Week 6 – Lecture notes

Maxima and Minima

In this session I have discussed how techniques
of calculus is applied to find the maximum and
minimum values of a function.
To model the real world problems we often
express physical quantities in terms of
variables. Then functions are used to define the
ways in which these variable changes.
Decision makers will be more interested in
finding the maximum profit, minimum loss or
minimum amount of material to make a
particular product.
There are numerous applications in which it is
preferred to find the maximum or minimum
value of a particular quantity.
Criteria for Maxima and Minima
dy d2y
If  0 at a point and if 2
 0 then that
dx dx
point must be maximum point for the function.
 dy d2y
If  0 at a point and if 2
 0 then that
dx dx
point must be minimum point for the function.
A talcum powder manufacturer has determined
the commercial advertisement on the media has
an appreciable impact on the sales of new
powder. It is estimated that the number of
pouches P ( x) , sold and the expenditure x (in
thousands of rupees) are related by
P( x)  160 x  x 2  300 . Find the amount that
must be spent on media so as to maximize sales.
First derivative:
dP
 160  2 x
dx
dP
P attains extrema when 0
dx
160  2 x  0
x  80
Is it maximum?
 d 2P
2
 2  0
dx
P attains maxima at x  80
Sales is maximized when 80 (in thousands of
rupees) spend on media.
The cost function of a firm is
C ( x)  24,000  180 x  0.50 x 2 where C is the
total cost for x units. A decision maker is
interested to calculate what level of output the
firm will minimize its average cost.
First derivative:
dC
 180  1.0 x
dx
dC
P attains extrema when 0
dx
180  1.0 x  0
x  180
Is it minimum?
 d 2C
2
1 0
dx
C attains minima at x  180
180 units of output is one that minimizes
average cost.
Application of Calculus in Business
Differentiation in business refers to the act of
marketing a particular product or service in a
way that makes it stand out against other
products or services. In this session I illustrate
just a few of the many applications of
derivatives to business. In this session I have
discussed how techniques of calculus is applied
to business.
The total cost of producing and marketing x
units of a product depend upon the number of
units of x.
The relationship between the output (assumed
by x) of a product and the total cost (assumed
by C) of a product is called as total cost
function.
Total cost of producing x units of a product
consists of two components:
a) Fixed cost which is independent of the
amount of output, that is, fixed cost
remains the same at all levels of output.
For example: rent, interest and so on.
b) Variable cost is the sum of all costs that
are dependent on the level of productions.
For example: raw materials, labour etc.,
If the total cost function C  500  4 x
Where 500 represent the fixed cost or
overhead (the total cost function when x  0 )
If C is the cost of producing x items then the
average cost (AC) of producing x items is
C
given by AC  .
x
Average cost represents the cost per unit of
the output.
 Marginal cost (MC) is the additional cost
incurred in producing one more unit of output
and it is given by
dC
MC 
dx
Marginal cost measures the rate of increase of
total cost with respect to small increase in
production.
Relationship between average and marginal
cost:
Average cost is minimum at the value of x for
which average cost equals marginal cost.
The cost function of a firm is given by
C ( x)  x3  3x  8 . Find the average cost and
also find marginal cost when x  6 units.
C ( x) x3  3 x  8
Average cost, AC  
x x
8
 x 3
2
x
 dC d 3
Marginal cost, MC   ( x  3x  8)
dx dx
 3x 2  3
Marginal cost when x  6 units is
3(6)2  3  105
The manufacturing cost of a product consists of
Rs. 6000 as overheads, material cost Rs.6 per
x2
unit and labour cost Rs. for x units
60
produced. Find how many units must be
produced so that the average cost is minimum?
Total cost C is given by
C= overheads + material cost +labour cost
x2
Therefore, C  6000  6 x  where x units
60
are produced.
C 6000 x
Average cost AC   6
x x 60
Average cost attains minimum,
 d
( AC )  0
dx
d  6000 x 
 6   0
dx  x 60 
6000 1
 0
x2 60
This implies, x  600
Is AC minimum?
d2 12000
2
( AC ) 
dx x3
d2 12000
At x  600 , 2
( AC )  3
0
dx x
Hence AC is minimum when 600 units
produced.
Problems for practice
1.The cost function of a firm is given by
2 2 3
C ( x)  5000  1000 x  500 x  x . Find
3
 the marginal cost and also find the average
cost function.
2.The manufacturing cost of an item consists
of Rs. 1000 as overheads, material cost Rs.2
x2
per item and labour cost Rs. for x items
90
produced. Find how many items must be
produced so that the average cost is
minimum?
The money which flows into a company from
either giving service or selling a goods is called
as revenue.
Total revenue is the total money received by
selling x items of the product at a price p per
unit.
Total revenue = price per unit (p)×quantity sold (x)

If R is the revenue from the sale of x items then

the average revenue (AR) from selling x items
R
is given by AR  .
x
Average revenue represents revenue per unit.
Marginal revenue (MR) is the additional
revenue earned by selling one more unit of a
product and it is given by
dR
MR 
dx
Marginal revenue (MR) measures the rate of
increase of total revenue with respect to
quantity demanded.
Profit (or the net revenue) of a company is the
difference between the total revenue and total
cost.
That is, P( x)  R( x)  C ( x)
Marginal profit (MP) is the additional profit
from selling one more unit of a product and it
is given by
dP
MP 
dx
Profit function will be maximum if marginal
revenue equals the marginal cost.
A manufacturer determines that the profit P (in
rupees) derived from selling x units of an item
is given by
P( x)  0.0002 x3  20 x
Find the marginal profit for a production level
of 50 units.
Profit P( x)  0.0002 x3  20 x
dP
Marginal profit MP 
dx
d
 (0.0002 x3  20 x)
dx
 0.0006 x 2  20
Now a marginal profit for a production level of
50 units is 0.0006(50)2  20  21.5Rs
A head phone manufacturer that in order to sell
x units of new head phone, the price per unit in
Rs, must be P( x)  10000  x
The manufacturer also determines that the total
cost of producing x units is given by
C ( x)  30000  200 x
a. Find the total revenue R(x).
b.Find the marginal revenue.
c. Find the total profit P(x).
d.How many units must the company produce
and sell in order to maximize profit?
a. R(x) = Total Revenue
= (Number of units). (Price per unit)
 x.P
 10000x  x 2
dR
b.Marginal revenue MR 
dx
 10000  2x
c. Total profit P(x) = Total Revenue–Total
cost
 R( x)  C ( x)

 (10000 x  x 2 )  (30000  200 x)

  x 2  9800 x  30000
 dP
d.P attains maxima when 0
dx
d
( x 2  9800 x  30000)  0
dx
2 x  9800  0
This implies, x  4900
Is it maximum?
d 2P
2
 2  0
dx
P attains maxima at x  4900
Therefore, profit is maximized when 4900 units
are produced and sold.