| | Cx | 180 CHAPTER 2 Applcations of the Derivative Applications of Derivatives to Business. and Economics In recent years, economic decision making hs becom® more andl more mathetiatically oriented, Faced with huge’ masses of statistical data, defending on hninvreds or even thousands of different variables, business analysts and wcouomists have incrensinidy ‘nrned to mathematical methods to help them describe what Is happening, predict the | effects of various policy alteruatives, aud choose reasouable cowtées of action frow the myriad of possibilities. Among the mathematical methods employed is ealeulus. In this section we illustrate just a few of the many applications of ealeulus to business and ‘economics. All our applications will center on what economists call the theory of the «frm. In other words, we study the activity of a business (or possibly # whole industry) « aand restrict our analysis to a time period during which background conditions (such as ‘supplies of raw materials, wage rates, and taxes) ae fairly constant, We ten slow how erivatives can help the manageient of such a firm inake vital production decisions 5 ‘Management, whether or uot it knows calculus, utilizes many functions ofthe sort ‘we have been cousidering. Examples of such funetious ate oy O(a) = cost of producing’ units of the product, oto lewd R(x) = rovenne generated by sling» unite of the product, P(z) = R(x) ~ C(2) = the profit (or loss) generated by producing and “ (eelling units of the product.) ' Nove that the functions O(2}, (2), and P(e) are often detined aly for nonnegative Intogers, that is, for 2 = 0,1,2,‘h:.y. The reasou is Hat it does nut make sense to speak about the cost of producing —L cars or the revenue generated by selling (= Cle) 3.62 refrigerators. ‘Thus, each function way give vise lo a sot of discrete poin raph, as iu Fig, 1(a). In studying these fictions, however, econousts usually a sinooth curve through the poysts and assune that Cx) is actually defined for all positive 2. OF course, we uiust oft interpret auswers to problems in light of the fact |. that xis, in most cases, a nonnegative integer. as Fa err Cost Functions If we assuine that a cost function, C(2), has a sunooth graph as i. in Fig. 1(b), we can use the tools of calculus to study it. A typical cost function is Figure 1) A cost function. analyzed in Example 1. EXAMPLE 1 Marginal Cost Anolsis Suppose that the cost function fora manufacturer is given by C(x) = (10-4) 23 — 00822 + 52 +1000 dollars. (a) Describe the behavior of the marginal cost. (b) Sketch the graph of C(e). SOLUTION. The first two derivatives of C(2) are given by C(@) = 8-10") * — 0060 +5 2M) = (6-10-92 — 006. ‘Let us sketch the marginal cost C"(z) first. From the belivior of C'(z), we will be able to graph C(x). The marginal cost fuuction y = (3-10-)2A ~ 0062 + 5 has as its graph a parabola that opeus upward. Since y' = C"(2) = ,00000G(x ~ 1000), we see that the parabola has a Lorizontal tangent at # = 1000. So the minimum value of O"(x) occurs at x = 1000, The corresponding y-coordinate is (3-10-*)(1000)% ~ 006: (1000) +5 =3<-6+5=2 ‘The graph of y = C'(z) is shown in Fig. 2. Consequently, st fist, the mnargi doeroases. It reacios a minimum of 2 at production level 1000 and ost eases thereafter,Fr tnswes art (a) Tel us now graph Cle). Since {the graph shown in Pig. 2 isthe Staph of the derivative of (2), we see ay sea hi ever toro, other ae a eating Sarre ean Since Ca) is alae postive (a) is edways increasing (a any ae oie ould). Moreover, since C's) decreases) Jess than 1000 andl in Up fore pt 1000, we Se that C() is concave dos‘ » ote Se Figure 2 A marginal cost anction mang let to economies of production which legen unit costs. Thus, ta aoa on Geereases. Mowever, increased producer eventually leads to U1 Of as ffclent, oder plants, and competitor for scarce raw materials. Ay» cat of additional units wil increase for wy leone = So wee that Ca) intial decreases and theu ineieases Eighomists use this to measure the rate of mes in revenue per unit iferense iq sales, gilts of product are sold at a price p per unit, the total revende R(x) ig siven by Re) = 2p. {firm is sinall and isin competition wich many other companies, its sales have lithe fect on the markt price. ‘Then, sinc the sa constant as far as the ohe firm ig that the fa marsnal revenue Fe(2) equals the price P (that is, (2) is tle unownt that the fn receives fru the sale cree ‘ditional uni). In this case, te revennt function will have @ graph as in Fig, Revenue Figured A revenue curve,182 CHAPTER 2 Applications of he Datvaive Eg ‘Questity Pigure 5] A demand curve EXAMPLE 2 SOLUTION a Ws) = be po (6,48) hel Figuse 6) Maxieniing reveaua, EXAMPLE 3 | SOLUTION, Figure 7|A demand carve, For each quantity , let /(2) be the highest price per uult that eau be set to sell all © units to customers, Since selling greater quantities requires a lowering uf the price, ‘{z) will be a decreasing function. Figure 6 shows « typical deaand curve that relates ‘the quantity demanded, x, to the price, p = f(2), ‘The demand cruation p= f(z) determines the total revenue function. If the fi wants to sell 2 units, the highest price it can set is f(x) dollars per unit, and so the total revenue fiom the sale of 2 anits is Ra) = 2p = 2- fla) (1) ‘The concept of a demand curve applies to au entire industry (with many produce ers) as well as to a single monopolistic firm. In this case, many producers offer the saine product for sale [fx denotes the total output of the industry, f(2) is the market price per unit of output aud x f(a} is the total revenue earned rom the sale of the units, Maximizing Revenue The demand equatioa for a certain product isp Find the level of production that results in maximum revenue In this case, the revenue function R(x) is 2(@-4s) sents fata. minal nt en R(x) tangent preislyat those for which R(x) = O- that i, for those.» at which anarginnl reveune is 0. The only such fs « = 6. The eotresponiiug value of revenue ia Lo: Re) RO) = 6-6 18 dollars. ‘hus, the rate of production resulting it manitntim revenue i. = 6, which results fa total revenue of 18 dollars. Now Tey Exercise 3 Setting Up a Demand Equation The WMA Bus Lines offers sightseeing tours of Washington, D.C. Oue tour, priced at $7 per person, had an average demand of about 1000 customers per week. When the price was lowered to $5, the weekly demand jumped to about 1200 customers. Assuiing that the demand equation is linear, find ‘the tour price that should be charged per person to maximize the total revenue cach, week. First, we must find the demand equation. Let x be the ufinber of stoners per week ‘and let phe the price ofa tour ticket, Then (2,7) 1200, 6) are oon the demand curve. (See Fig. 7.) Using the point-slope formula for the line through these two points, we have 76 1000 = 1200 ®1 P= 12 51900) = 6 dottars, ‘Tins, the price of $6 is most Ikely to bring the greatest revenue per wk paws Figure 8 Mexiniaing venue, Profit Functions . Once we know the cost function Cz) and the even * RG), we can compre ee Profit function P(x) from Pla) = Ra) ~ Cf), * BXAMPLE4 — Maximizing Profs Suppose that 2 = 100 — 01x and the cost. funetion Figure 9 A demand curve, Quanity SOLUTION ‘The tata revenue fenetion is Ro) Hence, the profit function is “P= (100 ~ O12) = 1005 ~ on, . . Pla) = R(x) ~ C¢e) sine fr0eh ofthis function i», parsbela thas pneas downward. (See Fig. 10) tis Pa) ae Nabe where te has ato tog 15, where the marginal profs P*(2) is zero, Now, Ply =~ 026+ 80 = — 0% — 2500),184 CHAPTER 2 Applications ofthe Derivative EXAMPLES soumon, ¥ (2500, 5200) Die! + sz Figure 10. Maximising prot, So P"(z) = 0 when x = 2500. The profit for this lovel of production is ‘P(2500) = ~01(2500)? + 50(2500) — 10,000 = 52,500 dolls. Finally, we return to the demand equation ta por unit to soll all 2500 units: ‘p= 100 ~.01(2500) = 100 ~ 25 = 75 dollars ‘Thus, to maximize the profit, produce 2500 units and gell them at $75 per unit. The profit will be $52,500. » Now Try Exercise 17° \ the highest price that ean be dharged Rowork Example 4 undue the condfiion that Uhe goverument link imposed an excise tax of $10 per unit For each unit sold, the manufactuzer will huve to pay $10 to tive goverment, bu other words, 10 dollars are added to, the cost of producing aud selling # units. ‘The cost fnusetion is now Oe) = (60+ 10,000) + 10s = Gox + 10,000. ‘The demand equation is wuchanged by this tax, so the revenue is still R(2) = 1002 ~ ote’ Proceeding before, we have P(2) = R(x) - (2) = oor ~ 012" ~ (602 + 10,000) =i" +40 — 10,000, Pi(z) = 02 + 40 = —02(= — 2000) ‘The graph of P(2) is where P’(2) ila parabola that opens downward, and the highest point is 0, that is, where « = 2000. (See Fig, 11.) The corespouding profit is -P (2000) = ~.01(2000}* + 40(2000) — 10,000 = 30,000 dotlacs. P(e) = —0122 + Me 1000 (2000, 30.000) Figure 12 Profit after anles 185 zeny CNEME ean,» = 100 ~ O15, we nd the pie that corgponds to r= 200 100 — 01/2000) = 80 dollars Be ganna Profit, produce 2000 units adsl hem at $80 per unit, Thelprotie wi bbe $30,000, 4 Howes in Example 5 that the optimal pice ig raised from $75 to $80. IF the” to theca shes to maitnize profits, he or ahe shours Pass only half the $10 tax on, * Feeegustomer. The monopolist cannot avoid ewe Lat profits will be substantially {omered by the imposition ofthe tax. This ante *eag0n why industries lobby agnians : Rating Production Levels Suppose that tra an cost function C(e) ad revanue saya (2). In rewanterpineconnmy the ten an Production in such a ‘way a8 lo maximize the profit heetine Pla) = R(x) ~ oa), Ie have Son that if PCs) has a maximum at ¢ = 4, then F(a) since P(e) = (2) - (2), In other words, R(a)~C'@ =0 F(a) = Oe), reagent Is axinie st a prodition level or whch ‘marginal revelue equate ‘margioal cost. (See Pig 12.) ‘edition lev Figure 12 Check Your Understanding 2.7 © Remark Example d by nding the production leet a catia ce However, the markt research feparunean which marginal revenue equals masgval see tom 100 tat Fetch 81 incream in av tafe 2 Rework Example 4 under the eondition that the fixed cost the ae seo. Determine the peice that maximizes {8 increased from $10,000 to $15 000 , Fei cata sone, a regional acting caries 8000 paston- S074 Der monty, cach paying 480. The arine wa teeIAPTER 2 Applicatens ofthe Derivative EXERCISES 2.7 1. Faniiing Marginel Cast Given the cost fncsion night. When the price was vaisad to $440, hamburger Cf2) = 2} 6a + 182415, find the minimum marginal sales dropped off to an average of 8000 per aight wat 10, ua. (Mi ex 2. Minalog Marginal Cost Ifa total cost function te (2) = ? — 00a? +122-+ 100, is the marginal cost increase ing, decseasing, oF not changing at x = 100? Find the ‘inirhum marginal cost, sizing Rverwo Cort ‘The revenve function lor a one prod frm is 1600 12) = 200 - 100 Find fe value of 2 that results in maxim revenue, 32 ising Revenue The revenue function for & particular pops A(2) = 2(4-— 0002) Pind the largest posable even, 2(20,00U) = 40,000 fs mazeuan possible Cost nd Profi A one-product firm estimates that ite daily ‘total cost function (in suitable units) is, Cf) = 2 ~ 62? + 132-4 15 aid its total revenue function i Rip) ~ 28, Find the value of = that maximizes the dally prot. 6 ining Profit A emall tie ehop Thi daily eost fusotion ie estimated to be C(2) dolla, wher} ¢ is the number of ties sold oa a typical day aad (O(a)/= 06 — Se? + 25'+20, Find the value of that vl sanitize the store's dally profit, Masa ocr ls toe for $3.50 each Dem il ond Revenwe ‘The demand oquatie far a certain jodity is , = 105+ 300, @ 0S 4 ¢ 60, Find the value of 2 and the corresponding price)» that maximize the revenue, = ‘Maxipising Revenue ‘The devaaa equation for 8 products p= 00Lx. Pind the value of 2 and the corresponding Dricely thot maximtze the revenue. p= $1, 2 ~ 1000 ). Profit|Some years ago it was estimated that the de- ruin for stool apprexiwnately satisfied the equation p= $56 ~ 502, and the total cost of producing = units GF stdel was C(2) = 182-4 85x. (The quantity 2 was weae sured in millions of tons and the price and total eost ware ‘moasliced in millions of dollar.) Determine the level of prodiiction and the corresponding price that maximize he pots. 2 wil tons BL per toa Maxinixing Areo Considers rectangle in the ey-plane, vith Borner at (0,0), (0,0), (0,0, and (2,0) 1 (8 es on tle geaph ofthe equation y = 30—z, fd @ and b Such thatthe aca ofthe rectangle is mastnized. What couse interpretations cam be gives to your auswer if Ae epunion y = 302 repeseuts a demand curve and vie Domed Revers, an Profit Uni rectly Iumburges the ely sports avena cont HE cal. The food eonczsion size fold'an average of 1,000 hamburgers on © gre fmewore that are in th back ofthe Book, a2. 13. a4, 1s. hits, p= $183.8 10. a7. fe price orresponding to the demand 27 = 19,3 ~ 15. (a) Assuming a linear dematud eure, fined the prise of Ihemburgee tbat will iexdmize the nightly babueger revenue. $5.00 (b) Ifthe concessionaire has fixed costs of $1000 per ulght sud the variable cost ia 8.60 par hamipurger, fad the price of hamburger that will maximize the nightly hamiager profit. $8.30, Bomand ond Reverve ‘The veroge ticket price for a vou ‘ert af the opera houte as 850, The average attendance was 4000, When the ticket price was raised to $52, atten- duce declinad to an average of 3500 persous per perfor tance. What should the teket price be to msi the fevenue for the opera howe? (Assume a finear demand ceurve) $16 per teket Demand ond Reverve An artist is plauning to sell signed prints of her latest work. If 50 prints aze offered for sale, ‘she can charge S100 each. However, if she makes aoe than 50 pints, she must lower the price ofall the prints bay 85 foreach prin im excess of the 60. ow many prints should the artist make to maximise her cevene? Demand and Revenue A swiimning cul offers member: ships ab the ente of $200, provided that iain of 100 people join. For eacl member in excess of 10, the metbership fee will be reduced $1 per person (foreach roubet). AE ost, 160 members will be sold, Hus any inenerships shoudl the eb try to salto uae than is revenne? = 150 sarnrshins Profit In the planing of « sidewalk eal, tis estimate that for 12 tables, the daly prof will be $1U per table. Because of overcrowding, for each additional table the profit per table (for every table in the caf) will be 10. duogd by 8.50. How many tables should be provided to ‘maximize the profit from the cab? Domond ond Reverwe A ceciaia tall road averages 36,000 curs per day when charging $1 pet car. A su vey concludes that increasing te toll wil result in 300, fever ents for each cant ofnezesge, What toll should be ‘charged to toaahuie tie rovetne? Toll ld be $1.10. Price Setng ‘The monthly demand equation for au electric tity company is estimated to be p= 60 (0), ‘where pis measured in dollars and 2 is measured in thou sands of Wllowatt-hours, Tho ullliy bas fixed costs of 7 millon dollars per month aud variable costs of $30 por 1000 kilowatt-hons of electricity generated, so the cost function O(c) = 7-10" +205, (a) Find the value of 2 and the corresponding. price for 1000 Kilowatt-Loure that auixiniee Use wiiy’s profit, 2= 15-108, p = S46, Tal cost i decreasing ut x = 100, (200) = 0 6 the riirmal marginal cst.©) Suave tht rising Sue increase the uty ty From $50 toga ae ew cost fine 18. Taxis, Profit, and Reven at emdation for com, Dany is = 909 «9 Function Ole) = 75.4 soe — Dsecay, (9) Determine th ertesponding price hat maxima determine the new Teg tines the page” gt ©) Te goveuneat nips. 12 of T dollars per ene s he seeraina the ney value of » that maximizes the tiny fan's Wot as «Frac Assuming that the coupaay eats ber Production to tis ive) a fe ee a events rece Dy the guvernunenr tat wn eT: Foal dee the value of 7 iat will maximize te eo Fevenie received bythe severunent, a= 30 apy ee S6/uie we ait tts fe Secrets Ne enes Pred 40 nis op secs laeeicb n n Tneany food 75 i aie ni ase thal cnt 88 mete rec wen tag cia ha te a ae Prot fgg he oat es , (tt retest 2 Tha Lt 7) oes ug, br so waetadte wher he taal money sont on) At wag OAD a eco tn nl en sddvertising. (Sco Fig 13) faut 89007 32.5 unas (0) Inert ay (0) At what ee Of retin rea ag (©) Doct tow the muta! prop hang a ta Ean Pen tet ante (© att te amie tion 20) ate pot th no advrtigifger me ma me et et te . : tera Han gt ey et P Degins to decreas de ftticoawoney sea Sern mut edraae at the infect ing, Move sen on wera lowre 19 Prof a enc op advertising188 CHAPTER 2 Applications ofthe Derivative 122, Cost ad Original Cost ‘The cost funetiow for & manufuce ler is C(z) daliaes, where = is the number of unlte of goods prodced and C, C’, und CO are the functions given in Fig. 15 (©) At shut lovel of production isthe east $12007 100 (A) At what level(s) of production is the marginal cust 822.507 20 units‘ind 140 vice (a) What isthe cost of manuucturing 60 units of goods? $1,100 (@) At what level of production docs the margial eost (b) What is the marginal cost when 40 units of goods axe shauufactared? $12.5 yet unit i Solutions to Check Your Understanding 2.7 1. The tpcuue function is Hi{e) = 100r— O12, wo the tacgifal revenue function is (2) = 100 = 024. The ost function is @(c) = 50x + 10,000, so the soarginal test function is C'(z) = 50. Let us now equate the tw + margial fuetions and salve for 3 Of colitse, we obtain the same level of production as efor 2._ If the fixed cost is increased from $10,000 to $15,000, the new cist function will be C(z) = S02 + 15,000, but the ‘magibal coat function will stil be C'(z) = 50. Therefore, the solution wil be the same: 2500 unite should be pros Anced ad old at $75 per usit. (Increases in Bod costs sould not necessarily be passed on to the eoasumer if the objective is to maximize the profit.) 3. Let z|denote the number of passengers por month and the rice per ticket. We obtain the number of passe vets lost due toa fare increase by amutiplyng the number of dolhrs of fare increase, p~ 50, by the muber of pas- agers lost for each dollar of fae increase. So = = 8000 ~ (p~ 50)100 = —100p + 13,000. have the least valne? What is dis marginal cost at {his lovel of production? a smite, Sper ou Figuro 15 Cost fusetion aun ite derivatives, nlving for p, we get the demas exation hess, Pm vaquation (1), the eevenne function is Ris) =eon=a( ‘The graph is a parabola that opens downrned, with S-intorespts at 2 = 0 and z= 13,000, (See Fig. 16,) Tis ‘maxim Is located at the midpoint of the 2-intreepts or z= 6300, The price correpouding to this umber of passengers is p = ~ ly (6500) +180 = 865. Thus the price ‘of $65 per ticket will bring the highest revenue to th alcline company per month. s Re) = (e+ 109) = e 5 ° on asa0n' Niger of pssngeis * Figure 16‘A revenue funtion Appendix F Business and Economic Applications FI lal Understand basi business terme and formulas, determine marginal reveriues, costs and profits, find demand functions and solv business and economies optimization problems. Business and Economics Applications Previously, you leamed that one of the most common ways to measure change is with respect to time. In this section, you will stdy some important rates of change in economics that are not measured with respect to time, For example, econdmists refer to marginal profit, marginal revenue, and marginal cost as the rates of change of the profit, revenoe, and eost with respect to the numberof units produced sod SUMMARY OF BUSINESS TERMS AND FORMULAS. Basic Terms Basic Formulas xs the number of units produced (or sold), pis the price per unit Riis the total revenue from selling x units, R Cis the total cost of producing x units, ‘he brine pla fre Marghals | | = mara vem = ex vee en tinge tin! on | $6. marginal con = xa om of procag one moa nit arn prt» er rt fom ing oe inn i In this summary, note that maeginals can be used to approximate the ela even, cost, or profit associated with selling or producing one additonal unit Tis} illustrated graphically for marginal revenue in Figure F.1wn pantttue determines tay Ne Poti? Gn dotarsy “ere Hom sting nie og ‘an item is ven by . 0002 + tay, py Bit he marginal prone f2¢4 Prouction lee ot 59 nis, 50.0 Solution fest Me OK is Pm ooaons "05 te marina ott i gen oy te = com +n WHEN 5, the mint tg > (oon g 10 Maia eto

‘5 p= 10.0 Gone! + 1806 foo 6 R=302” — 25 t igure for ¢ igure for 2ert ean 37a perm fe osu in he wae ARE He tars a ore becom can aes en isn SiS bec month or ret ho Oba ape matte ance fie des 2 Minimum coe, oe ie 10 cm Bt it Blew, AP Tat 6 down mae et ont ig {0 power Baa deol and $25 ern’ MA Tn he et sets pak tre 120 from te po Bion tothe a % Matrna Revere ro EY 5 may 25 Peony sale ot PE wk ane a ser, ge a fie sid cringe ta Ck Asn ei ito ie nt ese ‘01 creme Mininnum cose oa Eton downs of deny "Posse Aor i aniactning mine he dy of thy M Offeror ggg oo 8 grt te tom and aprons SO ee er 80 he then, Modeling Data ‘The tbl shows the monthly sales G (i ousands gallon) oF gasstine aca gas sation in 2012 The "ime in moots is represented by 4, with = | eoresponding lame : Le L 2 3 a]s 6 [e [sor [oas [oa [ous Pint [rove PLL [> [ele ye [e [vas [toss [oo [oor [oss [ost 0+ 950~esten(2- 0) he (a) Uses graphing uiity to plo the data and graph he mol {) Use the mall to approximate the month whga gasoline sales were greatest. {) What fctor ia the model eaues the seasonal vation in soles of gisoline? What par of the model gives Ue average monthly sles of giteine? (8) The gas station adds the term 002¢ o the mode What does the isclasion ofthis term mea? Use this model 1 estimate the maxim monly sales in 2016, 2%, Aldieg Revanwes The annual revenue & (in millions of Alan) fran atine Fo ths years 205-2014 ca be lee by R= a! ~ 19350 + 29407" — Wants sua ‘where ¢= 5 corresponds to 2008. Dig ee tea oe eens ea 0) aig wl jax ius cas post tian uapeon Ay Une gig tty ont et ci inp 8 9, Wlodling Date The maui of » dopant ae recorded the quanedy sales $ (in thousands of dollars) of a new seasonal pret vera period of 2 years at eam inte tbl, where ede ine ngs, with = cored tothe wine quater of 2011+ Tele lll! s[7s [62 [ss [70 [1 [78 | 69 | 86 ‘Appendix F Business and Economic Applications FT (6) Use graphing wily to plot he data (Find moéel of the form $ = @ + b+ chp Br forthe dau. (Win Star by inding B. Next sea groping wlty to finda + bs Finally, approximate «) (6) Uses graphing lity to raph the model with data and ‘make any adjustments necessary to obtain a beter fi (8) Use the model to predict the maximum quar ses ia the year 2015, 30. Think About It Motch each graph withthe Futon i best represcs—a demand funetion, 3 revenve fncfon, a cost funtion, ora proft function, Explain your reaspring. [The als ae labeled (2). (b,(€, and (8). © » soe ep oe >ese: zo. apn nooo veo 2000 sino Yaad © ry . Bet ot” responsiveness of consimers to a iter i elle the price Ce) isa differentiable demand fax iy of demand is ange inthe price of ttemand. 1p ple > apna ‘For a given price, i || < 1, then the demand is nelate, IF Jn] > 1 then dhe demand is ease. In Kxercises 31-34, find for the demand funeton atthe indicated valves the demand laste, castle, or nelther atthe indeated vale’ 32 p= S~ 00s x= 100 BL p= 400 ~ 36 x=00 3B. p = 400-0502 1-0i