12 Further topics in calculus

Learning objectives
After completing this chapter students should be able to:

Use the chain, product and quotient rules for differentiation.

Choose the most appropriate method for differentiating different forms of
functions.
Check the second-order conditions for optimization of relevant economic functions using the quotient rule for differentiation.
Integrate simple functions.
Use integration to determine total cost and total revenue from marginal cost and
marginal revenue functions.
Understand how a denite integral relates to the area under a function and apply
this concept to calculate consumer surplus.

12.1 Overview
In this chapter, some techniques are introduced that can be used to differentiate functions that
are rather more complex than those encountered in Chapters 8, 9, 10 and 11. These are the
chain rule, the product rule and the quotient rule. As you will see in the worked examples, it
is often necessary to combine several of these methods to differentiate some functions. The
concept of integration is also introduced.

12.2 The chain rule

The chain rule is used to differentiate functions within functions. For example, if we have
the function
y = f(z)
and we also know that there is a second functional relationship
z = g(x)
then we can write y as a function of x in the form
y = f[g(x)]
1993, 2003 Mike Rosser

To differentiate y with respect to x in this type of function we use the chain rule which
states that
dy
dy dz
=
dx
dz dx
One economics example of a function within a function occurs in the marginal revenue
productivity theory of the demand for labour, where a rms total revenue depends on output
which, in turn, depends on the amount of labour employed. An applied example is explained
later. However, we shall rst look at what is perhaps the most frequent use of the chain
rule, which is to break down an awkward function articially into two components in order
to allow differentiation via the chain rule. Assume, for example, that you wish to nd an
expression for the slope of the non-linear demand function
p = (150 0.2q)0.5

(1)

The basic rules for differentiation explained in Chapter 8 cannot cope with this sort of
function. However, if we dene a new function
z = 150 0.2q

(2)

then (1) above can be rewritten as

p = z0.5

(3)

(Note that in both (1) and (3) the functions are assumed to hold for p 0 only, i.e. negative
roots are ignored.)
Differentiating (2) and (3) we get
dz
= 0.2
dq

dp
= 0.5z0.5
dz

Thus, using the chain rule and then substituting equation (2) back in for z, we get
dp
dp dz
0.1
0.1
=
= 0.5z0.5 (0.2) = 0.5 =
dq
dz dq
z
(150 0.2q)0.5
Some more examples of the use of the chain rule are set out below.

Example 12.1
The present value of a payment of 1 due in 8 years time is given by the formula
PV =

1
(1 + i)8

where i is the given interest rate. What is the rate of change of PV with respect to i?
1993, 2003 Mike Rosser

Solution
If we let
z=1+i

(1)

then we can write

PV =

1
= z8
z8

(2)

Differentiating (1) and (2) gives

dz
=1
di

dPV
= 8z9
dz

Therefore, using the chain rule, the rate of change of PV with respect to i will be
dPV
dPV dz
8
=
= 8z9 =
di
dz di
(1 + i)9

Example 12.2
If y = (48 + 20x 1 + 4x + 0.3x 2 )4 , what is dy/dx?
Solution
Let
z = 48 + 20x 1 + 4x + 0.3x 2

(1)

and so
dz
= 20x 2 + 4 + 0.6x
dx

(2)

Substituting (1) into the function given in the question

y = z4
and so
dy
= 4z3
dz
Therefore, using the chain rule and substituting (2) and (3)
dy
dy dz
=
dx
dz dx
= 4z3 (20x 2 + 4 + 0.6x)
= 4(48 + 20x 1 + 4x + 0.3x 2 )3 (20x 2 + 4 + 0.6x)
1993, 2003 Mike Rosser

(3)

The marginal revenue productivity theory of the demand for labour

In the marginal revenue productivity theory of the demand for labour, the rule for prot
maximization is to employ additional units of labour as long as the extra revenue generated
by selling the extra output produced by an additional unit of labour exceeds the marginal cost
of employing this additional unit of labour. This rule applies in the short run when inputs
other than labour are assumed xed.
The optimal amount of labour is employed when
MRPL = MCL
where MRPL is the marginal revenue product of labour, dened as the additional revenue
generated by an additional unit of labour, and MCL is the marginal cost of an additional unit
of labour. The MCL is normally equal to the wage rate unless the rm is a monopsonist (sole
buyer) in the labour market.
If all relevant functions are assumed to be continuous then the above denitions can be
rewritten as
MRPL =

dTR
dL

MCL =

dTCL
dL

where TR is total sales revenue (i.e. pq) and TCL is the total cost of labour. If a rm is a
monopoly seller of a good, then we effectively have to deal with two functions in order to
derive its MRPL function since total revenue will depend on output, i.e. TR = f(q), and
output will depend on labour input, i.e. q = f(L). Therefore, using the chain rule,
MRPL =

dTR dq
dTR
=
dL
dq dL

(1)

We already know that

dTR
= MR
dq

dq
= MPL
dL

Therefore, substituting these into (1),

MRPL = MR MPL
This is the rule for determining the prot-maximizing amount of labour which you should
encounter in your microeconomics course.

Example 12.3
A rm is a monopoly seller of good q and faces the demand schedule p = 200 2q, where p
is the price in pounds, and the short-run production function q = 4L0.5 . If it can buy labour
at a xed wage of 8, how much L should be employed to maximize prot, assuming other
inputs are xed?
1993, 2003 Mike Rosser

Solution
Using the chain rule we need to derive a formula for MRPL in terms of L and then set it equal
to 8, given that MCL is xed at this wage rate. As
MRPL =

dTR dq
dTR
=
dL
dq dL

(1)

we need to nd dTR/dq and dq/dL.

Given p = 200 2q, then
TR = pq = (200 2q)q = 200q 2q 2
Therefore
dTR
= 200 4q
dq

(2)

Given q = 4L0.5 , then the marginal product of labour will be

dq
= 2L0.5
dL

(3)

Thus, substituting (2) and (3) into (1)

MRPL = (200 4q)2L0.5 = (400 8q)L0.5
As all units of L cost 8, setting this function for MRPL equal to the wage rate we get
400 8q
=8
L0.5
400 8q = 8L0.5

(4)

Substituting the production function q = 4L0.5 into (4), as we are trying to derive a formula
in terms of L, gives
400 8(4L0.5 ) = 8L0.5
400 32L0.5 = 8L0.5
400 = 40L0.5
10 = L0.5
100 = L
which is the optimal employment level.
In the example above the idea of a short-run production function was used to simplify
the analysis, where the input of capital (K) was implicitly assumed to be xed. Now that
you understand how an MRPL function can be derived we can work with full production
functions in the format Q = f(K, L). The effect of one input increasing while the other is
held constant can now be shown by the relevant partial derivative.
1993, 2003 Mike Rosser

Thus
MPL =

Q
L

The same chain rule can be used for partial derivatives, and full and partial derivatives can
be combined, as in the following examples.

Example 12.4
A rm operates with the production function q = 45K 0.7 L0.4 and faces the demand function
p = 6,980 6q. Derive its MRPL function.
Solution
By denition MRPL = TR/L, where K is assumed xed.
We know that
TR = pq = (6,980 6q)q = 6,980q 6q 2
Therefore
dTR
= 6,980 12q
dq

(1)

From the production function q = 45K 0.7 L0.4 we can derive

MPL =

q
= 18K 0.7 L0.6
L

(2)

Using the chain rule and substituting (1) and (2)

MRPL =

dTR q
TR
=
= (6,980 12q)18K 0.7 L0.6
L
dq L

(3)

As we wish to derive MRPL as a function of L, we substitute the production function given

in the question into (3) for q. Thus
MRPL = [6,980 12(45K 0.7 L0.4 )]18K 0.7 L0.6
= 125,640K 0.7 L0.6 9,720K 1.4 L0.2
Note that the value MRPL will depend on the amount that K is xed at, as well as the
value of L.
Point elasticity of demand
The chain rule can help the calculation of point elasticity of demand for some non-linear
demand functions.
1993, 2003 Mike Rosser

Example 12.5
Find point elasticity of demand when q = 10 if p = (120 2q)0.5 .
Solution
Point elasticity is dened as
e = (1)

p 1
 
q dp
dq

(1)

Create a new variable z = 120 2q. Thus p = z0.5 and so, by differentiating:
dz
= 2
dq

dp
= 0.5z0.5
dz

Therefore
dp dz
dp
=
dq
dz dq
= 0.5z0.5 (2)
= 0.5(120 2q)0.5 (2)
=

1
(120 2q)0.5

and so, inverting this result,

1
= (120 2q)0.5
dp/dq
When q = 10, then from the original demand function price can be calculated as
p = (120 20)0.5 = 1000.5 = 10
Thus, substituting these results into formula (1), point elasticity will be
e = (1)

10
(1)(120 2q)0.5 = (120 20)0.5 = 1000.5 = 10
10

Sometimes it may be possible to simplify an expression in order to be able to differentiate

it, but one may instead use the chain rule if it is more convenient. The same result will be
obtained by both methods, of course.

Example 12.6
Differentiate the function y = (6 + 4x)2 .

1993, 2003 Mike Rosser

Solution
(i) By multiplying out
y = (6 + 4x)2 = 36 + 48x + 16x 2
Therefore
dy
= 48 + 32x
dx
(ii) Using the chain rule, let z = 6 + 4x so that y = z2 . Thus
dy dz
dy
=
= 2z 4 = 2(6 + 4x)4 = 48 + 32x
dx
dz dx

Test Yourself, Exercise 12.1

1.

2.
3.

A rm operates in the short run with the production function q = 2L0.5 and faces
the demand schedule p = 60 4q where p is price in pounds. If it can employ
labour at a wage rate of 4 per hour, how much should it employ to maximize
prot?
If a supply schedule is given by p = (2 + 0.05q)2 show (a) by multiplying out,
and (b) by using the chain rule, that its slope is 2.2 when q is 400.
The return R on a sum M invested at i per cent for 3 years is given by the formula
R = M(1 + i)3

4.
5.
6.

7.

8.
9.

What is the rate of change of R with respect to i?

If y = (3 + 0.6x 2 )0.5 what is dy/dx?
If a rm faces the total cost function TC = (6 + x)0.5 , what is its marginal cost
function?
A rm operates with the production function q = 0.4K 0.5 L0.5 and sells its output
in a market where it is a monopoly with the demand schedule p = 60 2q. If K
is xed at 25 units and the wage rate is 7 per unit of L, derive the MRPL function
and work out how much L the rm should employ to maximize prot.
A rm faces the demand schedule p = 650 3q and the production function
q = 4K 0.5 L0.5 and has to pay 8 per unit to buy L. If K is xed at 4 units how
much L should the rm use if it wishes to maximize prots?
If a rm operates with the total cost function TC = 4 + 10(9 + q 2 )0.5 , what is its
marginal cost when q is 4?
Given the production function q = (6K 0.5 + 0.5L0.5 )0.3 , nd MPL when K is 16
and L is 576.

1993, 2003 Mike Rosser