Optimization

By
Atwijukire Rhinah

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 What is optimization
Optimization refers to the process or
technique of finding the value of the
independent variable (X) that can
maximize or minimize the value of a
dependent variable(Y) in a given
relationship in order to get the best or
optimal results out of that functional
relationship.

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 Some firms may be interested in finding the
optimum size or level of output(Q) that
maximizes their total revenue(TR) or Profits
or sales, or that minimizes total costs(TC).
To get the optimum values, certain rules and
principles of optimization are followed to
determine the values of independent
variables (X) or resources/inputs which are
under the managers control in order to
maximize firm’s performance indicators(like
sales and profits)-Y

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 For optimization to be achieved there
should be some relationship between
the variables under consideration in a
given model/function/phenomenon
In managerial decision making (or
business /project/ economic analysis),
optimization is said to be a powerful tool
that helps managers, producers and
consumers in allocation of scarce
resource to get best possible outcomes.

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 For optimality or effectiveness/ efficiency
in management (or organization
performance as well as planning and
resource allocation), managers should
apply some principles & knowledge of
optimization.
Efficiency in production is correlated to
the timeliness of delivered necessary
goods or services and supplies that are
delivered at the least cost and are
consistent with the applicable quality
standard of goods or services.
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 Optimization Methods
A number of techniques can be used in
optimization:
 Differentiation (unconstrained and constrained )
 Linear programming and
 Others.
 But for purposes of this session, we shall
concentrate on differentiation.

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 Differentiation
Differentiation is the process of finding rates
of change in one variable(dependent) with
respect to changes in
another(independent)variable.
Suppose Y is some measure of organizational or
business or project performance or an economic
or business variable ( like sales, profits, Total
revenue(TR), total cost(TC),Output(Q),
etc), and X is a variable under the manager’s
control (independent variable), then by
differentiating Y with respect X will help to find
the value of X at which Y is optimized.

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 RULES OF DIFFEENTIATION

Differentiation is the process of finding

the derivative of a function. It involves
nothing more complicated than applying
a few basic rules or formulae to a given
function. In explaining the rules of
differentiation for a function such as y =f
(x), other functions such as g (x) and h
(x) are commonly used, where g and h
are both unspecified functions of x.
The rules of differentiation are the
following:

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 Rules

1. The constant rule. The derivative of a constant function, f (x) =k, where k is a
constant, is zero.
Given f (x) =k,  f 1 ( x) 0
Examples. Given f (x) =8,  f 1 ( x) 0 . Given f (x) =-6,  f 1 ( x) 0

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 Rules
2. The linear function rule
The derivative of a linear function f (x)
=mx+b is equal to m, the coefficient of
x. The derivative of a variable raised to
the first power is always equal to the
coefficient of the variable, while the
derivative of a constant is simply zero.

Given f (x) = mx+b,  f 1 ( x) m

Example: Given f(x) =3x+2  f 1 ( x) 3 . Given f (x) =5-1/4x,  f 1 ( x)  1 / 4

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 Rules
3. The power function rule

The derivative of a power function f(x) = kx n , where k is a constant and n is any real
number, is equal to the coefficient k times the exponent n, multiplied by the variable x
raised to the n-1 power.

Given f(x) = kx n ,  f 1 ( x) k .n.x n 1

Example: Given f (x) = 4 x 3 ,  f 1 ( x) 4.3 x 3 1 12 x 2

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 Rules
4. The rules for sums and differences
The derivative of a sum of two functions f (x)
= g (x) + h (x), where g (x) and h (x) are both
differentiable functions, is equal to the sum of
the derivatives of the individual functions.
Similarly, the derivative of the difference of
two functions is equal to the difference of the
derivatives of the two functions.

Given f (x) =g (x) h(x) ,  f 1 ( x)  g 1 ( x) h1 ( x)

Example: Given f(x) = 12 x 5  4 x 4 ,  f 1 ( x) 60 x 4  16 x 3

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 Rules
5. The product rule
The derivative of a product f (x)= g (x). h
(x), where g (x) and h (x) are both
differentiable functions, is equal to the first
function multiplied by the derivative of the
second plus1 the second 1
function
1
multiplied
Given f (x) = g (x). h (x),  f ( x)  g ( x).h ( x)  h( x). g ( x)
by the derivative 4
of the 4
first.
Example: Given f (x) = 3 x (2 x  5), let g (x) = 3x and h (x) =2x-5. Taking the individual
derivatives,  f 1 ( x) 12 x 4 and h1 ( x) 2 . Then by substituting these values in the
product- rule formula, f 1 ( x) 3 x 4 .2  (2 x  5).12 x3 =30x3(x-2)

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 Rules
6. The quotient rule
The derivative of a quotient f(x) =g(x)/h(x),
where g(x) and h(x) are both differentiable
functions, and h(x) , i.e. equal to the
denominator times the derivative of the
numerator, minus the numerator times the
derivative of the denominator, all divided by
the denominator squared.
h( x).g ( x)  g( x).h ( x)
1 1

f ( x) 
1
Given f (x)=g h(x)  (x)/h (x),
2

3
5x 3
Example: Given f (x) = , where g (x) =5x and h (x) =4x+5. We know that
4x  3
f ( x) 15x and h ( x) 4substituting these values in the quotient rule formula above,
1 2 1

4x 3 15x 5 x 4

2 3

f ( x) 
1

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 4 x  
2
352
 Rules
7. The generalized power function rule

Given f (x) =  g ( x) , f 1 ( x) ng ( x) .g 1 ( x )

n n 1

Example: Given f (x) = x  6 3

5

Let g (x) = x 3  6, then g 1 ( x) 3 x 2

Substituting in the above formula, f ( x) 5x  6  .3 x 15 x x  6 
1 3 5 1 2 2 3 4

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 Rules

8. Higher-order derivatives
11 d2y
The second order derivative written f ( x )  2 , measures the slope and the rate of
dx
change of the first derivative, just as the first derivative measures the slope and the rate of
d3y
change of the original function. The third order derivative f 111 ( x)  3 measures the
dx
slope and the rate of change of the second order derivative.

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 Rules
Example. Given y =f (x) , common notation for the second order derivative includes
d2y d3y
f 11 ( x ), 2 ; for the third-order derivative, f 111 ( x )  3 , etc
dx dx
Given f (x) = 2 x 4  5 x 3  3 x 2 or y = 2 x 4  5 x 3  3x 2
dy
It implies, f 1 ( x)  8 x 3  15 x 2  6 x
dx
d2y
f 11 ( x)  24 x 2  30 x  6
dx 2
d 3y
f 111 ( x)  3 48 x  30
dx

d4y
f 4  ( x )  4
48
dx
d5y
f 5  ( x )  5 0
dx
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 RELATIVE EXTREMA (Relative
Maximum or Minimum)
A relative extrenum is a point at which a
function is at a relative maximum or
minimum.
To distinguish mathematically between a relative maximum and minimum, the second
derivative test is used. Assuming f 1 ( x) 0 ,

1. If f 11 ( x)  0, indicating that the function is convex and the graph lies completely
above its tangent line at x=a, the function ia a relative minimum at x=a.
2. If f 11 ( x)  0, denoting that the function is convex and the gragh of the function
lies completely below its tangent line x=a, the function is at a relative maximum
at x=a.
3. If f 11 ( x) 0, the test is inconclusive for functions, which are differentiable or
smooth functions, one need only consider cases where f 1 ( x) 0 in looking for
critical points.
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 Relative Maximum or
Minimum
To summarise,

f 1 11
(x) 0 and f ( x)  0 ,elative
r minimum at x=a

1 11
f (x) 0 and f ( x)  ,0relative maximum at x=a

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 Relative Maximum or
Minimum

To summarize,
f 1 ( x) 0 and f 11 ( x )  0 , relative minimum at x =a
f 1 ( x) 0 and f 11 ( x)  0 , relative maximum at x =a

y y

a x
a x f 1 ( x ) 0
f 1 ( x ) 0 f 11 ( x )  0
ff 111 ((xx)) 
 00
Relative minimum
f 11 ( x)  0
Relative maximum
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 Example
Example: Optimize f(x) = 2 x 3  30 x 2  126 x  59
(a) Find critical points by taking the first derivative setting it to zero and solving for
x.

f 1 ( x) 6 x 2  60 x  126 6( x 2  10 x  21) 0

= x 2  10 x  21 0
=(x-3)(x-7)=0
x-3 =0, x-7 =0
x=3, x =7
(b) Test for concavity by taking the second derivative, evaluating it at the critical
points, and checking the signs to distinguish between a relative maximum and
minimum
f 11 ( x) 12 x  60
f 11 ( x ) 12(3)  60  24  0 , Concave, relative maximum
f 11 ( x ) 12(7)  60 24  0 , Convex, relative minimum

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 MARGINAL CONCEPTS

Marginal cost (MC) in economics is defined

as the change in total cost incurred from
the production of an additional unit.
Marginal revenue (MR) is defined as the
change in total revenue brought about by
the sale of an extra good. Since total cost
(TC) and total revenue (TR) are both
functions of the level of output (Q), MC and
MR can each be expressed mathematically
as derivative of their respective total
functions.
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 MARGINAL CONCEPTS

dTC dTR
Thus, if TC =TC (Q)=, then MC= , and if TR = TR (Q), then MR=
dQ dQ
In short, the marginal concept of any economic function can be expressed as the
derivative of its total function.

dTR
Example: If TR = 75Q  4Q 2 , then MR= 75  8Q .
dQ
dTC
If TC= Q 2  7Q  23 , then MC= 2Q  7
dQ

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 FUNCTIONS
Example: Maximize profits (  ) for a firm, given TR = 4000Q  33Q 2 and
TC= 2Q 3  3Q 2  400Q  5000 assuming Q>0
(a) Set up the profit function  TR  TC

 4000Q  33Q 2  (2Q 3  3Q 2  400Q  5000)

= 4000Q  33Q 2  2Q 3  3Q 2  400Q  5000
=  2Q 3  30Q 2  3600Q  5000
(b) Take the first derivative set it equal to zero and solve for Q to find the critical
points

 1  6Q 2  60Q  3600 0
  6(Q 2  10Q  60 0
(Q  30)(Q  20) 0
Q+30=0, Q+20 =0
Q =-30, Q=20 are critical points
(c) Take the second derivative, evaluate it at the positive critical point and ignore
Negative critical point, which has no economic significance.
 11  12Q  60 , Substitute Q=20
 11 (20)  12(20)  60  300  0, Concave, relative maximum
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Profit (  ) is maximized at Q=20, where
 (20)  20(20) 3  30(20) 2  3600(20)  5000 39000
 Application Of optimization
 -Product mix: where optimal quantities of
ingredients are estimated to produce high
quality product mix given a factory production
function or model.
 -Decision making to achieve optimal solutions
to problems like profit or revenue maximizing
and cost minimizing output levels given certain
constraints.
 -Estimating price elasticities of demand and
supply, promotional elasticity of sales to
advertising (promotional) expenses.
 -Determining tax rate for achieving optimal tax
25 revenues in economy.
 Cont’d.
-Estimating the investment and growth rates.
-We can also use the knowledge of
differentiation to understand how total costs
and revenues in the production and business
processes change with changes in output.
In this case, differentiation assists us to
determine the marginal cost, marginal
revenue and marginal profit functions that
may guide firms in business operations.

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 Group work
KATU limited the producers and sales of
yoghurt in Mbarara determined that their
total revenue (TR) and total cost (TC) are
given in millions as
TC=1/4 Q3 – 8.5Q2 +50Q+10
TR=22Q-0.5Q2
How many packets of yoghurts (Q)
should KATU limited produce in order to
maximize profits.

END
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