Lecture 11 - Business and Economics Optimization Problems and Asymptotes

11.1 More Economics Applications

Price Elasticity of Demand One way economists measure the responsiveness of consumers to a change in the price of a product is with what is called price elasticity of demand. For example, changing the price on vegetables usually strongly aects the demand while changing the price of milk or water doesnt aect that demand that much. Denition 11.1 If p(x) is a dierentiable demand function, then the price elasticity of demand is given by p(x)/x = dp/dx where the lowercase Greek letter eta. For a given price, the demand is said to be elastic if | | > 1 and the demand is said to be inelastic if | | < 1. The demand is unit elasticity if | | = 1. The Price Elasticity of Demand measures the ratio of the percentage change of demand of a product to the percentage change of price of the product. If demand is elastic (| | > 1), the percentage increase in demand is greater than the percentage increase in price, and hence the demand is sensitive to changes in price. Likewise if demand is inelastic(| | < 1), the percentage increase in demand is less than the percentage increase in price, and hence the demand is insensitive to changes in price. When elasticity is equal to 1, the percentage changes are roughly equal. For example, rough values of elasticity for some common commodities are: Tomatoes Automobiles Housing Mail Examples: 1. Let the demand function for a product be modelled by p(x) = 21 price elasticity of demand when x = 36 and x = 400.
3 x. 2

= 4.60 = 1.35 = 1.00 = 0.05

Find the

solution: Here

dp dx

3 . So for x = 36: = 4 x

p(36) = 21 = 12

3 36 2

3 p (36) = 4 36 1 = 8 Thus = Here | | > 1 so the demand is elastic. For x = 400: p(400) = 21 = 9 3 p (400) = 4 400 3 = 80 9/400 3 = 3/80 5 Here | | < 1 so the demand is inelastic. = 2. Suppose the demand function for ice cream bars is given by p(x) = 8 2x. For what values of x do ice cream bars have unit elasticity? solution: Mmm, ice cream bars. At any rate, the formula for is p(x)/x dp/dx (8 2x)/x = 2 4 = +1 x Thus 3 400 2 12/36 8 = 1/8 3

We want the values of x for which | | = 1. | | = 1 4 4 + 1 = 1 + 1 = 1 x x

4 4 4 4 If x + 1 = 1 then x = 0 which is impossible. If x + 1 = 1 then x = 2 x = 2. Thus x = 2 gives us unit elasticity.

Average Cost Due to the nature of cost functions, the minimum cost usually corresponds to making 0 units. This isnt very useful information, as it is obvious that if we make no units we will spend the least money. More informative would be to nd the production level that minimizes the cost per unit, or average cost: ( x) = C ( x) C x Example: Suppose that our cost function is C (x) = 800 + 0.04x + 0.0002x2 . Find the production level that minimizes the average cost. solution: In this case the averave cost is (x) = C (x) = 800 + 0.04 + 0.0002x C x x We nd the critical points: (x) = 800 + 0.0002 = 0 x2 = 800 = 4,000,000 C x2 0.0002 Since we are again only considering x in (0, ), we have one critical point, x = 2000. Now, (x) = 1600 C x3 (2000) = 1600 > 0 C 20003 so x = 2000 is a local minimum, and that together with the fact that it is the only critical point in the domain (0, ) gives us that it is an absolute minimum. The minumum average cost is (2000) = 800 + 0.04 + 0.0002(2000) = $0.84 C 2000 Example: (Old Midterm Question) A pumpkin patch can sell 100 pumpkins per week at a price of $3 each. The pumpkin farmer estimates that for each $0.10 reduction in price, she can sell 5 more pumpkins per week. (a) Assuming the demand function is linear, nd the demand function and the total revenue as a function of the number of pumpkins sold. (b) How many pumpkins does she sell when revenue is maximized? (c) What price per pumpkin maximizes the revenue?

(d) Explain why your answer is an absolute maximum. solution: (a) We are assuming the demand function p(x) = mx + b. To nd m we use the formula m= p 0.10 1 = = x 5 50

1 x + b. To nd b we plug in a point So p(x) = 50

3=

1 (100) + b b = 5 50

1 1 2 So p(x) = 50 x + 5, and thus R(x) = xp(x) = 50 x + 5 x.

(b) We want to maximize R(x). The domain of R(x) of R: 1 R (x) = x + 5 = 0 25 So x = 125 is our only critical point. R (125) maximum. This together with the fact that it implies that it is an absolute maximum. (c) We plug in x = 125 p(25) =

is [0, ). We nd the critical points x = 125

1 = 25 < 0, so x = 125 is a local is the only critical point in [0, )

5 1 (125) + 5 = + 5 = 2.5 50 2

So setting the price to be $2.50 maximizes revenue. (d) It is explained in (b) above. The point x = 125 is a local maximum, and this together with the fact that it is the only critical point in [0, ) implies that it is an absolute maximum.

11.2

Asymptotes
3 x2

The function f (x) =

has a graph that looks like this

Here we say that x = 2 is a vertical asymptote for the graph of f . Notice that
x2+

lim f (x) =

x2

lim f (x) =

This leads to the following denition. Denition 11.2 If f (x) approaches or as x approaches some xed c from the right or left, then the line x = c is said to be a vertical asymptote of the graph of f . If f is a rational function, ie f (x) = g (x) h(x)

then c is a vertical asymptote for f if h(x) = 0 and g (x) = 0. Examples: 1. Suppose that f is dened as f (x) = x+4 x+4 = 2 x 4x x(x 4)

Then the denominator is 0 when x = 0 or x = 4. Neither of these make the numerator 0, so both x = 0 and x = 4 are vertical asymptotes. To nd out the behaviour of f

near the asymptotes we compute the one-sided limits: lim f (x) = lim f (x) = + lim x+4 x(x 4) x+4 x(x 4) x+4 x(x 4) x+4 x(x 4) + ()() + (+)() + (+)() + (+)(+)

x 0

x0

= +
x 0 x0

lim + lim

=
x 4

lim f (x) = lim f (x) = +

x4

=
x 4 x4

lim +

= +

We summarize this with the following graph

2. Suppose that f is dened as f (x) = x2 + 2 x 8 (x 2)(x + 4) = 2 x 4 (x 2)(x + 2)

In this case we have a vertical asymptote at x = 2 but not at x = 2. Note that f is still not dened at the point x = 2 even though the (x 2) term cancels out. When

x = 2, we can cancel f (x) = (x 2)(x + 4) (x 2)(x + 2) x+4 = x=2 x+2 x+2+2 = x=2 x+2 2 = 1+ x=2 x+2

2 So we see that everywhere except x = 2, f looks like 1 + x+2 . At x = 2, f has a hole.

Notice that the last function appears to approach a value as x goes to . This leads to the following denition. Denition 11.3 If f is a function and L is a real number, the statements
x

lim f (x) = L or

lim f (x) = L

denote limits at . In either of these cases, the line y = L is called a horizontal asymptote for f . Examples: 1. For any r > 0, 1 =0 x xr 2. In the last example with the graph above, lim f (x) = x2 + 2 x 8 2 = 1 + for x = 2 x2 4 x+2

If we take the limit as x approaches , the lim 1+

2 x+2

term gets smaller and smaller, and so =1

2 x+2

So the function has a horizontal asymptote at y = 1.

( x) A common situation is nding horizontal asymptotes for rational functions p . There are q ( x) a few simple rules that will let you easily see what asymptotes such functions have. 2x+1 . 4x2 +5

3. Find the horizontal asymptotes of f (x) =

solution: To evaluate this limit, we multiply the top and bottom by the reciprocal of 1 the largest power of x involved (in this case, that will be x 2 ): 2x + 1 lim = x 4x2 + 5 =
x

lim

2x + 1 4x2 + 5
2 x

1 x2 1 x2

1 +x 2 x 4 + 5 x2 0+0 = 4+0 = 0

lim

So f (x) has a horizontal asymptote at y = 0. 4. Find the horizontal asymptotes of g (x) =

2x2 +1 4x2 +5

solution: We can use the same trick as before: 2x2 + 1 lim = x 4x2 + 5 = lim 2x2 + 1 4x2 + 5
1 x2 5 x2 1 x2 1 x2

2+ x 4 + 2+0 = 4+0 1 = 2 lim

So g (x) has a horizontal asymptote at y = 1 . 2 The last couple examples can be summarized as follows: suppose f (x) = q are both polynomials. Then
p(x) , q ( x)

where p and

If the degree of p is less than the degree of q , then f has a horizontal asymptote at y = 0.

 If the degree of p is equal to the degree of q , then f has a horizontal asymptote at y = L where L is the ratio of the leading coecient of p to the leading coecient of q . If the degree of p is greater than the degree of q , then the function has no horizontal asymptotes. Example: (Real life example of asymptotic behaviour) A small business invests $5000 in a new product. In addition to the initial investment, the product costs $0.50 per unit to produce. Find the average cost per unit a) if 1000 units are produced, b) if 10000 units are produced, c) as the number of units produced goes to innity. solution: We can just read the formula o and evaluate at 1000 and 10000 to get a) and b) x 2 5000 1 (x) = C + x 2 1 (1000) = 5 + = $5.50 C 2 1 1 (10000) = C + = $1 2 2 C (x) = 5000 + (x) as x : To get c) we evaluate C
x

(x) = 0 + 1 = $0.50 lim C 2

This makes sense; as you make more and more units the cost due to the initial investment becomes less and less signicant.