UNIT 6.

OPTIMIZATION WITH MORE THAN ONE VARIABLE

Contents
6.0 Aims and objectives
6.1 Introduction
6.2 Extreme Values of a Function of Two Variables
6.2.1 Second Order Partial Derivatives
6.3 First order Necessary Condition for an Extremum
6.4 Second Order Condition
6.5 Examples on Economic Applications
6.6 Summary
6.7 Answers to Check Your Progress Exercise
6.8 Model Examination Questions
6.9 References

6.0 AIMS AND OBJECTIVES

In this unit we will discuss how to find the relative extremum values of a function with two
variables. We will learn the conditions for finding the relative maxima, relative minima and
saddle points. Since the two variables case explains the important points, we will restrict
ourselves to it only.

After completing this unit, you will be able to:

- know concepts like second order partial derivatives
- know Young's theorem, second order total differential and conditions for relative
extremum of functions of the form Z = f (x
(x, y).
y).
- apply this knowledge in solving economic problems like problems of multi product
firm:

6. 1 INTRODUCTION

In unit 4 we have seen optimization problems of a function with a single independent

variable. In this unit we will extend the concept of optimization to a function of two
independent variables. To handle optimization problems with two choice variables we will
use those concepts discussed in the preceding unit (5), here extreme values are again of two

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kinds i.e., absolute and relative. But this unit will focus on relative extrema. Both the
necessary and sufficient conditions are discussed.

6.2 EXTREME VALUES OF A FUNCTION OF TWO VARIABLES

As stated above in this section you will learn how to use the concept of partial derivatives that
we have discussed in chapter V to find the extreme values of functions of the type Z= f (x,
(x, y).
y).
Before going to the discussion, let us see how to find the second order partial derivatives of a
function.

6.2.1 Second Order Partial Derivatives

Let f be a function of the two variables x and y.

The first partial derivatives of f denoted by and were discussed in chapter

V. Now we want to find the partial derivatives of fx and fy. The second order partial deviates
are fxx, fyy, fxy and fyx.

Students can use any one of the notations which they like is convenient.
fxx measures the rate of change of fx with respect to x, while y remains fixed.
fyy denotes the rate of change of fy with respect to y, while x is heed constant.

The other two second order partial derivatives (f

(fxy and fyx) are called the cross or mixed partial
derivatives and each measures the rate of change of one first-order partial derivative with
respect to the other variable.

Now let us see the following examples on how to find the four second order partial
derivatives

Example 1: Find the four second order partial derivatives of the function
Z = x3 – 2xy
2xy + 5y
5y

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Solution:
In order to find the second order partial derivatives, we have to find first the
first partial derivatives

The partial derivatives of fx and fy with respect to x and y are

The other two mixed partial derivatives are

From the above result, the mixed partial derivatives fxy and fyx are the same.

Young's theorem: As long as the two mixed partial derivatives are both continuous
fxy = fyx.

Example 2: Z = x3 – 2x
2x2y2 – 4y
4y – 2x
2x + 15
Solution:

Therefore, the second order partial derivatives are:

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As expected the mixed partial derivatives (f
(fxy and fyx) are equal

Check Your Progress Exercise -1

1. Find the first partial derivatives of the following function
a) Z = x2y + 2xy
2xy + 3
b) Z = (3x 2y)5
(3x + 2y
c) Z = x4 – 6x
6x2 – 3xy
3xy2 + 17
2. Find the second order partial derivatives of the above functions

6.3 FIRST ORDER NECESSARY CONDITION FOR AN EXTREMUM OF A

FUNCTION WITH TWO VARIABLES

In this section we will see the necessary conditions for finding the relative extremum of a
function Z = f (x,
(x, y).
y).

The necessary condition is to find the values of x and y which make the first partial
derivatives of the function Z = f (x,
(x, y)
y) zero. That is, fx = fy = 0. These values play an
important role in finding the relative maxima, minima or saddle points of the function Z = f (x,
y) as we did for functions of one variable in chapter five. To find the critical points of the
function, set fx = fy = 0 and solve these equations simultaneously for x and y. After this we use
the second order test inorder to know that the solutions for the above equations corresponds to
the relative maximum, relative minimum or saddle points.

6.4 SECOND ORDER CONDITION

The sufficient condition for finding relative extremum of the function f (x,
(x, y)
y) is presented as
follows.
Let (a, b) is a critical point of the function f (x,
(x, y).
y). Then

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 f (a , b) is a relative maximum if and only if fxx < 0, fyy < 0 and fxx fyy > f2xy
 f (a, b) is a relative minimum if and only if fxx > 0, fyy > 0 and fxx fyy > f2xy.
▪ f (a , b) is a saddle point if fxx fyy < f2xy and fxx, fyy have different signs.
▪ f (a , b) is an inflection point if fxx fyy < f2xy and fxx, fyy have the same signs.

The test fails to give information about the behavior of the function if f2xy = fxx fyy.

Note that the second order partial derivatives (f

(fxx, fyy and fxy) should be evaluated at the critical
points (a, b). The necessary and sufficient conditions for relative extremum are summarized
below.

Conditions Minimum Maximum

- First-Order fx = fy = 0 fx = fy = 0
necessary condition
- Second-Order fxx > 0 , fyy > 0 fxx < 0, fyy < 0
sufficient condition fxx fyy > f2xy and
fxx fyy > f2xy

Example 3: Find the extreme value(s) of the function Z = x2 + y2 +2

Solution:
Solution:
Step 1: Find the critical points from the first partial derivatives

fx = fy = 0 is the necessary condition

2x = 2y
2y = 0
x = 0 and y = 0
The only critical point is (0, 0)
Step 2: Check the Second-Order sufficient conditions

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Evaluating the second order partial derivatives at the critical values of the function, we get:
fxx (0, 0) = 2 fyy (0, 0) = 2 fxy (0, 0) = 0

Therefore, since fxx > 0, fyy > 0 and fxx fyy > f2xy,
xy, the critical values (0 , 0) belongs to the

relative minimum value of Z.

Hence Z = 02 + 02 + 2 = 2 is the relative minimum.

2x2 – 3y
Example 4: Find the extreme value of the function Z = 2x 3y2.
Solution:
Step 1. The first order partial derivatives are

The necessary condition

fx = fy = 0
4x = 0 -6y
-6y = 0
x=0 y=0
The critical point is (0, 0)

Step 2. The second-order sufficient condition

Therefore, since fxxfyy < f2xy the point (0, 0) belongs to the saddle point.

Example 5: -x2 – y2 + xy + 2x
5: Z = -x 2x + y

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Solution:
Step 1. Find fx and fy

Solving equations (1) and (2) simultaneously we get x =5/3 and y = 4/3.
That is (5/3, 4/3) is the critical point

Step 2: Check the second order partial derivatives

Evaluating the second order partial derivatives at the critical points we get
fxx < 0, fyy < 0, fxxfyy = 4 > 0
fxy = 1, f2xy = 1

Therefore, since fxx < 0, fyy < 0 and fxxfyy > f2xy the function Z has a relative maximum at
(5/3 , 4/3). At the maximum point Z = 7/3.

Example 6: Z = x4 – 8x
8x2 + 6y
6y2 – 12y
12y + 3

Solution:
Solution:
Step 1. Find fx and fy

Solving the above equations, we get x = 0 or 2 or -2 and y = 1. That is (0, 1), (2 , 1) , (-2 ,
1) are the critical points.

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Step 2. The second order partial derivatives are

At x = 0, fxx = -16 < 0, fyy = 12 > 0

At x = 2, fxx = 32 > 0, fyy = 12 > 0
At x = -2, fxx = 32 > 0, fyy = 12 > 0
fxy = 0 , f2xy = 0

Therefore, from the above result we have the following conclusions:

- At x = 0, fxx < 0, fyy > 0 and fxx fyy < f2xy the point (0 , 1) belongs to the saddle point
and Z = -3
- At x = 2 , fxx > 0 , fyy > 0 and fxxfyy > f2xy , the point (2 ,1) is the relative minimum
and Z = -19
- At x = -2 , fxx > 0 , fyy > 0 and fxxfyy > f2xy , the point (-2 , 1) is also another relative
minimum and Z = -19

Check Your Progress Exercise -2

1. State the necessary and sufficient conditions for relative extremum of a function
Z = f(x, y).
2. Find the extreme value(s) of each of the following functions

a) -2x2 – 3y
Z = -2x 3y2 + 9 b) Z = 2xy
2xy
c) Z = x2 – xy d) Z = x3 + y3+ 4xy
4xy

6.5 ECONOMIC APPLICATIONS

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Here let's see the application of the above discussions in solving economic problems with the
help of the following examples.
Example on problem of a multiproduct firm.

Let's consider the following problems of a firm.

A firm operating under pure competition produces two products. Since price of the products
are exogenous to the firm, the level of the two products should be determined to get the
maximum profit.

Let Q1 and Q2 represent the output level of the first and second products per unit of time.
Accordingly, the firm's revenue function is as follows:

R = P1Q1 + P2Q2
Let's assume that P1 = 12 and P2 = 18
R = 12Q1 + 18Q2
The firm's cost function is given by
C = 2Q2 + Q1Q2 + 2Q22
The profit function is therefore

The firm's objective is to choose the level of Q 1 and Q2 that maximizes its profit. Hence as
usual we need to compute the first order partial derivatives first.

These are the necessary condition for finding the maximum profit.
Solving the equations 4Q1+Q2 =12 and Q1+4Q2 =18 simultaneously, we get Q1 = 2 and Q2 = 4

Substituting the values of Q1 and Q2 (i.e. 2 & 4) in to the profit functions, the optimal profit
becomes 48 per unit of time.
Use the second order partial derivatives to check the result obtained above.

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Therefore, since the maximum profit is 48.

Example 2:A
2:A monopolist sells two products x and y for which the demand functions are
x = 25-0.5P
25-0.5Px
y = 30-P
30-Py
And the combined cost function is x2+2xy+y2+20, and then find
+2xy+
a) the profit maximizing level of output for each product
b) the profit maximizing price for each product
c) the maximum profit

Solution:
a) To find the profit maximizing level of output, first construct the profit function.

But TRx = Pxx and TRy = Pyy and hence .

From the demand functions we have
Px = 50-2x
50-2x and Py = 30-y
30-y
Substituting these values in to the profit function, we obtain

The first order necessary conditions for maximizing profit are

and

Solving simultaneously we get x =7 and y = 4

Now check the second order conditions

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Therefore since xx <0, yy 0 and  xxyxy > 2xy profit is maximized at x =7 and y = 4
b) To get the profit maximizing prices substitute x=7 and y=4 in to the demand functions
Px=50-2x
=50-2x and Py=30-
Py=30-y.
y.
Px = 50-2(7) =36 and Py =30-4 =26
c) The maximum profit is therefore obtained by substituting the values of x and y in to the
profit function and

Check Your Progress Exercise -3

1. If the firm's profit function is given by where x and y
are the amount of the two products x and y respectively,

a) find the level of x and y at the maximum profit

b) what is the maximum profit

6.6 SUMMARY

This section tries to summarize some of the important points on the chapter.
Extreme values of a function with two variables: Z = f (x
(x, y)
Partial derivatives:

Second order partial derivatives: fxx, fyy, fxy, fyx

Cross (mixed) partial derivatives: fxy, fyx

Young’s theorem: fxy = fyx
The necessary and sufficient conditions for relative extremum:

Conditions Minimum Maximum

-First-Order fx = fy = 0 fx = fy = 0
necessary
condition
-Second-Order fxx > 0 , fyy > 0 fxx < 0 , fyy < 0

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 sufficient condition and fxx fyy > f2xy
and
fxx fyy > f2xy

Multiproduct firm

6.7 ANSWERS TO CHECK YOUR PROGRESS EXERCISE

Check Your Progress Exercise - 1

1. a) fx = 2xy 2y ; fy = x2 + 2x
2xy + 2y 2x
b) fx = 5(3x 2y)4 (3) = 15 (3x
5(3x + 2y 2y)4
(3x + 2y
fy = 5(3x 2y)4 (2) = 10(3x
5(3x + 2y 2y)4
10(3x + 2y
4x3 – 12x
c) fx = 4x 3y2
12x – 3y
fy = -6xy
-6xy

2. a) fxx = 2y
2y , fyy = 0 , fxy = 2x
2x + 2 ; fyx = 2x
2x + 2

b) fxx = 60(3x 2y)3 (3) = 180 (3x

60(3x + 2y 2y)3
(3x + 2y
fyy = 40(3x 2y)3 (2) = 80(3x
40(3x + 2y 2y)3
80(3x + 2y
fyx = 40(3x 2y)3 (3) = 120 (3x
40(3x + 2y 2y)3
(3x + 2y
60(3x + 2y)3 (2) = 120(3x
fxy = 60(3x 2y)3
120(3x + 2y

12x2 – 12 , fyy = -6x

c) fxx = 12x -6x
fxy = -6y
-6y , fyx = -6y
-6y

Check Your Progress Exercise - 2

1. See the table in page 115.
2. a) The critical point is (0,0) and it has a relative minimum at Z = 9.
b) Saddle point at (0,0,0)
c) Saddle point at (0,0,0)
d) Saddle (0,0,0) Relative maximum at (-4/3, -4/3, 64/27)

Check Your Progress Exercise - 3

a) The firm should produce 30 units of x and 20 units of y and
b) The maximum profit will be 690 units

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6.8 MODEL EXAMINATION QUESTIONS

1. Find the first partial derivatives of each of the following functions

a) f(x,y)
x,y) = 3xy
3xy x,y) = x2 + 5xy
b) f(x,y) 5xy + y2 +2
c) f(x,y)
x,y) = 2x 3x2y4
2x + 3x x,y) = exy
d) f(x,y)
e) f(
f(x,y) 3x2 – 2xy
x,y) = 3x 2xy + y2 – 2x
2x + 3y
3y –7 f) f(x,y) (x2 + y2)5
x,y) = (x
g) f(x,y)
x,y) = xy(12
xy(12 – 3x
3x – 4y
4y)

2. Find the four second order partial derivatives of the functions in exercise 1 above.

3. Use the second-order derivative test to find the relative maxima, minima or saddle points.
(Check that both the necessary and sufficient conditions are satisfied)

a) Z = x2 + xy + 2y
2y2 +3 b) Z = x2 + y2 –4
c) Z = x3 – y3 – 3xy
3xy d) Z = x2 – 12y
12y2 + 4y
4y3 + 3y
3y4
2ey – ex – e2y
e) Z = x + 2e f) Z = x2y2 – 5x
5x2 – 8xy 5y2
8xy – 5y
g) Z = x4 – (x
(x + y)4 lny + x2 – 4x
h) Z = x lny 4x – 5y
5y + 3
8x3 + 2xy
i) Z = 8x 3x2 + y2 +1
2xy – 3x 2x3 + y3 + 3x
j) Z = 2x 3x2 – 3y
3y – 12x
12x –4
-x4 – 32x
k) Z = -x 32x + y3 –12y
–12y + 7

4. A producer who sells the same product to different classes of customers at different prices
is said to practice price discrimination. Suppose that the demand functions for a certain
product are different in two regions.

The demand function for a product in region 1 is given by

P1= 100 – x/5
The demand function for a product in region 2 is given by
P2 = 200 – y/15

Where x and y are the quantity demanded in region 1 and 2 respectively. P 1 and p2 are the
unit prices in the two regions. Find the level of x and y with their respective prices to get the
maximum revenue.

6.9 REFERENCES

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Barnett and Ziegler: Applied Calculus for Business, Economics, Life Sciences, and
Sciences, 6thed.
Social Sciences,

economics, 3rd ed.

Chiang, Alpha c.: Fundamental methods of mathematical economics,

Applications, 5th ed.

Hoffman and Bradley: Brief calculus with Applications,

Schaum,s Outlines: Introduction to Mathematical Economics,

Economics, 3rd ed.

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