Z00_REND1011_11_SE_MOD6 PP2.QXD 2/21/11 12:48 PM Page 1 MODULE 6 Calculus-Based Optimization LEARNING OBJECTIVES After completing this module, students will be able to: 1. Find the slope of a curve at any point. 2. Find derivatives for several common types of functions. 3. Find the maximum and minimum points on curves. 4. Use derivatives to maximize total revenue and other functions. MODULE OUTLINE M6.1 M6.2 M6.3 M6.4 M6.5 M6.6 Introduction Slope of a Straight Line Slope of a Nonlinear Function Some Common Derivatives Maximum and Minimum Applications Summary • Glossary • Key Equations • Solved Problem • Self-Test • Discussion Questions and Problems • Bibliography M6-1 Z00_REND1011_11_SE_MOD6 PP2.QXD M6-2 M6.1 2/21/11 12:48 PM Page 2 MODULE 6 • CALCULUS-BASED OPTIMIZATION Introduction Although most of the quantitative techniques presented in this book are based on algebra, there are many situations in which calculus and derivatives are helpful in finding the best solution to a business problem. In this module, we begin by reviewing the slope of a line, as this is important in understanding the derivative of a function. Then we explain what a derivative is and how it is used. M6.2 Slope of a Straight Line The equation of a straight line is Y = a + bX. Recall that the equation of a line can be written as Y = a + bX (M6-1) where b is the slope of the line. If we are given any two points, 1X1, Y12 and 1X2, Y22, that are on a line, the slope is The slope of the line is the change in Y over the change in X. Change in Y Y2 - Y1 ¢Y = = Change in X ¢X X2 - X1 b = (M6-2) where ¢ (delta) is used to represent “change in.” For example, the slope of the line that passes through the points (2,3) and (4,7) is b = ¢Y 7 - 3 4 = = = 2 ¢X 4 - 2 2 We can find the intercept, a, by using this slope and either point in the equation for a line. For this example, if we select the point (2, 3), we have Y = a + bX 3 = a + 2122 a = -1 The equation of this line is then Y = -1 + 2X This is illustrated in Figure M6.1. Notice that the slope of this line (and any other straight line) is constant. We can pick any two points on the line and compute the slope using Equation M6-2. For a nonlinear equation, the slope is not constant, as we explain in the next section. FIGURE M6.1 Graph of Straight Line 14 Y = –1 + 2X 12 10 Y 8 (4,7) ⎧ ⎪ ⎨ ⌬Y = 7 – 3 = 4 ⎪ ⎩ 6 4 –2 0 –2 –4 (2,3) ⎧ ⎪ ⎨ ⎪ ⎩ 2 ⌬X = 4 – 2 = 2 2 4 X 6 8 Z00_REND1011_11_SE_MOD6 PP2.QXD 2/21/11 12:48 PM Page 3 M6.3 M6.3 SLOPE OF A NONLINEAR FUNCTION M6-3 Slope of a Nonlinear Function Figure M6.2 provides a graph of the function Y = X2 - 4X + 6 If a curve is nonlinear, we can find the slope at any point by finding the slope of a tangent line at that point. Notice that this is not a straight line. To determine the slope of a curve at any point, we find the slope of a line tangent to the curve at this point. For example, if we wish to find the slope of the line when X = 3, we find a line that is tangent at that point. To find the slope of a line, we use Equation M6-2, which requires us to have two points. We want the slope at X = 3, so we let X1 = 3 and we find Y1 = (3)2 - 4(3) + 6 = 3 Thus, one point will be (3,3). We wish to find another point close to this, so we will choose a value of X2 close to X1 = 3. If we pick X2 = 5 for the other point (an arbitrary choice used simply to illustrate this process), we find Y2 = 1522 - 4152 + 6 = 11 This other point is (5,11). The slope of the line between these two points is b = ¢Y 11 - 3 8 = = = 4 ¢X 5 - 3 2 To get a better estimate of the slope where X1 = 3, we choose a value of X2 even closer to X1 = 3. Taking the point (3,3) with the point (4,6), we have b = ¢Y 6 - 3 3 = = = 3 ¢X 4 - 3 1 Neither of these slopes would be exactly the same as the slope of the line tangent to this curve at the point (3,3), as shown in Figure M6.3. However, we see that they each give us an estimate of the slope of a tangent line. If we keep selecting points closer and closer to the point where X = 3, we find slopes that are closer to the value we are trying to find. To get a point very close to (3,3), we will use a value, ¢X, and add this to X = 3 to get the second point. As we let ¢X get smaller, we find a point 1X + ¢X, Y22 closer to the original point (3,3). From the original equation, Y = X2 - 4X + 6 we have Y1 = 32 - 4132 + 6 = 3 FIGURE M6.2 Graph of Quadratic Function 12 Y = X 2 – 4X + 6 10 8 Y 6 4 2 –2 0 2 X 4 6 Z00_REND1011_11_SE_MOD6 PP2.QXD M6-4 2/21/11 12:48 PM Page 4 MODULE 6 • CALCULUS-BASED OPTIMIZATION FIGURE M6.3 Graph of Tangent Line and Other Lines Connecting Points 20 Y = X 2 – 4X + 6 Line through (3,3) and (5,11) Line through (3,3) and (4,6) Tangent line at (3,3) 15 10 5 Y –2 0 2 4 6 8 X –5 –10 –15 and Y2 = 13 + ¢X22 - 413 + ¢X2 + 6 = 19 + 6¢X + ¢X22 - 12 - 4¢X + 6 = ¢X2 + 2¢X + 3 Thus, ¢Y = Y2 - Y1 = 1¢X2 + 2¢X + 32 - 3 = ¢X2 + 2¢X The slope is then b = The limit as ¢ X approaches 0 is used to find the slope of a tangent line. ¢X1¢X + 22 ¢Y ¢X2 + 2¢X = = = ¢X + 2 ¢X ¢X ¢X As ¢X gets smaller, the value of ¢Y>¢X approaches the slope of the tangent line. The value of the slope (b) in this example will approach 2. This is called the limit as ¢X approaches zero and is written as lim 1¢X + 22 = 2 ¢X:0 It is obvious that at other points on the curve, the tangent line would have a different slope as Y and ¢Y would not be the values given here. To find a general expression for the slope of the tangent line at any point on a curve, we can repeat this process for a general point X. Let X1 = X and X2 = X + ¢X, and let Y1 and Y2 represent the corresponding values for Y. For an equation of the form Y = aX2 + bX + c we let Y1 = aX2 + bX + c and Y2 = a(X + ¢X)2 + b(X + ¢X) + c Z00_REND1011_11_SE_MOD6 PP2.QXD 2/21/11 12:48 PM Page 5 M6.4 SOME COMMON DERIVATIVES M6-5 Expanding these expressions and simplifying, we find ¢Y = Y2 - Y1 = b(¢X) + 2aX(¢X) + c(¢X)2 Then b(¢X) + 2aX(¢X) + c(¢X)2 ¢X(b + 2aX + c¢X) ¢Y = = = b + 2aX + c¢X ¢X ¢X ¢X Taking the limit as ¢ X approaches zero, we have lim (b + 2aX + c¢X) = b + 2aX ¢X:0 The derivative of a function is used to find the slope of the curve at a particular point. This is the slope of the function at the point X, and it is called the derivative of Y. It is denoted as Y¿ or dY>dX. The definition of a derivative is Y¿ = dY ¢Y = lim e f ¢X:0 ¢X dX (M6-3) Fortunately, we will be using some common derivatives that are easy to remember, and it is not necessary to go through this process of finding the limit every time we wish to find a derivative. M6.4 Some Common Derivatives Although derivatives exist for a number of different functional forms, we restrict our discussion to the six most common ones. The references at the end of this module provide additional information on derivatives. Table M6.1 gives a summary of the common derivatives. We provide examples of each of these. The derivative of a constant is 0. If Y = c, then Y¿ = 0 c = constant 1. (M6-4) For example, if Y = 4, then Y¿ = 0. The graph of Y is a horizontal line, so the change in Y is zero, regardless of the value of X. If Y = Xn, then Y¿ = nXn - 1 2. (M6-5) For example, if Y = X2, then Y¿ = 2X2 - 1 = 2X if Y = X3, then Y¿ = 3X3 - 1 = 3X2 if Y = X9, then Y¿ = 9X9 - 1 = 9X8 If Y = cXn, then Y¿cnXn - 1 3. TABLE M6.1 Some Common Derivatives FUNCTION DERIVATIVE Y = C Y⬘ = 0 Y = Xn Y⬘ = nXn⫺1 Y = cXn Y⬘ = cnXn⫺1 Y = 1 Xn Y¿ = -n Xn + 1 Y = g(x) + h(x) Y⬘ = g⬘(x) + h⬘(x) Y = g(x) ⫺ h(x) Y⬘ = g⬘(x) ⫺ h⬘(x) (M6-6) Z00_REND1011_11_SE_MOD6 PP2.QXD M6-6 2/21/11 12:48 PM Page 6 MODULE 6 • CALCULUS-BASED OPTIMIZATION For example, if Y = 4X3, then Y¿ = 4(3)X3 - 1 = 12X2 if Y = 2X4, then Y¿ = 2(4)X4 - 1 = 8X3 Note that Y = If a function is the sum or difference of two functions, the derivative is the sum or difference of the individual derivatives of those two functions. 1 - n -n-1 = n+1 n , then Y¿ = - nX x X If Y = 4. (M6-7) 1 , is the same as Y = X - n. For example, Xn if Y = 1 -3 (or Y = X - 3), then Y¿ = -3X - 3 - 1 = -3X - 4 = 4 3 X X if Y = 2 -8 , then Y¿ = 2(-4)X - 4 - 1 = 5 4 X X If Y = g(x) + h(x), then Y¿ = g¿(x) + h¿(x) 5. (M6-8) For example, if Y = 2X3 + X2 then Y¿ = 2(3)X3 - 1 + 2X2 - 1 = 6X2 + 2X if Y = 5X4 + 3X2 then Y¿ = 5(4)X4 - 1 + 3(2)X2 - 1 = 20X3 + 6X If Y = g(x) - h(x), then Y¿ = g¿(x) - h¿(x) 6. (M6-9) For example, if Y = 5X3 - X2 then Y¿ = 5(3)X3 - 1 - 2X2 - 1 = 15X2 - 2X if Y = 2X4 - 4X2 then Y¿ = 2(4)X4 - 1 - 4(2)X2 - 1 = 8X3 - 8X The second derivative is the derivative of the first derivative. Second Derivatives The second derivative of a function is the derivative of the first derivative. This is denoted as Y– or d2Y>dX2. For example, if Y = 6X4 + 4X3 then the first derivative is dY = 6(4)X4 - 1 + 4(3)X3 - 1 dX = 24X3 + 12X2 Y¿ = and Y¿¿ = d2Y = 24(3)X3 - 1 + 12(2)X2 - 1 dX2 = 72X2 + 24X The second derivative tells us about the slope of the first derivative, and it is used in finding the maximum and minimum of a function. We use this in the next section. M6.5 Maximum and Minimum In using quantitative techniques in business, we often try to maximize profit or minimize cost. If a profit function or cost function can be developed, taking a derivative may help us to find the optimum solution. In dealing with nonlinear functions, we often look at local optimums, which represent the maximums or minimums within a small range of X. Z00_REND1011_11_SE_MOD6 PP2.QXD 2/21/11 12:48 PM Page 7 M6.5 FIGURE M6.4 Graph of Curve with Local Maximum and Local Minimum MAXIMUM AND MINIMUM M6-7 Y 3 2 Y= 1 3 X – 4X + 12X + 3 A B 0 0 A local maximum (or minimum) is the highest (or lowest) point in a neighborhood around that point. To find a local optimum, we find the first derivative, set it equal to 0, and solve for X. This point is called a critical point. 2 4 6 8 10 X Figure M6.4 illustrates a curve where point A is a local maximum (it is higher than the points around it), point B is a local minimum (it is lower than the points around it), but there is no global maximum or minimum as the curve continues to increase without bound as X increases, and it decreases without bound as X decreases. If we place limits on the maximum and minimum values for X, then the endpoints can be checked to see if they are higher than any local maximum or lower than any local minimum. To find a local optimum, we take the derivative of the function and set it equal to zero. Remember that the derivative gives the slope of the function. For a point to be a local maximum or minimum, the tangent line must be a horizontal line, which has a slope of zero. Therefore, when we set the derivative equal to zero and solve, we find a value of X that might be a local maximum or minimum. Such a point is called a critical point. The following function generated the graph in Figure M6.4: Y = 1 3 X - 4X2 + 12X + 3 3 Point A gives a local maximum and point B gives a local minimum. To find the values of X where these occur, we find the first derivative and set this equal to zero: Y¿ = X2 - 8X + 12 = 0 Solving this for X, we factor this and have (X - 2)(X - 6) = 0 so the critical points occur when X = 2 and X = 6. The second derivative is Y– = 2X - 8 At the first critical point, X = 2, so Y– = 2(2) - 8 = -4 Because this is negative, this point is a local maximum. At the second critical point, where X = 8, Y– = 2(8) - 8 = 8 Because this is positive, this critical point is a local minimum. Consider Figure M6.5, which is a graph of Y = X3 Y¿ = 3X2 This derivative is equal to zero when X = 0. The second derivative is Y– = 3(2)X2 - 1 = 6X Z00_REND1011_11_SE_MOD6 PP2.QXD M6-8 2/21/11 12:48 PM Page 8 MODULE 6 • CALCULUS-BASED OPTIMIZATION FIGURE M6.5 Graph of Function with Point of Inflection at Xⴝ0 Y 1.5 Y = X3 1 0.5 –1.5 –1 –0.5 0 0.5 1 1.5 X –0.5 –1 –1.5 When X = 0, Y– = 6(0) = 0. Thus, this is neither a maximum nor a minimum but is a point of inflection, as shown in Figure M6.5. A critical point will be 1. a maximum if the second derivative is negative. 2. a minimum if the second derivative is positive. 3. a point of inflection if the second derivative is zero. M6.6 Applications There are many problems in which derivatives are used in business. We discuss a few of these here. Economic Order Quantity The EOQ model is derived from the total inventory cost function. In Chapter 6, we show the formula for computing the economic order quantity (EOQ), which minimizes cost when certain conditions are met. The total cost formula under these conditions is Total cost = (Total ordering cost) + (Total holding cost) + (Total purchase cost) Q D TC = Co + Ch + DC Q 2 where Q = order quantity D = annual demand Co = ordering cost per order Ch = holding cost per unit per year C = purchase (material) cost per unit The variable is Q and all of the others are known constants. The derivative of the total cost with respect to Q is Ch -DCo dTC + = 2 dQ 2 Q Z00_REND1011_11_SE_MOD6 PP2.QXD 2/21/11 12:48 PM Page 9 M6.6 APPLICATIONS M6-9 Setting this equal to zero and solving results in Q = ; 2DCo A Ch We cannot have a negative quantity, so the positive value is the minimum cost. The second derivative is DCo d2TC = 2 dQ Q3 If all the costs are positive, this derivative will be positive for any value of Q 7 0. Thus, this point must be a minimum. The formula for the EOQ model demonstrated here is the same formula used in Chapter 6. This method of using derivatives to derive a minimum cost quantity can be used with many total cost functions, even if the EOQ assumptions are not met. Total Revenue In analyzing inventory situations, it is often assumed that whatever quantity is produced can be sold at a fixed price. However, we know from economics that demand is a function of the price. When the price is raised, the demand declines. The function that relates the demand to the price is called a demand function. Suppose that historical sales data indicate that the demand function for a particular product is Q = 6,000 - 500P where Q = quantity demanded (or sold) P = price in dollars Total revenue equals total demand times the selling price. The total revenue function is Total revenue = Price * Quantity TR = PQ Substituting for Q (using the preceding demand function) in this equation gives us TR = P(6,000 - 500 P) TR = 6,000 P - 500 P2 To maximize total revenue, find the derivative of the total revenue function, set it equal to 0, and solve. A graph illustrating this total revenue function is provided in Figure M6.6. To find the price that will maximize the total revenue, we find the derivative of total revenue: TR¿ = 6,000 - 1,000P Setting this equal to zero and solving, we have P = 6 Thus, to maximize total revenue, we set the price at $6. The quantity that will be sold at this price is Q = 6,000 - 500 P = 6,000 - 500(6) = 3,000 units The total revenue is TR = PQ = 6(3,000) = $18,000 Z00_REND1011_11_SE_MOD6 PP2.QXD M6-10 2/21/11 12:48 PM Page 10 MODULE 6 • CALCULUS-BASED OPTIMIZATION FIGURE M6.6 Total Revenue Function 20,000 Y = 6,000X – 500X 2 18,000 16,000 Revenue 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0 5 10 15 Price Summary In this module we use the concept of limits to demonstrate that the derivative is the slope of a curve. We use several common derivatives to find the maximums and minimums of functions. The local optimums are found by taking the derivative of a function, setting it equal to zero, and solving. If the second derivative is negative at this point, the local optimum is a maximum. If the second derivative is positive at this point, the local optimum is a minimum. If the second derivative is zero, the point is called a point of inflection. Derivatives can be used to find the EOQ, which minimizes total inventory cost. A total revenue function is based on a demand curve. The derivative of this shows where revenues are maximized. Glossary Critical Point A point on a curve where the first derivative is equal to zero. Derivative The slope of a function at a particular point. It is the limit of the change in Y over the change in X, as the change in X approaches 0. Local Maximum The highest point in the neighborhood around that point. Local Minimum The lowest point in the neighborhood around that point. Point of Inflection A point on a curve where the first derivative is equal to zero, but the point is neither a maximum nor a minimum. Second Derivative The derivative of the first derivative. Slope The slope of a line is the change in the Y value divided by the change in the X value. Key Equations (M6-1) Y = a + bX Equation of a straight line. Y2 - Y1 Change in Y ¢Y = = Change in X ¢X X2 - X1 Slope of a straight line found from two points. (M6-2) b = ¢Y dY = lim e f ¢X: 0 ¢X dX Definition of derivative. (M6-3) Y¿ = (M6-4) If Y = c where c is any constant, then Y¿ = 0 Derivative of a constant function. (M6-5) If Y = Xn, then Y¿ = nXn - 1 Derivative of X raised to a power. (M6-6) If Y = cXn, then Y¿cnXn - 1 Derivative of a constant times a function of X. (M6-7) If Y = 1>Xn, then Y¿ = -nX - n - 1 = -n>Xn + 1 Derivative of 1>X to a power. (M6-8) If Y = g(x) + h(x), then Y¿ = g¿(x) + h¿(x) Derivative of the sum of two functions of X. (M6-9) If Y = g(x) - h(x), then Y¿ = g¿(x) - h¿(x) Derivative of the difference of two functions of X. Z00_REND1011_11_SE_MOD6 PP2.QXD 2/21/11 12:48 PM Page 11 SELF-TEST M6-11 Solved Problem Solved Problem M6-1 The following function relates the price for a product to the quantity sold: P = 6 - 0.75Q Find the price that will maximize total revenue. Solution Total revenue = Price * Quantity TR = PQ TR = (6 - 0.75Q)Q = 6Q - 0.75Q 2 So, TR¿ = 6 - 0.75(2)Q Setting this equal to zero and solving, we have 6 - 1.5Q = 0 or Q = 4 Then, P = 6 - 0.75Q = 6 - 0.75(4) = 6 - 3 = 3 Self-Test 䊉 䊉 䊉 Before taking the self-test, refer back to the learning objectives at the beginning of the module and the glossary at the end of the module. Use the key at the back of the book to correct your answers. Restudy pages that correspond to any questions that you answered incorrectly or material you feel uncertain about. 1. The slope of a curve at a particular point can be found a. by computing the first derivative of the function for that curve. b. by computing the second derivative of the function for that curve. c. by computing the change in X divided by the change in Y. d. by dividing the value of Y at that point by the value of X. 2. If the first derivative is set equal to zero and solved for X, at that point (X) the curve could be a. at a maximum. b. at a minimum. c. at an inflection point. d. any of the above. 3. A critical point is a point where a. the slope of the function is 0. b. the Y value for the function is 0. c. the X value for the function is 0. d. the value of Y/X is 0. 4. A function is at a maximum at the point X = 5. At this point, a. the value of the second derivative is 0. b. the value of the second derivative is negative. c. the value of the second derivative is positive. d. the value of the first derivative is negative. 5. A point of inflection occurs when a. the first derivative is 0. b. the second derivative is 0. c. the first and the second derivatives are both 0. d. the first and the second derivatives are both positive. 6. The EOQ model can be derived from the derivative of a. the holding cost function. b. the ordering cost function. c. the purchase cost function. d. the total inventory cost function. 7. To find the quantity that maximizes total revenue, we should a. set total revenue equal to total cost. b. find the derivative of the total cost function. c. find the derivative of the total profit function. d. find the derivative of the total revenue function. Z00_REND1011_11_SE_MOD6 PP2.QXD M6-12 2/21/11 12:48 PM Page 12 MODULE 6 • CALCULUS-BASED OPTIMIZATION Discussion Questions and Problems Discussion Questions M6-1 Explain how to find the slope of a straight line. M6-2 Explain how to find the slope of a nonlinear function at a particular point, using limits. M6-3 What is the procedure for finding the maximum or minimum of a function? How is the second derivative used in this process? M6-4 What are critical points? Problems M6-5 Find the derivative of the following functions. (a) Y = 2X3 - 3X2 + 6 (b) Y = 4X5 + 2X3 - 12X + 1 (c) Y = 1>X2 (d) Y = 25>X4 M6-6 Find the second derivative for each of the functions in Problem M6-5. M6-7 Find the derivatives of the following functions. (a) Y = X6 - 0.5X2 - 16 (b) Y = 5X4 + 12X2 + 10X + 21 (c) Y = 2>X3 (d) Y = 25>2X4 M6-8 Find the second derivative for each of the functions in Problem M6-7. M6-9 Find the critical point for the function Y = 6X2 5X + 4. Is this a maximum, minimum, or point of inflection? M6-10 Find the critical points for the function Y = A 13 B X3 - 5X2 + 25X + 12. Identify each critical point as a maximum or a minimum or a point of inflection. M6-11 Find the critical point for the function Y = X3 - 20. Is this a maximum, minimum, or point of inflection? M6-12 The total revenue function for a particular product is TR = 1,200Q - 0.25Q 2. Find the quantity that will maximize total revenue. What is the total revenue for this quantity? M6-13 The daily demand function for the AutoBright car washing service has been estimated to be Q = 75 - 2P, where Q is the quantity of cars and P is the price. Determine what price would maximize total revenue. How many cars would be washed at this price? M6-14 The total revenue function for AutoBright car washing service (see Problem M6-13) is believed to be incorrect due to a changing demand pattern. Based on new information, the demand function is now estimated to be Q = 180 - 2P2. Find the price that would maximize total revenue. M6-15 The total cost function for the EOQ model is TC = Q D Co + Ch + DC Q 2 In a particular inventory situation, annual demand (D) is 2,000, ordering cost per order (Co) is $25, holding cost per unit per year (Ch) is $10, and purchase (material) cost per unit (C) is $40. Write the total cost function with these values. Take the derivative and find the quantity that minimizes cost. M6-16 Find the second derivative of the total cost function in Problem M6-15 and verify that the value at the critical point is a minimum. Bibliography Barnett, Raymond, Michael Ziegler, and Karl Byleen. College Mathematics for Business, Economics, Life Sciences, and Social Sciences, 9th ed. Upper Saddle River, NJ: Prentice Hall, 2002. Haeussler, Ernest, and Richard Paul. Introductory Mathematical Analysis for Business, Economics and the Life and Social Sciences, 10th ed. Upper Saddle River, NJ: Prentice Hall, 2002.
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