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    of 12

    Faculty of Management and Commerce

    Topic One

    Unconstrained Optimisation
    (Two Variables)

    Economics Lecture presentation by B. MGXEKWA

    2
    Lecture Outcomes

    Understand First Order Conditions in two variable


    case.

    Understand second derivative test for functions of two


    variables.
    First Order Conditions
    (Two Variables)

    A necessary condition for a differentiable function f(x,y) to have a maximum or a


    minimum at an interior point (x0,y0) of its domain is that (x0,y0) is a stationary
    point of f – that is:

    f1' (x0 ,y0) = 0 , f2' (x0 ,y0) = 0

    4
    Second Derivative Test
    for Functions of Two Variables

    A  f 11 ( x 0 y o ), B  f 12 ( x 0 y 0 ) and C  f 22 ( x 0 y 0 )

    a ) if A  0 and AC  B 2  0 , then ( x 0 , y 0 ) is a local max imum

    b ) if A  0 and AC  B 2  0 , then ( x 0 , y 0 ) is a local min imum

    c ) if AC  B 2  0 , then ( x 0 , y 0 ) is a saddle po int

    d ) if AC  B 2  0 , then ( x 0 , y 0 ) could be a local max imum ,


    a local min imum or a saddle po int
    5
    Example 1

    For the production functions


    1. Q = 20K0.5L0.5
    2. Q = 25K0.4L0.5
    Derive MPL and MPK

    6
    Example 2

    The demand functions of a monopoly in two different markets are given by:
    P1 = 53 – 4Q1
    P2 = 29 – 3Q2
    And the Total Cost function in C = 20 + 5Q, where P 1 and P2 are the prices and Q1 and Q2 are
    the outputs in market 1 and market 2 respectively. Such that Q = Q 1 + Q2.
    1. Find (i) profit maximizing otput to be sold in markets 1 and 2, (ii) equilibrium prices of first
    and second markets, (iii) Maximum profit.

    7
    Example 3
    Q1: A firm produces two different types A and B
    of a commodity. The daily cost of producing x units
    of A and y units of B is:
    C (x,y) = 0.04x2+0.01xy +0.01y2+4x+2y+500

    Suppose that the firm sells all its output at a


    price per unit of R15 for A and R9 for B.
    a) Find the production levels x and y that maximise
    profit.
    b) Find the maximum profit
    c) Verify that this combination gives the maximum.

    8
    Example 4

    9
    Example 5

    10
    ANY QUESTIONS OR CONTRIBUTIONS ?

    11

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