APPLICATIONS OF DERIVATIVES IN BUSINESS
1. Let y = C(x), where y represents the cost to manufacture x items. Thus, C(x)
is described as the cost function.
Example: The total cost in thousands of Pesos to manufacture x electric
generators is given by
C(x) = -x3 + 15x2 +1000
2. Average cost per item, AC(x), is determined by dividing the total cost by the
number of items.
AC(x) = C(x)/ x
In the given example where C(x) = -x3 + 15x2 +1000, AC(x) = -x2 + 15x +
1000/x
3. Marginal Cost (MC) gives the rate of change in the cost of producing one
more item after x items have already been produced. It is the approximate
change in the cost resulting from one additional unit of output. It is the first
derivative of the of the cost function.
MC = C(x)
Example 1: The cost to produce x units of an item is given by C(x) = 9x 2 4x
+ 8.
a. Find the average cost per unit to produce: 10 units, 20 units
AC(x) = C(x)/x = 9x 4 + 8/x
C(10) = 9(10) 4 + 8/10 = 86.8
C(20) = 9(20) 4 + 8/20 = 176.4
b. Find the 1st derivative of the average cost function
AC(x) = 9 8/x2 = (9x2 8)/x2
Example 2: Given the cost function C(x) = 2x 2 + 5x + 18, find the minimum
average cost.
a. Solve for the average cost, AC(x).
AC(x) = 2x + 5 + 18/x
b. Solve for AC(x). AC(x) = 2 18/x2
c. Equate AC(x) to 0 and solve for x.
2 18/x2 =0
(2x2 18)/x 2 =0
2(x2 9) =0
x=3 x = -3
d. Only x = 3 since it is positive and since C(x) = 4 is positive, x =
3 is a minima.
e. Substitute x = 3 to AC(x) = 2x + 5 + 18/x
AC(3) = 2(3) + 5 + 18/3
= 17
Therefore, the minimum average cost is P17
Example 3: Suppose that the total cost (in hundreds of Pesos) to produce
x (in thousand units) of an item is given by the function C(x) = 4x2 +
100x + 500. Find the marginal cost for the following values of x:
a. x = 5 or (5000 units)
Cost for x = 5 or (5000 units) is C(x) = 4x2 + 100x + 500
C(5) = 4(5)2 + (100 x 5) + 500
= P1100 or P110,000 (P1100 x 100)
Average cost per item for x = 5 or (5000 units) is
AC(x) = 4x + 100 + 500/x
AC(5) = (4x5) + 100 + (500/5)
= P220 or P22,000
(P220 x 100)
Marginal cost MC = C(x) = 8x + 100
C(5) = (8 x 5) + 100 = P140 or P14,000 (P140
x 100)
Therefore, after 5000 units of an item have been produced, the cost to
produce 1000 more units will be approximately 140 (in hundreds of pesos) or
P14,000.
b. x = 30 or (30000 units)
Cost for x = 30 or (30000 units) is C(x) = 4x2 + 100x + 500
C(30)= 4(30) 2 + (100x30) + 500
= P7100 or P710,000
(P7100 x 100)
Average cost per item for x = 30 or (30000 units) is AC(x) = 4x +
100 + 500/x
AC(30) = (4x30) + 100 +
(500/30)
= P131.67 or P13,167
(P131.67 x 100)
Marginal cost MC = C(x) = 8x + 100
C(30) = (8 x 30) + 100 = P340 or P34,000
(P340 x 100)
Therefore, after 30000 units of an item have been produced, the
cost to produce 1000 more units will be approximately P340 (in
hundreds of pesos) or P34,000.
4. When AC(x) = 0. The critical values (value of x) may either be considered as
the minimum number of units required to achieve the minimum cost or the
maximum number of units required to achieve the maximum cost.
If C(x) is negative, x is maximum value. If C(x) is positive, x is a
minimum value.
Example 4: In the previous example, when AC(x) = 0, x is computed as
AC(x) = 4 500/x2
4 500/x2 = 0
(4x2 500)/x2 = 0
4x2 500 = 0; therefore 0 = 4(x2 125) where x = 125 or 11
X is approximately 11 or (11000 units)
Since C(x) = 8 is positive, x = 11 is the minimum value. The minimum
cost is determined by substituting the value of x to AC(x).
AC(x) = 4x + 100 + 500/x
AC(11) = (4 x 11) + 100 +
(500/11)
= P189.45 or P18,945
(P189.45 x 10)
5. Revenue (R) For any given demand function y = f(x), the total Revenue
function, R, is the product of x (the number of units demanded) and y (the
price per unit demanded).
R=xy or R = x f(x)
6. Marginal Revenue function (MR) rate of change (derivative) of the total Peso
vale received with the total number of units sold. It is also the approximate
change in revenue that results from selling one additional unit.
d
f (x)
MR = R= x dx + f(x)
Example: The revenue for selling x units of an item is given by R(x) = 800x
+ 10x2. Find the Marginal Revenue when a. x = 10, b = 20, c = 32
R(x) = 800x + 10x2
R(x) = 800 + 20x
a. R(10) = 800 + 20(10) = 1000
b. R(20) = 800 + 20(20) = 1200
c. R(32) = 800 + 20(32) = 1440
Example: The demand function of a commodity is given by the function y =
200 5x where x is the quantity demand and y is the unit price.
Determine the price and quantity for which revenue is maximum.
Demand: y = 200 5x
Revenue R=xy
= x (200 5x) = 200x 5x2
R = 200 10x
To get the critical value/s, equate R to 0 and solve for x
200 10 x = 0
x = 20
Substitute x to the demand function, y = 200 5(20) = 100
To determine if x = 20 is a minima or maxima, get the 2nd derivative
of R. If R is positive, x = 20 is a minima. If R is negative, x = 20 is
a maxima.
R = -10 and since it is negative, x = 20 is a maxima. Therefore a
maximum revenue is expected for a sale of 20 units at P100 each.
Example: The price per bar of a chocolate candy is given by the function y=
6 x
5 250
How many bars must be sold to maximize revenue? What is the
maximum revenue?
Revenue: R=xy
6 x
=x
( )
5 250
= 6x/5 x2/250
R = 6/5 2x/250
= (300 2x)/250
To get the critical value/s, equate R to 0 and solve for x
(300 2x)/250 = 0
300 2x = 0
x= 150
Substitute x = 150 to the revenue function,
R = 6(150)/5 1502/250
= 90
To determine if x = 150 is a minima or maxima, get the 2 nd derivative
of R. If R is positive, x = 20 is a minima. If R is negative, x = 20 is
a maxima.
R = 2/150 and since it is positive, x = 150 is a minima. Therefore a
maximum revenue of P90 is expected for a sale of 150 bars.
7. The Profit Function is the difference of the revenue function, R(x) and the cost
function, C(x).
P(x) = R(x) C(x)
Maximize profit may be achieved when the 1st derivative of the Profit function
is equated to 0.
Example: A certain item can be produced at a unit cost of P10. The
demand function for the product is D = 90 - .02x, where D is the
price in pesos, and x is the number of units.
a. How many units must be produced to maximize Profit?
b. What is the price that gives maximum profit?
c. What is the maximum profit?
Cost Function C(x) = 10x
Revenue function R(x) = x(D)
= x(90 .02x)
= 90x .02x2
Profit function P(x) = R(x) C(x)
= (90x .02x2) 10x
= 80x .02x2
Maximum profit may be achieved when 1 st derivative of
P(x) = 0
P(x) = 80x .02x2
P(x) = 80 .04x
At P(x) = 0, 80 .04x = 0
x = 2000
Test for P(x) to check if x = 2000 is maximum or
minimum.
P(x) = 80 .04x
P(x) = .04. Since P(x) is negative x =
2000 is maximum.
The price that gives maximum profit is determined by
substituting x to the Demand function D = 90 - .02x. D =
90 - .02(2000) = P50
The maximum profit is determined by substituting x to
the
Profit function P(x) = 80x .02x2
P(2000) = 80(2000) - .02(2000)2
= 160,000 - .
02(4,000,000)
= 160,000
80,000
= P80,000
