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Chapter 4: Using

the Derivative

Chapter 4: Using the Derivative


Section 4: Profit, Cost, and Revenue

Department of Mathematics

Frostburg State University

November 30, 2017


Chapter 4: Using
Cost and Profit Functions the Derivative
Chapter 4: Using
Marginal Cost, Marginal Revenue, and Profit the Derivative
Chapter 4: Using
Profit the Derivative

Maximum and Minimum Profit


The maximum profit and the minimum profit occur where

Marginal profit = Mπ = 0,

which is equivalent to

Marginal cost = Marginal revenue.

Notice that the values of q (quantity) where


Marginal cost = Marginal revenue are critical points of the
profit function.
Example Chapter 4: Using
the Derivative

Suppose C(q) = 2q + 500 is the cost function of a product


and that R(q) = 10q − 0.005q2 is the revenue function,
where 0 ≤ q ≤ 2000. Find the production level that gives the
maximum profit, and the one that gives the minimum profit.

Solution
We have
MC = C0 (q) = 2
and
MR = R0 (q) = 10 − 0.01q.
Setting marginal cost equal to marginal revenue we get

2 = 10 − 0.01q,

which on simplifying this equation gives us

8 − 0.01q = 0.
Chapter 4: Using
the Derivative

Solution (continued)
Solving for q in this equation we get

8
q= = 800.
0.01
To find the maximum and minimum values of the profit
function on the interval 0 ≤ q ≤ 2000, we must evaluate the
profit function at each of the two endpoints of the interval
and at the critical point.

The profit function is given by

π (q) = R(q) − C(q) = 10q − 0.005q2 − (2q + 500)


= 10q − 0.005q2 − 2q − 500
= 8q − 0.005q2 − 500/
Chapter 4: Using
the Derivative

Evaluating π (q) at the endpoints, q = 0 and q = 2000, and


at the critical point, q = 800, yields

Solution
q 0 800 2000
π (q) −500 2700 −4500

Therefore, the profit function has a maximum value at


q = 800 and a minimum value at q = 2000.
Chapter 4: Using
Example the Derivative

Supposed that the Cool River Tubing Company in Helen,


Georgia, charges $20 per day per person for tubing down the
Chattahoochee River. At that rate they attract 200 persons
per day. Suppose that for each $2 that the price drops, they
attract an additional 20 persons. What should the company
charge in order to maximize revenue?
Chapter 4: Using
the Derivative

Solution
You remember that the revenue function is given by
R(p) = p · q, where p stands for price and q stands for
quantity.

Then, to find an equation for R(p) in terms of p only, we


must express q in terms of p.

In other words, we must find the demand equation for the


Helen Tubing Company.
Chapter 4: Using
Graph of the Demand Equation the Derivative
Chapter 4: Using
the Derivative
Solution (continued)
The slope of the demand equation is given by
∆q 220 − 200 20
m= = = = −10 persons per dollar.
∆p 18 − 20 −2
Using the point slope form of a straight line,

q − q1 = m ( p − p 1 )

with the point (20, 200) and slope m = −10 produces

q − 200 = −10(p − 20)

which simplifies to

q = −10p + 400,

and this is the demand equation.


Chapter 4: Using
Solution (continued) the Derivative

Therefore, the revenue function is given by

R(p) = pq = p(−10p + 400) = −10p2 + 400p.

We now have
R0 (p) = −20p + 400.
Setting R0 (p) = 0 and solving for p gives us

− 20p + 400 = 0
20p = 400
p = 20.

Since R0 (p) = −20p, then R00 (p) = −20.

Thus, p = 20 is a critical point of R(p) where the second


derivative is negative.

Hence, by the Second Derivative test, R(p) has a local


Chapter 4: Using
Graph of Revenue Function the Derivative

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