyx .
a. z = x2 + 2x + y.
1 3
b. z = 16x 4 y 4 .
y x
c. z = 2 + .
x y

Ex 2: For z = f(x, y) = x2 y3 + x4 y + xey , find four second-order

partial derivatives.

Ex 3: Let z = f(x, y) = exy . Evaluate zxx (1, 2) and zyx (2, 1).

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Note

We have that
fxy = fyx
holds for all functions that arise in economics. Therefore, it is
immaterial in which order the partial differentiation is performed.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Small increments formula

Formula
The net change in z is estimated by

δz δz
∆z ≈ ∆x + ∆y.
δx δy

This is referred to as the small increments formula.

Note that: The formula is sometimes quoted with an equality sign and
written as
δz δz
dz = dx + dy.
δx δy
where the symbols dx, dy and dz are called differentials and represent
limiting values of ∆x, ∆y and ∆z, respectively.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Special cases

Formula
If x changes by a small amount ∆x and y is fixed, then

δz
∆z ≈ ∆x.
δx

Formula
If y changes by a small amount ∆y and x is fixed, then

δz
∆z ≈ ∆y.
δy

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

δz δz
If z = x3 y − y3 x, evaluate and at the point (1, 3). Hence
δx δy
estimate the change in z when x increases from 1 to 1, 1 and y
decreases from 3 to 2, 8 simultaneously.
Solution
First,
δz δz
= 3x2 y − y3 and = x3 − 3y2 x.
δx δy
δz δz
Therefore, (1, 3) = −18; (1, 3) = −26. Now, at the point (1, 3),
δx δy
we have
x increases from 1 to 1, 1 ⇒ ∆x = 0, 1.
y decreases from 3 to 2, 8 ⇒ ∆y = −0, 2.
Hence, by using small increments formula,
δz δz
∆z ≈ ∆x + ∆y ≈ 3, 4
δx δy
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Exercise
Ex 1. Use the small increments formula to estimate the change in

z = x2 y4 − x6 + 4y.

when
a. x increases from 1 to 1, 1 and y remains fixed at 0
b. x remains fixed at 1 and y decreases from 0 to −0, 5.
c. x increases from 1 to 1, 1 and y decreases from 0 to −0, 5.

Ex 2. If
z = x2 y3 − 10xy + y2 .
evaluate zx and zy at the point (2, 3). Hence estimate the change in z
as x increases by 0, 2 and y decreases by 0, 1.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Implicit Differentiation
Formula
If f(x, y) = constant, then

dy fx
=− .
dx fy

For example, given that

y3 + 2xy2 − x = 5.

Set f(x, y) = y3 + 2xy2 − x. Since f(x, y) = 5 = constant, we have

dy fx 2y2 − 1
=− =− 2 .
dx fy 3y + 4xy

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
First-order derivatives
3.2. Partial derivatives
Second-order partial derivatives
3.3. Marginal functions and elasticity
Small increments formula
3.4. Unconstrained optimization
Implicit Differentiation
3.5 Constrained Optimization

Exercise

Use implicit differentiation to find expressions for dy/dx given that

a. xy − y3 + y = 0.

b. y5 − xy2 = 10.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Elasticity of demand

Suppose that the demand, Q for a certain good depends on its price, P,
the price of an alternative good, PA , and the income of consumers, Y
so that
Q = f(P, PA , Y)

Definition
The (own) price elasticity of demand is defined to be

% change in Q δQ P
EP = = × .
% change in P δP Q

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Elasticity of demand

Definition
The cross-price elasticity is defined to be

% change in Q δQ PA
EPA = = × .
% change inPA δPA Q

Definition
The income elasticity is defined to be

% change in Q δQ Y
EY = = × .
% change in Y δY Q

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Example

Given the demand function

Q = 100 − 2P + 2PA + 0, 1Y

where P = 10, PA = 12 and Y = 1000, find the

a. price elasticity of demand

b. cross-price elasticity of demand

c. income elasticity of demand

Is the alternative good substitutable or complementary?

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Utility function
Definition
To analyse the behaviour of consumers quantitatively we associate
with each set of options a number, U, called utility, which indicates
the level of satisfaction.
Suppose that there are two goods, G1 and G2, and that the consumer
buys x1 items of G1 and x2 items of G2.
The variable U is then a function of x1 and x2 , which we write as

U = U(x1 , x2 ).

If U = (3, 7) = 20 and U(4, 5) = 25 then then the consumer

derives greater satisfaction from buying 4 items of G1 and 5 items of
G2 than from buying 3 items of G1 and 7 items of G2.
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Marginal utility

Definition
Given a utility function U = U(x1 , x2 ). The derivative

δU
δx1
is called the marginal utility of x1 . The derivative

δU
δx2
is called the marginal utility of x2 .

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Marginal utility

Formula
If x1 and x2 both change then the net change in U can be found from
the small increments formula

δU δU
∆U ≈ ∆x1 + ∆x2 .
δx1 δx2

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Example

Given the utility function

1 3
U = x14 x24

determine the value the marginal utilities

δU δU
and
δx1 δx2
when x1 = 100 and x2 = 200. Hence estimate the change in utility
when x1 decreases from 100 to 99 and x2 increases from 200 to 201.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Indifference curves

Definition
Given a utility function U = U(x1 , x2 ). Indifference curves join
points (x1 , x2 ) which give the same value of utility. Mathematically,
an indifference curve is defined by an equation

U(x1 , x2 ) = U0

for some fixed value of U0 .

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Indifference curves

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Marginal rate of commodity substitution

Definition
The marginal rate of commodity substitution, MRCS, is defined to be

dx2 Ux
MRCS = − = 1.
dx1 Ux2

Meaning: the marginal rate of commodity substitution the increase in

x2 necessary to maintain a constant value of utility when x1 decreases
by 1 unit.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Example

Given the utility function

1 1
U = x2 y2

find a general expression for MRCS in terms of x1 and x2 .

Calculate the particular value of MRCS for the indifference curve that
passes through (300, 500). Hence estimate the increase in x2 required
to maintain the current level of utility when x1 decreases by 3 units.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Exercise
Ex 1: Given the demand function
Q = 500 − 3P − 2PA + 0, 01Y
where P = 20, PA = 30 and Y = 5000. Find the price elasticity of
demand, the cross-price elasticity of demand, the income elasticity of
demand. If income rises by 5%, calculate the corresponding
percentage change in demand.
Ex 2: An individual’s utility function is given by
U = 1000x1 + 450x2 + 5x1 x2 − 2x21 − x22
where x1 is the amount of leisure measured in hours per week and x2
is earned income measured in dollars per week. Determine the value
of the marginal utilities when x1 = 138 and x2 = 500.
Hence estimate the change in U if the individual works for an extra
hour, which increases earned income by $15 per week.
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Production functions

Definition
The output, Q, depends on capital K, and labour, L, so we can write

Q = f(K, L)

Such functions are called production functions.

The general Cobb-Douglas production function is a a function of the

form
Q = AKα Lβ .
where A, α and β are positive constants.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Marginal product
Given a production function Q = f(K, L).
Definition
The partial derivative
δQ
δK
is called the marginal product of capital, denoted by MPK .

Definition
The partial derivative
δQ
δL
is called the marginal product of labour, denoted by MPL .

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Marginal product

Formula
If K and L both change simultaneously, then the net change in Q can
be found from the small increments formula
δQ δQ
∆Q ≈ ∆K + ∆L.
δK δL

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Isoquants
Definition
Let Q = f(K, L) be a production function. Isoquants join possible
combinations of inputs (K, L) which produce a constant level of
output Q0 .
f(Q, L) = Q0

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Marginal rate of technical substitution

Definition
The marginal rate of technical substitution, MRTS, is defined to be

dK MPL
MRTS = − = .
dL MPK

Meaning: MRTS is the amount by which capital needs to rise to

maintain a constant level of output when labour decreases by 1 unit.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives Elasticity of demand
3.3. Marginal functions and elasticity Utility
3.4. Unconstrained optimization Production
3.5 Constrained Optimization

Exercise
Ex 1: If Q = 2K3 + 2L2 K. Show that
K(MPK ) + L(MPL ) = 3Q.
Ex 2: Evaluate MPK and MPL for production function
√
Q = 2LK + L.
given that the current levels of K and L are 7 and 4, respectively.
Hence estimate the increase in capital needed to maintain the current
level of output given 1 decrease in labour.

Ex 3: If a firm’s production function is given by

Q = 5L + 7K.
sketch the isoquants corresponding an output level, Q = 700 and
Q = 1000.
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Stationary points

Definition
Let z = f(x, y) be a function. A point (a, b) is called a stationary point
if 
 fx (a, b) = 0

fy (a, b) = 0

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Classification

There are three types of stationary points

Local minimum (a)
Local maximum (b)
Saddle point (c)

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

How to classify stationary points

Step 1: Find fx , fy , fxx , fyy and fxy .

fx = 0
Step 2: Solve the system ⇒ a stationary point (a, b).
fy = 0

Step 3: Calculate A = fxx (a, b), B = fxy (a, b) and C = fyy (a, b).

Step 4:

AC − B2 > 0
⇒ a minimum.
A>0

AC − B2 > 0
⇒ a maximum.
A<0

AC − B2 < 0 ⇒ a saddle point.

Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Example

Find and classify stationary points of

f(x, y) = xy − x3 − y2 .

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Exercise

Ex 1: Find and classify the stationary points of the function

f(x, y) = x3 + y2 − 3x − 4y + 3.

Ex 2: Find and classify the stationary points of the function

f(x, y) = x2 + 6y − 3y2 + 10.

Ex 3: Find and classify the stationary points of the function

f(x, y) = x2 + y4 + 2xy.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Example: Maximum profit

A firm is a perfectly competitive producer and sells two goods G1 and

G2 at $1000 and $800, respectively, each. The total cost of producing
these goods is given by

TC = 2Q21 + 2Q1 Q2 + 2Q22 .

where Q1 and Q2 denote the output levels of G1 and G2, respectively.

Find the maximum profit and the values of Q1 and Q2 at which this is
achieved.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Example: Maximum profit

A firm is allowed to charge different prices for its domestic and
industrial customers. If P1 and Q1 denote the price and demand for
the domestic market then the demand equation is
P1 + Q1 = 500.
If P2 and Q2 denote the price and demand for the industrial market
then the demand equation is
2P2 + 3Q2 = 720
The total cost function is
TC = 50000 + 20Q
where Q = Q1 + Q2 . Determine the firm’s pricing policy that
maximizes profit with price discrimination and calculate the value of
the maximum profit.
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Exercise
Ex 1: A firm sells two goods G1 and G2 at $70 and $50, respectively,
each. The total cost is given by
TC = Q21 + Q1 Q2 + Q22
Find the maximum profit and the values of Q1 and Q2 at which this is
achieved.
Ex 2: A monopolist produces two goods with demand functions
P1 = 40 − Q1 and P2 = 60 − 2Q2
and the cost function is TC = Q21
+ 3Q1 Q2 + Q22 . Determine the
maximum value of profit.
Ex 3: A firm sells two related products whose demand functions are
given as
Q1 = 190 − 4P1 − P2 and Q2 = 120 − 2P1 − 3P2 .
Calculate the maximum revenue.
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
3.2. Partial derivatives
Stationary points
3.3. Marginal functions and elasticity
Maximum profit
3.4. Unconstrained optimization
3.5 Constrained Optimization

Exercise
Ex 4: A firm’s production function is given by
1 1
Q = 2L 2 + 3K 2

Labour costs are $2 per unit, capital costs are $1 per unit and output
sells at $8 per unit. Find the maximum profit and the value of L and K
at which it is achieved.
Ex 5: An individual’s utility function is given by

U = 260x1 + 310x2 + 5x1 x2 − 10x21 − x22

where x1 is the amount of leisure measured in hours per week and x2

is earned income measured in dollars per week. Find the values of x1
and x2 which maximize U. What is the corresponding hourly rate of
pay?
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Example

A firm’s unit capital and labour costs are $1 and $2 respectively. If the
production function is given by

Q = 4KL + L2

find the maximum output and the levels of K and L at which it is

achieved when the total input costs are fixed at $105.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Constrained Optimization

Mathematical model: We want to optimize a function

z = f(x, y)

subject to a constraint
φ(x, y) = M.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

The method of Lagrange Multiplier

Step 1: Determine the objective function z = f(x, y) and the
constraint φ(x, y) = M.
Step 2: Define a new function

g(x, y) = f(x, y) + λ(M − φ(x, y))

λ is called the Lagrange multiplier and g(x, y) is called the Lagrange

function.
Step 3: Solve the system

 gx = 0
gy = 0 ⇒ (a, b).

gλ = 0

The point (a, b) is the optimal solution of the constrained problem.

Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

The method of Lagrange Multiplier

Step 4: (Optional) To classify as maximum and minimum we

compute the determinant of the 3x3 matrix of second-order partial
derivatives
gxx gxy gxλ
D = gxy gyy gyλ
gxλ gyλ gλλ

If D > 0 then the optimum point is a maximum.

If D < 0 then the optimum point is a minimum.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Example: A firm’s unit capital and labour costs are $1 and $2

respectively. If the production function is given by Q = 4KL + L2
find the maximum output and the levels of K and L at which it is
achieved when the total input costs are fixed at $105.
Solution
Step 1: Determine the objective function and the constraint.
We will maximize
Q = 4KL + L2 .
subject to the cost constraint
K + 2L = 105.
Step 2: Construct the Lagrange function. Set
g(x, y) = f(x, y) + λ(M − φ(x, y))
= 4KL + L2 + λ(105 − K − 2L).
Nguyễn Hoàng Huy Tú Functions of several variables
 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Step 3: Find the optimal solution (stationary point)

  
 gK = 0  4L − λ = 0  λ = 4L
gL = 0 ⇔ 4K + 2L − 2λ = 0 ⇔ 4K − 6L = 0
  
gλ = 0 105 − K − 2L = 0 K + 2L = 105

 K = 45
⇔ L = 30

λ = 120
Hence the output has a maximum at K = 45 and L = 30. Moreover
Qmax = 6300.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Substitution

Lets reconsider the previous example. From the constraint

K + 2L = 105

we obtain that
K = 105 − 2L.
Now,

Q = 4KL + L2 = 4(105 − 2L)L + L2 = 420L − 7L2 .

is a single variable function. It is very easy to verify that Q has a

maximum at L = 30 and the corresponding level of capital K = 45.
Moreover, Qmax = 6300.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Example

An individual’s utility function is given by

U = x1 x2

where x1 and x2 denote the number of items of two goods, G1 and G2.
The prices of the goods are $2 and $10 respectively. Assuming that
the individual has $400 available to spend on these goods, find the
utility-maximizing values of x1 and x2 .

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Example

A firm’s production function is given by

1 1
Q = 10K 2 L 4

Unit capital and labour costs are $4 and $5 respectively and the firm
spends a total of $60 on these inputs. Find the values of K and L
which maximize output.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Example

A monopolistic producer of two goods, G1 and G2, has a joint total

cost function
TC = 10Q1 + Q1 Q2 + 10Q2
where Q1 and Q2 denote the quantities of G1 and G2 respectively. If
P1 and P2 denote the corresponding prices then the demand equations
are
P1 = 50 − Q1 + Q2
P2 = 30 + 2Q1 − Q2
Find the maximum profit if the firm is contracted to produce a total of
15 goods of either type. Estimate the new optimal profit if the
production quota rises by 1 unit.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Lagrange Multiplier

Meaning
The value of λ gives the approximate change in the optimal value of f
due to a 1 unit increase in M.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Exercise

Ex 1: Find the maximum value of

Q = 10K1/2 L1/2

subject to the cost constraint K + 4L = 16.

Ex 2: A firm’s production function is given by

Q = 2K1/2 L1/2

Unit capital and labour costs are $4 and $3 respectively. Find the
values of K and L which minimize total input costs if the firm is
contracted to provide 160 units of output.

Nguyễn Hoàng Huy Tú Functions of several variables

 3.1. Functions of several variables
Model
3.2. Partial derivatives
The method of Lagrange Multiplier
3.3. Marginal functions and elasticity
Substitution
3.4. Unconstrained optimization
Lagrange Multiplier
3.5 Constrained Optimization

Exercise
Ex 3: Find the maximum value of
z = 6 − 3x2 + 2y
subject to the constraint y − 2x2 = 2.
Ex 4: A monopolistic producer of two goods, G1 and G2, has a total
cost function
TC = 5Q1 + 10Q2
where Q1 and Q2 denote the quantities of G1 and G2. If P1 and P2
denote the corresponding prices then the demand equations are
P1 = 50 − Q1 − Q2
P2 = 100 − Q1 − 4Q2
Find the maximum profit if the firm’s total costs are fixed at $100.
Estimate the new optimal profit if total costs rise to $101.
Nguyễn Hoàng Huy Tú Functions of several variables