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Diaa Noureldin
diaa.noureldin@aucegypt.edu
Department of Economics
The American University in Cairo
The material for this topic is Ch. 11 (except Section 11.6) in the course
textbook (Hoy et al., 2011).
I Partial dierentiation.
I Second-order partial derivative.
I The rst-order total dierential.
I Implicit dierentiation.
I Level curves.
I Homogenous and homothetic functions.
I Economic applications.
1 / 61
RECALL: the derivative
dny
f (n ) ( x ) .
dx n
2 / 61
RECALL: the rules of dierentiation I
1. f (x ) = c (c is constant), then f 0 (x ) = 0.
2. f (x ) = cx (c is constant), then f 0 (x ) = c.
3. f (x ) = x n , then f 0 (x ) = nx n 1.
5. h(x ) = f (x ) g (x ), then h0 (x ) = f 0 (x ) g 0 (x ).
6. h(x ) = f (x )g (x ), then h0 (x ) = f 0 (x )g (x ) + f (x )g 0 (x ).
f (x ) f 0 (x )g (x ) f (x )g 0 (x )
7. h(x ) = , g (x ) 6= 0, then h0 (x ) = .
g (x ) (g (x ))2
3 / 61
RECALL: the rules of dierentiation II
The rules of dierentiation (continued):
h 0 (x ) = f 0 (u )g 0 (x ),
or
dy dy du
= .
dx du dx
Example
Let y = (3x 4)6 , thus u = g (x ) = 3x 4, and y = f (u ) = u 6 . We
have
dy dy du
= = 6u 5 (3) = 18u 5 = 18 (3x 4)5 .
dx du dx
4 / 61
RECALL: the rules of dierentiation III
The rules of dierentiation (continued):
9. If y = expfg (x )g e g (x ) , then
dy
= e g (x ) g 0 ( x ) .
dx
Example
2 dy 2 2
Let y = e 2x 1, then dx = e 2x 1 (4x ) = 4xe 2x 1.
dy 1 0
= g (x ).
dx g (x )
Example
dy 1 4x 4x .
Let y = log(2x 2 1), then dx = 2x 2 1
= 2x 2 1
5 / 61
RECALL: the rules of dierentiation IV
The rules of dierentiation (continued):
dx 1 1
= 0 = .
dy f (x ) dy /dx
Example
dy dx 1
Let y = 3x 2 =) dx = 6x =) dy = 6x . We also have
y 1 /2
x =
3
1 /2
dx 1 y 1 /2 1 1 y 1 /2 1 3x 2
= = =
dy 2 3 3 6 3 6 3
1 /2 1 /2
1 2 1 1 1
= x = = .
6 6 x2 6x
6 / 61
RECALL: the rules of dierentiation V
The rules of dierentiation (continued):
f (x ) 0
12. LHbo pitals rule: If limx !a g (x ) = 0 (i.e. indeterminate), then the
limit can be evaluated as follow:
f (x ) f 0 (x )
lim = lim 0 .
x !a g (x ) x !a g (x )
Example
2 x 2 25
Evaluate limx !5 xx 25 .
5 Since limx !5 x 5 = 00 , then we can use
LHb
o pitals rule:
f (x ) f 0 (x )
lim = lim
x !a g (x ) x !a g 0 (x )
x2 25 2x
lim = lim = 10.
x !5 x 5 x !5 1
7 / 61
RECALL: The total dierential
If f 0 (x0 ) is the derivative of f (x ) at the point x0 , then the total
dierential at the point x0 is
dy = f 0 (x0 )dx.
Example
Let y = x 2 . Let x change from the value 10 to 10.1 (i.e. x = 0.1). We
have that the corresponding y value will change from y = (10)2 = 100
to y = x 2 = (10.1)2 = 102.01. Thus y = 2.01. Using the total
dierential we have
dy = f 0 (x0 )dx
= 20(0.1)
= 2
2.01
10 / 61
The partial derivative II
I The reason for calling these expressions partial derivatives, and for
using the notation "" is that we are changing only one of x1 and x2
at a time, despite the fact that y depends on both of them.
f (x1 ,x2 )
I It is important to note that the partial derivative will in
x 1
f (x1 ,x2 )
general depend on x2 , and the partial derivative x 2 will in
general depend on x1 !
I For instance, the rate of change of output w.r.t. to the labor input
will depend on the level of capital input.
I Similiarly, the rate of change of output w.r.t. to the capital input
will depend on the amount of labor employed in production.
11 / 61
The partial derivative: General denition
Denition
The partial derivative of a function y = f (x1 , x2 , ..., xn ) = f (x) w.r.t.
the variable xi is:
We can also use alternative notation for the general denition of the
partial derivative:
f f (xi + xi jx i ) f (x)
f i ( x ) = f 0 ( xi j x i ) = lim ,
xi x i !0 xi
where the notation f 0 (xi jx i ) denotes the derivative of f (x) w.r.t. to its
i th argument, holding all other xs (apart from xi ) constant.
12 / 61
The partial derivative: Examples I
Example
Let y = f (x1 , x2 ) = x13 + 5x2 . In this example, we have the arguments of
f being additively separable. We have
f
f1 = 3x12
x1
f
f2 = 5.
x2
Example
Let y = f (x1 , x2 ) = x12 x2 . We have
f
f1 = 2x1 x2
x1
f
f2 = x12 .
x2
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The partial derivative: Examples II
Example
Let y = f (x1 , x2 ) = 10x1 x22 5x13 + 4x2 + x1 x2 . We have
f
f1 = 10x22 15x12 + x2
x1
f
f2 = 20x1 x2 + 4 + x1 .
x2
You should note that in these examples, the partial derivative will in
general depend on all the arguments of f .
14 / 61
The demand function I
We have that the demand for product a (QaD ) will depend on the price of
a (Pa ), the price of a related good b (Pb ) as well as income (I):
We also have the following expected signs for the partial derivatives:
I
Q aD
P a fP a < 0 (law of demand).
I
Q aD
P b fP b > 0 (goods a and b are substitutes).
I
Q aD
P b fP b < 0 (goods a and b are complements).
I
Q aD
I fI > 0 (good a is a normal good).
I
Q aD
I fI < 0 (good a is an inferior good).
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The demand function II
Example
Let
QaD = f (Pa , Pb , I) = 50Pa + 10Pb 2I.
Then we have
I
Q aD
P a fP a = 50 (downward sloping demand curve).
I
Q aD
P b fP b = 10 (goods a and b are substitutes).
I
Q aD
I fI = 2 (good a is an inferior good).
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The utility function I
U (x1 , x2 ) = x1 x21
.
I U 1 1
x 1 U1 = x1 x2 , which is positive for > 0.
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The utility function II
For 0 < < 1, the marginal utility functions satsify the law of
diminishing marginal utility. This is obvious since
U 1 1 x21
= x1 x2 =
x1 x11
U (1 )x1
= x1 (1 )x2
= .
x2 x
2
I U U
We have x 1 > 0, however x 1 # as x1 ".
I U U
We have x 2 > 0, however x 2 # as x2 ".
18 / 61
The production function
Let Q = f (K , L) be a production function for a rm, where Q, K and L
denote output, capital and labor, respectively.
Example
Let Q = 3L1 /2 K 1 /2 . We have
Q 3 1 /2 1 /2
QL = L K
L 2
Q 3
QK = L1 /2 K 1 /2 .
K 2
The concept of the production function can also be applied on the macro
level, where Q denotes aggregate economic output (or GDP), L denotes
the labor force and K denotes the capital stock (or cumulative
investments).
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The Cobb-Douglas production function
The Cobb-Douglas production function is given by
Q = AL K .
Q 1 AK
= AL K =
L L1
Q 1 AL
= AL K = 1 .
K K
I Note that both marginal product functions satisfy the law of
diminshing marginal productivity.
I We have QL > 0; however QL # as L ".
I Q Q
Also K > 0; however K # as K ".
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The Cobb-Douglas production function with 3 inputs
With three factors of production, the Cobb-Douglas production function
is given by
Q = Ax1 x2 x3 , A > 0, 0 < , , < 1.
I Q = 10 L 2 /3 K 1 /2 = 10 K 1/2 .
L 3 3 L 2/3
1/3
I Q
= 1
5L K / 3 1 / 2 L
= 5 K 1/2 .
K
Suppose the total labor force is 25 million workers, and the capital stock
(measured in monetary terms) is LE 15 billion. Then we have
Q 10 K 1 /2 10 (15)1 /2
= = = 1.51
L 3 L2 /3 3 (25)2 /3
Q L1 /3 (25)1 /3
= 5 = 5 = 3.77.
K K 1 /2 (15)1 /2
The gures are interpreted as follows:
I As labor increases by 1 unit (i.e. 1 million workers), Q increases by
LE 1.51 billion.
I As capital increases by 1 unit (i.e. LE 1 billion), Q increases by
LE 3.77 billion.
22 / 61
In-class exercises I
2
2. y = e x log x 2 .
3. y = e log (x ) .
23 / 61
In-class exercises II
Find the partial derivatives of the following functions:
2x23
y = x12 e 3x2 +x1 x3 + .
x1
24 / 61
In-class exercises III
2. Find the marginal product functions for the following CES (constant
elasticity of substitution) production function:
2
1 /2 1 /2
y = 12 0.4x1 + 0.6x2 .
25 / 61
The constant elasticity of substitution (CES) production
function I
The CES production function with 2 inputs is given by:
1 /r
y = A x1 r + (1 ) x2 r
,
26 / 61
The CES (constant elasticity of substitution) production
function II
y Ar
The marginal products can be written in a simpler form. Multiply x1 by Ar ,
we have
y Ar A (1/r ) 1
= x1 r + (1 ) x2 r
x1 Ar x1r +1
(1/r ) 1
Ar +1 x1 r + (1 ) x2 r
= .
Ar x1r +1
Also note that
1/r r +1
y r +1 = A x1 r + (1 ) x2 r
(1/r ) 1
= Ar +1 x1 r + (1 ) x2 r
.
Thus we have
r +1
y y r +1 y
= r r +1 = r .
x1 A x1 A x1
And Similarly, we have
r +1
y (1 ) y r +1 (1 ) y
= = .
x2 Ar x2r +1 Ar x2
27 / 61
The CES (constant elasticity of substitution) production
function III
Note that we have the condition that r > 1, which implies that
r +1 > 0.
28 / 61
Second-order partial derivatives
I Now that we have dened the (rst-order) partial derivative, we now
move on to dene the second-order partial derivatives.
I Recall the denition of the rst-order partial derivatives of f (x1 , x2 ):
f (x1 , x2 ) y f (x1 + x1 , x2 ) f (x1 , x2 )
f1 (x 1 , x 2 ) = lim
x1 x1 x1 !0 x1
f (x1 , x2 ) y f (x1 , x2 + x2 ) f (x1 , x2 )
f2 (x1 , x2 ) = lim .
x2 x2 x2 !0 x2
fi (x1 , x2 , ..., xn )
fij = , i , j = 1, 2, ..., n.
xj
I fij is found by rst dierentiating the function f (x) w.r.t. xi , and then
dierentiation the result w.r.t. xj .
29 / 61
Second-order partial derivatives (continued)
It is clear that for a function of n variables, there will be n2 second-order
partial derivatives.
Example
For y = f (x1 , x2 ) we have 4 second-order partial derivatives:
f11 f12
f21 f22
Example
For y = f (x1 , x2 , x3 ) we have 9 second-order partial derivatives:
This makes it clear that we can neatly present the second-order partial
derivatives using matrices.
30 / 61
The gradient vector
First let us dene the gradient vector, denoted by 5f , which collects all
the rst-order partial derivatives of the n-variable function f (x).
Denition
The gradient vector is 2 3
f1
6 f2 7
6 7
5f = 6 .. 7.
4 . 5
fn
31 / 61
The gradient vector: Examples
Example
Find the gradient vector for f (x) = 2x12 + 3x2 + x34 + 1. We have
2 3 2 3
f1 4x1
5 f = 4 f2 5 = 4 3 5 .
f3 4x33
Example
Find the gradient vector for f (x) = x12 x23 x34 . We have
2 3 2 3
f1 2x1 x23 x34
5f = 4 f2 5 = 4 3x12 x22 x34 5 .
f3 4x12 x23 x33
32 / 61
The Hessian matrix
Example
For y = f (x1 , x2 ), we have n2 = 22 = 4 second-order partial derivatives:
f1 (x1 , x2 ) f1 (x1 , x2 )
f11 , f12
x1 x2
f2 (x1 , x2 ) f2 (x1 , x2 )
f21 , f22 .
x1 x2
The Hessian matrix is given by
f11 f12
52 f = .
f21 f22
33 / 61
The Hessian matrix (continued)
34 / 61
The Hessian matrix: Example I
Find the Hessian matrix for f (x) = x12 x23 .
Solution
First, the gradient vector (i.e. vector of rst-order partial derivatives) is
f1 2x1 x23
5f = = .
f2 3x12 x22
We now compute
f1 f1
f11 = 2x23 , f12 = 6x1 x22 ,
x1 x2
f2 f2
f21 = 6x1 x22 , f22 = 6x12 x2 ,
x1 x2
and we have
f11 f12 2x23 6x1 x22
52 f = = .
f21 f22 6x1 x22 6x12 x2
35 / 61
The Hessian matrix: Example II
Find the Hessian matrix for f (x) = x12 x23 x34 .
Solution
The gradient vector (i.e. vector of rst-order partial derivatives) is
2 3 2 3
f1 2x1 x23 x34
5f = 4 f2 5 = 4 3x12 x22 x34 5 .
f3 4x12 x23 x33
We now compute
f1 f1 f1
f11 = 2x23 x34 , f12 = 6x1 x22 x34 , f13 = 8x1 x23 x33 ,
x1 x2 x3
f2 f2 f2
f21 = 6x1 x22 x34 , f22 = 6x12 x2 x34 , f23 = 12x12 x22 x33 ,
x1 x2 x3
f3 f3 f3
f31 = 8x1 x23 x33 , f32 = 12x12 x22 x33 , f33 = 12x12 x23 x32 ,
x1 x2 x3
and we have
2 3 2 3
f11 f12 f13 2x23 x34 6x1 x22 x34 8x1 x23 x33
52 f = 4 f21 f22 f23 5 4
= 6x1 x22 x34 6x12 x2 x34 12x12 x22 x33 5 .
f31 f32 f33 8x1 x23 x33 12x12 x22 x33 12x12 x23 x32 36 / 61
Symmetry of the Hessian matrix
Theorem
( Youngs Theorem) For a function y = f (x1 , x2 , ..., xn ) with
continuous rst- and second-order partial derivatives, the order of
dierentiation in computing the cross-partials does not matter. That is
fij = fji 8i, j = 1, 2, ..., n.
37 / 61
The Hessian matrix for additively separable functions I
I This immediatley implies that all the cross-partials will be zeros, and
the Hessian matrix will be diagonal in this case.
38 / 61
The Hessian matrix for additively separable functions II
39 / 61
RECALL: The total dierential
If f 0 (a) is the derivative of f (x ) at the point x = a, then the total
dierential at the point x = a is
dy = f 0 (a)dx.
The total dierential is used to approximate the change in y (y ) for a
given change in x (x) within a neighbourhood of the point x = a. That
is
y = f (a + x ) f (a)
can be approximated by
dy = f 0 (a)dx.
40 / 61
The total dierential for a function of 2 variables
For y = f (x) = f (x1 , x2 ), where f : R2 ! R, the total dierential is
f f
dy = dx1 + dx2 = f1 dx1 + f2 dx2 .
x1 x2
The interpretation here is as follows:
I At a specic point where x1 = a1 and x2 = a2 , i.e. y = f (a1 , a2 ), we
could change only x1 and get the result
y = f (a1 + x1 , a2 ) f (a1 , a2 ),
which can be approximated by
dy = f1 (a1 , a2 )dx1 .
10
-10
-20
y
-30
-40
-50
5
0 5
0
-5 -5
x x
2 1
42 / 61
The total dierential for a function of n variables
f f f
dy = dx1 + dx2 + + dxn
x1 x2 xn
= f1 dx1 + f2 dx2 + + fn dxn
n
= fi dxi .
i =1
43 / 61
The total dierential: Example
Let
1
y = f (x) = 2x12 + x1 x2 3x32 .
2
Find the total dierential for f (x).
Solution
The total dierential is given by
44 / 61
Implicit dierentiation I
When we have y = f (x ), we have an explicit function.
Example
dy
The function y = 3x 2 + 4, where dx = 6x.
45 / 61
Implicit dierentiation II
To deal with this problem, we totally dierentiate the implicit function
F (x, y ) = c as follows:
Fx dx + Fy dy = 0
Fy dy = Fx dx
which in turn implies
dy Fx
= , Fy 6= 0.
dx Fy
Example
For
x 2 y 3 + 3xy 2 + y = 22,
we have
dy Fx 2xy 3 + 3y 2
= = .
dx Fy (3x 2 y 2 + 6xy + 1)
Example
Compute the partial derivatives of
Here we can use the Implicit Function Theorem to compute the partial
derivatives. We have
y Fx1 (3x2 + 2x1 x2 y )
= =
x1 Fy 2x2 y + x12 x2
y Fx2 3x1 + y 2 + x12 y
= = .
x2 Fy 2x2 y + x12 x2
47 / 61
Level Curves
Suppose we have an explicit function y = f (x1 , x2 ). Then
y = f (x1 , x2 ) = c, c is a constant,
is the level curve of y .
Example
Let y = f (x1 , x2 ) = 2x1 + 3x2 . Then the level curve for this function is
y = 2x1 + 3x2 = c,
U U
dU = dx1 + dx2 = 0.
x1 x2
U U
Dene MU1 x 1 and MU2 x 2 . Then we have
49 / 61
Level curves: The Indierence curve (example)
Let U (x1 , x2 ) = ln(x1 ) + (1 ) ln(x2 ), 0 < < 1. Below is the plot
of U (x1 , x2 ) for = 0.5.
Plot of U(x ,x ) = (1/2)log(x ) + (1/2)log(x )
1 2 1 2
2.5
1.5
U(x ,x )
2
1
0.5
0
10
5 10
8
6
4
2
x 0 0
2 x
1
50 / 61
Level curves: The Indierence curve (example, continued)
The level curves (indierence curves) are given by
U (x1 , x2 ) = ln(x1 ) + (1 ) ln(x2 ) = c ( = 0.5):
Level curves of U(x ,x ) = (1/2)log(x ) + (1/2)log(x )
1 2 1 2
10
6
2
x
1
1 2 3 4 5 6 7 8 9 10
x
1
51 / 61
Level curves: The Indierence curve (numerical example)
Solution
We rst compute the marginal utilities:
U 1 U 3
MU1 = = , MU2 = = ,
x1 4x1 x2 4x2
and the marginal rate of substitution is given by
1
dx2 MU1 4x1 x2
MRS = = = 3
= .
dx1 MU2 4x2
3x1
52 / 61
Level curves: The Isoquant
Let Q = f (L, K ) be the production function using labor (L) and capital
(K ) inputs. The level curves are given by Q = f (L, K ) = c.
f f
dQ = dL + dK = 0.
L K
f f
Dene MPL L and MPK K . Then we have
MPL dL + MPK dK = 0
MPK dK = MPL dL
dK MPL
=
dL MPK
dK MPL
= = MRTS
| {z }
dL MPK
| {z } Marg. rate of tech. substitution
Slope of Isoquant
53 / 61
Level curves: The Isoquant (example)
Let Q = f (L, K ) = L K (1 ) , 0 < < 1. Below is the plot of
Q = f (L, K ) for = 13 .
1/3 2/3
Plot of Q(L,K) = L K
120
100
80
60
Q
40
20
0
10
10
8
5 6
4
2
K 0 0
L
54 / 61
Level curves: The Isoquant (example, continued)
The level curves (isoquants) are given by Q = f (L, K ) = L K (1 ) =c
( = 13 ):
1/3 2/3
Level curves of Q(L,K) = L K
10
5
K
0
0 2 4 6 8 10
L
55 / 61
Level curves: The Isoquant (numerical example)
Solution
We rst compute the marginal productivities:
2 /3 1 /3
f 1 K f 2 L
MPL = = , MPK = = ,
L 3 L K 3 K
56 / 61
Homogenous functions I
Denition
A multivariate function y = f (x1 , x2 , ..., xn ) is homogenous of degree
k, i.e. H k , if and only if:
Example
Let y = f (x1 , x2 ) = 3x1 x2 . We have
Example
x1
Let y = f (x1 , x2 ) = 3x22
. We have
(x1 ) x
f (x1 , x2 ) = 2
= 2 12 = 1
f (x1 , x2 ),
3 (x2 ) 3x2
Example
Let Q = f (L, K ) = L K , 0 < , < 1. We have
58 / 61
Eulers Theorem
If a multivariate function y = f (x1 , x2 , ..., xn ) is homogenous of degree k
(i.e. H k ), then
n
f i xi = ky .
i =1
Example
Cobb-Douglas production function: From above we have that
Q = f (L, K ) = L K is H + . Then
fL L + fK K = ( + ) Q.
59 / 61
Homothetic functions
Denition
If a multivariate function y = f (x1 , x2 , ..., xn ) is homogenous of degree k
(i.e. H k ), then g (y ) is homothetic if g 0 (y ) > 0.
60 / 61
Homothetic functions: Example
Example
The function g (y ) = y + 10 = x1 x2 + 10 is a homothetic function since
it is a monotonic transformation of a homogenous function, where
g 0 (y ) > 0.
Example
The function g (y ) = ln (y ) = ln (x1 x2 ) is a homothetic function since it
is a monotonic transformation of a homogenous function, where
g 0 (y ) > 0.
61 / 61