180 CHAPTER 2 Applications of the Derivative 2.

7 Applications of Derivatives to Business and Economics 181

This answers part (a). Let us now graph C(x). Since the graph shown in Fig. 2 is the
2.7 Applications of Derivatives to Business graph of the derivative of C(x), we see that C ′ (x) is never zero, so there are no relative
extreme points. Since C ′ (x) is always positive, C(x) is always increasing (as any cost
and Economics curve should). Moreover, since C ′ (x) decreases for x less than 1000 and increases for
x greater than 1000, we see that C(x) is concave down for x less than 1000, is concave
In recent years, economic decision making has become more and more mathematically up for x greater than 1000, and has an inflection point at x = 1000. The graph of
oriented. Faced with huge masses of statistical data, depending on hundreds or even C(x) is drawn in Fig. 3. Note that the inflection point of C(x) occurs at the value of
thousands of different variables, business analysts and economists have increasingly x for which marginal cost is a minimum.
turned to mathematical methods to help them describe what is happening, predict the
effects of various policy alternatives, and choose reasonable courses of action from the y
myriad of possibilities. Among the mathematical methods employed is calculus. In this
section we illustrate just a few of the many applications of calculus to business and y
y economics. All our applications will center on what economists call the theory of the y = C(x)
firm. In other words, we study the activity of a business (or possibly a whole industry)
and restrict our analysis to a time period during which background conditions (such as
supplies of raw materials, wage rates, and taxes) are fairly constant. We then show how y = C ′(x)
(1000, 2)
Cost

y = C(x)
derivatives can help the management of such a firm make vital production decisions.
Management, whether or not it knows calculus, utilizes many functions of the sort
x x
we have been considering. Examples of such functions are 1000 1000

x C(x) = cost of producing x units of the product, Figure 2 A marginal cost function. Figure 3 A cost function.
1 5 10 Now Try Exercise 1
Production level R(x) = revenue generated by selling x units of the product,
(a) P (x) = R(x) − C(x) = the profit (or loss) generated by producing and Actually, most marginal cost functions have the same general shape as the
(selling x units of the product.) marginal cost curve of Example 1. For when x is small, production of additional
y units is subject to economies of production, which lowers unit costs. Thus, for x small,
Note that the functions C(x), R(x), and P (x) are often defined only for nonnegative marginal cost decreases. However, increased production eventually leads to overtime,
integers, that is, for x = 0, 1, 2, 3, . . . . The reason is that it does not make sense use of less efficient, older plants, and competition for scarce raw materials. As a result,
to speak about the cost of producing −1 cars or the revenue generated by selling the cost of additional units will increase for very large x. So we see that C ′ (x) initially
y = C(x) 3.62 refrigerators. Thus, each function may give rise to a set of discrete points on a
Cost

decreases and then increases.

graph, as in Fig. 1(a). In studying these functions, however, economists usually draw
a smooth curve through the points and assume that C(x) is actually defined for all Revenue Functions In general, a business is concerned not only with its costs, but
positive x. Of course, we must often interpret answers to problems in light of the fact also with its revenues. Recall that, if R(x) is the revenue received from the sale of
x that x is, in most cases, a nonnegative integer. x units of some commodity, then the derivative R′ (x) is called the marginal revenue.
1 5 10
Production level Economists use this to measure the rate of increase in revenue per unit increase in
(b)
Cost Functions If we assume that a cost function, C(x), has a smooth graph as sales.
in Fig. 1(b), we can use the tools of calculus to study it. A typical cost function is If x units of a product are sold at a price p per unit, the total revenue R(x) is
Figure 1 A cost function. analyzed in Example 1. given by
R(x) = x · p.
EXAMPLE 1 Marginal Cost Analysis Suppose that the cost function for a manufacturer is given by
If a firm is small and is in competition with many other companies, its sales have little
C(x) = (10−6 )x3 − .003x2 + 5x + 1000 dollars. effect on the market price. Then, since the price is constant as far as the one firm is
(a) Describe the behavior of the marginal cost. concerned, the marginal revenue R′ (x) equals the price p [that is, R′ (x) is the amount
(b) Sketch the graph of C(x). that the firm receives from the sale of one additional unit]. In this case, the revenue
function will have a graph as in Fig. 4.
SOLUTION The first two derivatives of C(x) are given by
y
C ′ (x) = (3 · 10−6 )x2 − .006x + 5
C ′′ (x) = (6 · 10−6 )x − .006.

Revenue
R(x) = px
Let us sketch the marginal cost C ′ (x) first. From the behavior of C ′ (x), we will be
able to graph C(x). The marginal cost function y = (3 · 10−6 )x2 − .006x + 5 has as
its graph a parabola that opens upward. Since y ′ = C ′′ (x) = .000006(x − 1000), we
see that the parabola has a horizontal tangent at x = 1000. So the minimum value of x
C ′ (x) occurs at x = 1000. The corresponding y-coordinate is Figure 4 A revenue curve. Quantity

(3 · 10−6 )(1000)2 − .006 · (1000) + 5 = 3 − 6 + 5 = 2.

An interesting problem arises when a single firm is the only supplier of a certain
The graph of y = C ′ (x) is shown in Fig. 2. Consequently, at first, the marginal cost product or service, that is, when the firm has a monopoly. Consumers will buy large
decreases. It reaches a minimum of 2 at production level 1000 and increases thereafter. amounts of the commodity if the price per unit is low and less if the price is raised.
182 CHAPTER 2 Applications of the Derivative 2.7 Applications of Derivatives to Business and Economics 183

p For each quantity x, let f (x) be the highest price per unit that can be set to sell all Using R(x) and R′ (x), we can sketch the graph of R(x). (See Fig. 8.) The maximum
x units to customers. Since selling greater quantities requires a lowering of the price, revenue occurs when the marginal revenue is zero, that is, when x = 1200. The price
f (x) will be a decreasing function. Figure 5 shows a typical demand curve that relates corresponding to this number of customers is found from demand equation (2):
the quantity demanded, x, to the price, p = f (x). 1
The demand equation p = f (x) determines the total revenue function. If the firm p = 12 − (1200) = 6 dollars.
Price

p = f(x) 200
wants to sell x units, the highest price it can set is f (x) dollars per unit, and so the
Thus, the price of $6 is most likely to bring the greatest revenue per week.
total revenue from the sale of x units is
R(x) = x · p = x · f (x). (1) R
x
Quantity The concept of a demand curve applies to an entire industry (with many produc-
(1200, 7200)
Figure 5 A demand curve.
ers) as well as to a single monopolistic firm. In this case, many producers offer the
1

Revenue
same product for sale. If x denotes the total output of the industry, f (x) is the market R(x) = 12x −
200 x2
price per unit of output and x · f (x) is the total revenue earned from the sale of the
x units.

EXAMPLE 2 Maximizing Revenue The demand equation for a certain product is p = 6− 12 x dollars.
x
Find the level of production that results in maximum revenue. Figure 8 Maximizing revenue. 1200

SOLUTION In this case, the revenue function R(x) is Now Try Exercise 11
 
1 1
R
R(x) = 6x − 12 x2 R(x) = x · p = x 6 − x = 6x − x2 Profit Functions Once we know the cost function C(x) and the revenue function
2 2 R(x), we can compute the profit function P (x) from
(6, 18)
dollars. The marginal revenue is given by
P (x) = R(x) − C(x).
Revenue

R′ (x) = 6 − x.
The graph of R(x) is a parabola that opens downward. (See Fig. 6.) It has a horizontal
tangent precisely at those x for which R′ (x) = 0—that is, for those x at which marginal
x
6 revenue is 0. The only such x is x = 6. The corresponding value of revenue is EXAMPLE 4 Maximizing Profits Suppose that the demand equation for a monopolist is
1 p = 100 − .01x and the cost function is C(x) = 50x + 10,000. Find the value of x
Figure 6 Maximizing revenue. R(6) = 6 · 6 − (6)2 = 18 dollars. that maximizes the profit and determine the corresponding price and total profit for
2
this level of production. (See Fig. 9.)
Thus, the rate of production resulting in maximum revenue is x = 6, which results in
total revenue of 18 dollars. Now Try Exercise 3 p

p = 100 − .01x
EXAMPLE 3 Setting Up a Demand Equation The WMA Bus Lines offers sightseeing tours of
Washington, D.C. One tour, priced at $7 per person, had an average demand of about
1000 customers per week. When the price was lowered to $6, the weekly demand

Price
jumped to about 1200 customers. Assuming that the demand equation is linear, find
the tour price that should be charged per person to maximize the total revenue each
week.

SOLUTION First, we must find the demand equation. Let x be the number of customers per week x
Figure 9 A demand curve. Quantity
and let p be the price of a tour ticket. Then (x, p) = (1000, 7) and (x, p) = (1200, 6) are
p
on the demand curve. (See Fig. 7.) Using the point–slope formula for the line through SOLUTION The total revenue function is
(1000, 7) these two points, we have
Ticket price

(1200, 6) 7−6 1 1 R(x) = x · p = x(100 − .01x) = 100x − .01x2 .

p−7= · (x − 1000) = − (x − 1000) = − x + 5,
1000 − 1200 200 200 Hence, the profit function is
so
1
x p = 12 − x. (2) P (x) = R(x) − C(x)
500 1000 1500
200
Customers From equation (1), we obtain the revenue function: = 100x − .01x2 − (50x + 10,000)
Figure 7 A demand curve. = −.01x2 + 50x − 10,000.
 
1 1 2
R(x) = x 12 − x = 12x − x .
200 200 The graph of this function is a parabola that opens downward. (See Fig. 10.) Its
The marginal revenue function is highest point will be where the curve has zero slope, that is, where the marginal profit
1 1 P ′ (x) is zero. Now,
R′ (x) = 12 − x=− (x − 1200).
100 100 P ′ (x) = −.02x + 50 = −.02(x − 2500).
184 CHAPTER 2 Applications of the Derivative 2.7 Applications of Derivatives to Business and Economics 185

P From the demand equation, p = 100 − .01x, we find the price that corresponds to
x = 2000:

(2500, 52,500)
p = 100 − .01(2000) = 80 dollars.

Profit
P(x) = −.01x2 + 50x − 10,000 To maximize profit, produce 2000 units and sell them at $80 per unit. The profit will
be $30,000.

Notice in Example 5 that the optimal price is raised from $75 to $80. If the
x
monopolist wishes to maximize profits, he or she should pass only half the $10 tax on
2500 to the customer. The monopolist cannot avoid the fact that profits will be substantially
Figure 10 Maximizing profit.
lowered by the imposition of the tax. This is one reason why industries lobby against
taxation.
So P ′ (x) = 0 when x = 2500. The profit for this level of production is
P (2500) = −.01(2500)2 + 50(2500) − 10,000 = 52,500 dollars. Setting Production Levels Suppose that a firm has cost function C(x) and revenue
function R(x). In a free-enterprise economy the firm will set production x in such a
Finally, we return to the demand equation to find the highest price that can be charged way as to maximize the profit function
per unit to sell all 2500 units:
P (x) = R(x) − C(x).
p = 100 − .01(2500) = 100 − 25 = 75 dollars.
We have seen that if P (x) has a maximum at x = a, then P ′ (a) = 0. In other words,
Thus, to maximize the profit, produce 2500 units and sell them at $75 per unit. The
since P ′ (x) = R′ (x) − C ′ (x),
profit will be $52,500. Now Try Exercise 17
R′ (a) − C ′ (a) = 0
R′ (a) = C ′ (a).
EXAMPLE 5 Rework Example 4 under the condition that the government has imposed an excise
tax of $10 per unit. Thus, profit is maximized at a production level for which marginal revenue equals
marginal cost. (See Fig. 12.)
SOLUTION For each unit sold, the manufacturer will have to pay $10 to the government. In other
words, 10x dollars are added to the cost of producing and selling x units. The cost
function is now y
C(x) = (50x + 10,000) + 10x = 60x + 10,000.
y = R(x)
The demand equation is unchanged by this tax, so the revenue is still
2
R(x) = 100x − .01x . y = C(x)

Proceeding as before, we have

P (x) = R(x) − C(x)
= 100x − .01x2 − (60x + 10,000)
= −.01x2 + 40x − 10,000.
′
P (x) = −.02x + 40 = −.02(x − 2000).
x
The graph of P (x) is still a parabola that opens downward, and the highest point is a = optimal
where P ′ (x) = 0, that is, where x = 2000. (See Fig. 11.) The corresponding profit is production
level
P (2000) = −.01(2000)2 + 40(2000) − 10,000 = 30,000 dollars.
Figure 12

P (x) = −.01x2 + 40x − 10,000 Check Your Understanding 2.7

(2000, 30,000)
Profit

1. Rework Example 4 by finding the production level at crease the fare. However, the market research department
which marginal revenue equals marginal cost. estimates that for each $1 increase in fare the airline will
2. Rework Example 4 under the condition that the fixed cost lose 100 passengers. Determine the price that maximizes
is increased from $10,000 to $15,000. the airline’s revenue.

Figure 11 Profit after an x 3. On a certain route, a regional airline carries 8000 passen-
2000 gers per month, each paying $50. The airline wants to in-
excise tax.
186 CHAPTER 2 Applications of the Derivative Exercises 2.7 187

EXERCISES 2.7 (b) Suppose that rising fuel costs increase the utility’s 21. Revenue The revenue for a manufacturer is R(x) thou-
variable costs from $30 to $40, so its new cost func- sand dollars, where x is the number of units of goods
1. Minimizing Marginal Cost Given the cost function night. When the price was raised to $4.40, hamburger tion is produced (and sold) and R and R′ are the functions given
C(x) = x3 − 6x2 + 13x + 15, find the minimum marginal sales dropped off to an average of 8000 per night. in Figs. 14(a) and 14(b).
C1 (x) = 7 · 106 + 40x.
cost. $1 (a) Assuming a linear demand curve, find the price of a
2. Minimizing Marginal Cost If a total cost function is C(x) = hamburger that will maximize the nightly hamburger Should the utility pass all this increase of $10 per
y
.0001x3 − .06x2 + 12x + 100, is the marginal cost increas- revenue. $3.00 thousand kilowatt-hours on to consumers? Explain
80
ing, decreasing, or not changing at x = 100? Find the (b) If the concessionaire has fixed costs of $1000 per night your answer. No. Profit is maximized when price is
increased to $50. 70
minimum marginal cost. and the variable cost is $.60 per hamburger, find the
60 y = R(x)
3. Maximizing Revenue Cost The revenue function for a one- price of a hamburger that will maximize the nightly 18. Taxes, Profit, and Revenue The demand equation for a com-
hamburger profit. $3.30 pany is p = 200 − 3x, and the cost function is 50
product firm is
40
12. Demand and Revenue The average ticket price for a con-
1600 C(x) = 75 + 80x − x2 , 0 ≤ x ≤ 40. 30
R(x) = 200 − − x. cert at the opera house was $50. The average attendance
x+8
was 4000. When the ticket price was raised to $52, atten- (a) Determine the value of x and the corresponding price 20
Find the value of x that results in maximum revenue. 32 dance declined to an average of 3800 persons per perfor- that maximize the profit. x = 30, p = $110 10
4. Maximizing Revenue The revenue function for a particular mance. What should the ticket price be to maximize the x
revenue for the opera house? (Assume a linear demand (b) If the government imposes a tax on the company of 10 20 30 40
product is R(x) = x(4 − .0001x). Find the largest possible $4 per unit quantity produced, determine the new
curve.) $45 per ticket (a)
revenue. R(20,000) = 40,000 is maximum possible. price that maximizes the profit. $113 y
5. Cost and Profit A one-product firm estimates that 13. Demand and Revenue An artist is planning to sell signed
prints of her latest work. If 50 prints are offered for sale, (c) The government imposes a tax of T dollars per unit
its daily total cost function (in suitable units) is quantity produced (where 0 ≤ T ≤ 120), so the new 3.2
she can charge $400 each. However, if she makes more y = R′(x)
C(x) = x3 − 6x2 + 13x + 15 and its total revenue function cost function is 2.4
is R(x) = 28x. Find the value of x that maximizes the than 50 prints, she must lower the price of all the prints
1.6
daily profit. 5 by $5 for each print in excess of the 50. How many prints
C(x) = 75 + (80 + T )x − x2 , 0 ≤ x ≤ 40. .8
should the artist make to maximize her revenue?∗ x
6. Maximizing Profit A small tie shop sells ties for $3.50 each.
The daily cost function is estimated to be C(x) dollars, 14. Demand and Revenue A swimming club offers member- Determine the new value of x that maximizes the −.8 10 20 30 40
where x is the number of ties sold on a typical day and ships at the rate of $200, provided that a minimum of company’s profit as a function of T . Assuming that −1.6
C(x) = .0006x3 − .03x2 + 2x + 20. Find the value of x that 100 people join. For each member in excess of 100, the the company cuts back production to this level, ex- −2.4
will maximize the store’s daily profit. Maximum occurs at membership fee will be reduced $1 per person (for each press the tax revenues received by the government −3.2
x = 50. member). At most, 160 memberships will be sold. How as a function of T . Finally, determine the value of T
7. Demand and Revenue The demand equation for a certain many memberships should the club try to sell to maxi- that will maximize the tax revenue received by the (b)
commodity is mize its revenue? x = 150 memberships government. x = 30 − T /4, T = $60/unit Figure 14 Revenue function and its
1 2 first derivative.
p= x − 10x + 300, 15. Profit In the planning of a sidewalk café, it is estimated 19. Interest Rate A savings and loan association estimates that
12 that for 12 tables, the daily profit will be $10 per table. the amount of money on deposit will be 1 million times
Because of overcrowding, for each additional table the the percentage rate of interest. For instance, a 4% inter- (a) What is the revenue from producing 40 units of
0 ≤ x ≤ 60. Find the value of x and the corresponding
profit per table (for every table in the café) will be re- est rate will generate $4 million in deposits. If the savings goods? $75,000
price p that maximize the revenue. x = 20 units, p = $133.33
duced by $.50. How many tables should be provided to and loan association can loan all the money it takes in at (b) What is the marginal revenue when 17.5 units of
8. Maximizing Revenue The demand equation for a product is maximize the profit from the café? ∗ 10% interest, what interest rate on deposits generates the goods are produced? $3200 per unit
p = 2 − .001x. Find the value of x and the corresponding greatest profit? 5%
price p that maximize the revenue. p = $1, x = 1000 16. Demand and Revenue A certain toll road averages (c) At what level of production is the revenue $45,000? 15 units
36,000 cars per day when charging $1 per car. A sur- 20. Analyzing Profit Let P (x) be the annual profit for a cer-
9. Profit Some years ago it was estimated that the de- (d) At what level(s) of production is the marginal rev-
vey concludes that increasing the toll will result in 300 tain product, where x is the amount of money spent on
mand for steel approximately satisfied the equation enue $800? 32.5 units
fewer cars for each cent of increase. What toll should be advertising. (See Fig. 13.)
p = 256 − 50x, and the total cost of producing x units charged to maximize the revenue? Toll should be $1.10. (e) At what level of production is the revenue greatest?
(a) Interpret P (0).
of steel was C(x) = 182 + 56x. (The quantity x was mea- 35 units
sured in millions of tons and the price and total cost were 17. Price Setting The monthly demand equation for an electric (b) Describe how the marginal profit changes as the
measured in millions of dollars.) Determine the level of utility company is estimated to be amount of money spent on advertising increases.
production and the corresponding price that maximize (c) Explain the economic significance of the inflection 20. (a) P (0) is the profit with no advertising budget
the profits. 2 million tons, $156 per ton p = 60 − (10−5 )x,
point. (b) As money is spent on advertising, the marginal profit
10. Maximizing Area Consider a rectangle in the xy-plane, where p is measured in dollars and x is measured in thou- initially increases. However, at some point the marginal profit
with corners at (0, 0), (a, 0), (0, b), and (a, b). If (a, b) lies P begins to decrease. (c) Additional money spent on
sands of kilowatt-hours. The utility has fixed costs of
on the graph of the equation y = 30 − x, find a and b 7 million dollars per month and variable costs of $30 per advertising is most advantageous at the inflection point.
such that the area of the rectangle is maximized. What 1000 kilowatt-hours of electricity generated, so the cost

Annual profit
economic interpretations can be given to your answer if function is y = P(x)
the equation y = 30 − x represents a demand curve and
y is the price corresponding to the demand x? x = 15, y = 15. C(x) = 7 · 106 + 30x.

11. Demand, Revenue, and Profit Until recently hamburgers at (a) Find the value of x and the corresponding price
the city sports arena cost $4 each. The food concession- for 1000 kilowatt-hours that maximize the utility’s
x
aire sold an average of 10,000 hamburgers on a game profit. x = 15 · 105 , p = $45. Money spent on advertising
Figure 13 Profit as a function of
∗ indicates answers that are in the back of the book. advertising.
2. Marginal cost is decreasing at x = 100. M (200) = 0 is the minimal marginal cost.
188 CHAPTER 2 Applications of the Derivative

22. Cost and Original Cost The cost function for a manufac- (c) At what level of production is the cost $1200? 100 units
turer is C(x) dollars, where x is the number of units of (d) At what level(s) of production is the marginal
′ ′′
goods produced and C, C , and C are the functions given cost $22.50? 20 units and 140 units
in Fig. 15.
(e) At what level of production does the marginal cost
(a) What is the cost of manufacturing 60 units of goods? $1,100
have the least value? What is the marginal cost at
(b) What is the marginal cost when 40 units of goods are this level of production? 80 units, $5 per unit.
manufactured? $12.5 per unit
y y

1500
y = C(x) 30
y = C′(x)
1000
20

500 10
y = C″(x)
x
x 50 100 150
50 100 150
(a) (b)
Figure 15 Cost function and its derivatives.

Solutions to Check Your Understanding 2.7

1. The revenue function is R(x) = 100x − .01x2 , so the Solving for p, we get the demand equation
marginal revenue function is R′ (x) = 100 − .02x. The
cost function is C(x) = 50x + 10,000, so the marginal 1
p=− x + 130.
cost function is C ′ (x) = 50. Let us now equate the two 100
marginal functions and solve for x: From equation (1), the revenue function is
R′ (x) = C ′ (x) 
1

R(x) = x · p = x − x + 130 .
100 − .02x = 50 100
−.02x = −50 The graph is a parabola that opens downward, with
−50 5000 x-intercepts at x = 0 and x = 13,000. (See Fig. 16.) Its
x= = = 2500. maximum is located at the midpoint of the x-intercepts,
−.02 2
or x = 6500. The price corresponding to this number of
Of course, we obtain the same level of production as passengers is p = − 1 10 0 (6500) + 130 = $65. Thus the price
before. of $65 per ticket will bring the highest revenue to the
2. If the fixed cost is increased from $10,000 to $15,000, the airline company per month.
new cost function will be C(x) = 50x + 15,000, but the
marginal cost function will still be C ′ (x) = 50. Therefore, y
the solution will be the same: 2500 units should be pro- R(x) = x(− 1 x + 130)
Revenue in dollars

duced and sold at $75 per unit. (Increases in fixed costs 100
should not necessarily be passed on to the consumer if 422,500
the objective is to maximize the profit.)
3. Let x denote the number of passengers per month and
p the price per ticket. We obtain the number of passen-
gers lost due to a fare increase by multiplying the number
of dollars of fare increase, p − 50, by the number of pas- x
sengers lost for each dollar of fare increase. So 0 6500 13,000
Number of passengers
x = 8000 − (p − 50)100 = −100p + 13,000. Figure 16