Solution. We aim to compute the derivative [R(p(t))]� when t = 2.

Using the Chain Rule, it fol-

lows that [R(p(t))]� = R� (p(t)) · p� (t). Using the Quotient Rule, we have that
� �
� [p(t) + 4]� · [p(t) + 2] − [p(t) + 4] · [p(t) + 2]�
R (p(t)) = 1000
[p(t) + 2]2

� �
p� (t) · [p(t) + 2] − p� (t) · [p(t) + 4]
= 1000
[p(t) + 2]

� �
−2p� (t) p� (t)
= 1000 = −2000 and
[p(t) + 2]2 [p(t) + 2]2

� �
� (t2 + 2t + 4)� · (t2 + 4t + 8) − (t2 + 2t + 4) · (t2 + 4t + 8)�
p (t) = 50
(t2 + 4t + 8)2

� �
(2t + 2)(t2 + 4t + 8) − (2t + 4)(t2 + 2t + 4)
= 50 , hence
(t2 + 4t + 8)2

� �2
� −100000 (2t + 2)(t2 + 4t + 8) − (2t + 4)(t2 + 2t + 4)
[R(p(t))] = · , and
[p(t) + 2]2 (t2 + 4t + 8)2

� �2
−100000
� (2(2) + 2)(22 + 4(2) + 8) − (2(2) + 4)(22 + 2(2) + 4) 375
[R(p(2))] = · =− .
[p(2) + 2]2 (22 + 4(2) + 8)2 64

We conclude that the amount of money spent per passenger on a cruise in two years will be de-
creasing at a rate of approximately $5.86. �

3.4 Marginal Functions in Economics

Economics revolves largely around marginal analysis, the study of the rate of change of economic
quantities. For example, a macroeconomist might be interested in the rate of change of a coun-
try’s gross domestic product (GDP). On the other hand, a microeconomist employed by a tire
manufacturer might be interested in the rate of change of tire sales in addition to the total tire
sales. We use the term marginal when discussing cost, revenue, and profit.

3.4.1 Marginal Cost

Definition. We say that the marginal cost of a firm is the cost incurred in producing one addi-
tional unit of a certain good given that the firm is already at a certain level of production. We
take the marginal cost function to be the derivative of the cost function.

DVD Player Production. Consider a company that manufactures portable DVD players. Ex-
perts at this company have determined that the cost of producing a quantity of x DVD players
(in dollars) is given by C(x) = 0.0001x3 + 0.08x2 + 40x + 5000. Find the marginal cost function.
What is the marginal cost when x = 200, 300, 400, and 600? Interpret these results.

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Often, microeconomists are not only interested in a firm’s marginal cost function (i.e., the cost of
producing one more unit of a good given that a firm has already attained a certain level of pro-
duction) but also in the average cost of producing a certain number of goods.
C(x)
Definition. Given a cost function C(x), the average cost function is given by C(x) = x
. Like
before, the marginal average cost function is the derivative of C(x).

DVD Player Production, Cont’d. Consider the average cost function

0.0001x3 + 0.08x2 + 40x + 5000 5000
C(x) = = 0.0001x2 + 0.08x + 40 + .
x x
We note that the average cost of producing 600 DVD players is C(600) = $32 per DVD player.
Compare this with the marginal cost of producing the 601st DVD player, and notice that the
average cost is far less than the marginal. We have the marginal average cost function given by
C � (x) = 0.0002x + 0.08 − 5000
x2
. We will discuss the notion of increasing and decreasing in greater
detail later, but note that the marginal average cost function is positive when x > 203. We inter-
pret this as implying that the cost of producing each additional unit is increasing after 203 units.

3.4.2 Marginal Revenue and Profit

We define marginal revenue and marginal profit similarly to marginal cost.
Definition. We say that the marginal revenue (profit) of a firm is the actual revenue (profit)
realized from the sale of one additional unit of a good given that the firm is already at a certain
level of sales. We take the marginal revenue (profit) function to be the derivative of the rev-
enue (profit) function.

Revenue from Loudspeaker Sales. Consider a company that manufactures loudspeakers. Ex-
perts at this company have determined that the relationship between unit price p = D(x) (in
dollars) and quantity demanded x is given by p = D(x) = −0.02x + 400, 0 ≤ x ≤ 20, 000. Further-
more, the cost for producing x loudspeakers is given by C(x) = 100x + 200, 000 (in dollars).
(a.) Find the revenue function R(x). (Hint: Recall that revenue is given by p · x.)

(b.) Find the marginal revenue function R� (x). Compute R� (2000), and interpret your result.

(c.) Find the profit function P (x). (Hint: Recall that profit is given by R(x) − C(x).)

(d.) Find the marginal profit function P � (x). Compute P � (2000), and interpret your result.

3.4.3 Elasticity of Demand

Using the concepts just discussed, we develop the notion of elasticity of demand.
Definition. We say that the elasticity of demand measures how a change in the price of a good
affects the quantity demanded of the good.
We omit the derivation of the elasticity of demand function, as it is clear and concise in the text-
book; however, we discuss the general idea. Given the relationship between price and demand
p = D(x), we wish to consider the quantity demanded x as a function of price, i.e., we wish to
find a function such that x = f (p). We do this simply by solving for x in the equation p = D(x).

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Definition. Given a differentiable function f such that the quantity demanded x = f (p), where p
is price, then the elasticity of demand function at price p is given by

p · f � (p)
E(p) = − .
f (p)

Don’t fret if the choice to negate this quantity seems arbitrary. We will see in later examples that
f � (p) is always negative. Because we prefer to work with positive quantities rather than negative
ones, we take the negative multiple of this quantity as the elasticity of demand.

Revenue from Loudspeakers, Cont’d. Recall that the unit price of loud speakers of a quan-
tity of x loudspeakers is given by p = D(x) = −0.02x + 400, 0 ≤ x ≤ 20, 000. We wish to find the
elasticity of demand function. First, we find f (p). We can solve the given price (demand) equa-
tion for x to obtain x = f (p) = −50p + 20, 000. By taking the derivative of f (p), we have that
f � (p) = −50. Using the formula for the elasticity of demand function, we have that

p · f � (p) p(−50) 50p p

E(p) = − =− = = .
f (p) −50p + 20, 000 50(400 − p) 400 − p

Evaluating the elasticity of demand for p = $100, we see E(100) = 13 , hence an increase of 1%
in unit price results in a decrease of 0.33% in the quantity demanded. Likewise, evaluating the
elasticity of demand for p = $300, we see E(300) = 3, hence an increase in price of 1% results in a
decrease of 3% in the quantity demanded.

Definition. Consider the following range of values of the elasticity of demand function E(p).

(a.) Given that E(p) < 1, we note that a small change in the unit price leads to a small change
in quantity demanded, and we say that the demand is inelastic.

(b.) Given that E(p) > 1, we note that a small change in unit price leads to a large change in
quantity demanded, and we say that the demand is elastic.

(c.) Given that E(p) = 1, we note that a change of 1% in unit price will lead to a 1% change in
quantity demanded, making the demand unitary.

We wish to know what consequence these terms have. Consider the revenue function R(x) = px.
We note that x can be expressed as a function x = f (p) of price, hence we can rewrite the rev-
enue function as R(p) = p · f (p), a function that likewise depends on price alone. We wish to
know how revenue changes as the price changes. By taking the derivative of R(p) in of p, we have
� �
� d d � p · f � (p)
R (p) = R(p) = [p · f (p)] = f (p) + p · f (p) = f (p) 1 + = f (p)(1 − E(p)).
dp dp f (p)

We will assume first that demand is elastic at a price p = a. By definition of elastic, we have
that E(a) > 1, from which it follows that R� (a) = f (a)(1 − E(a)) < 0 since f (p) is positive
for all values of p. We conclude that a small increase in unit price leads to a decrease in revenue.
Continuing this analysis, we arrive at the following results.

1.) If demand is elastic at a price p, then an increase in unit price causes a decrease in revenue.
Likewise, a decrease in unit price causes an increase in revenue.

31
 2.) If demand is inelastic at a price p, then an increase in unit price causes an increase in rev-
enue. Likewise, a decrease in unit price causes a decrease in revenue.

3.) If demand is unitary at a price p, then an increase in unit price causes the revenue to stay
about the same.

Revenue from Loudspeakers, Cont’d. We note that demand is elastic when p = 300 since
E(300) = 3 > 1. On the other hand, when p = 100, we have that E(100) = 13 < 1, hence demand
is inelastic. Because demand is inelastic when p = 100, it follows by the above that an increase in
unit price causes an increase in revenue.

3.5 Higher-Order Derivatives

3.5.1 Higher-Order Derivatives
Recall that the derivative of a differentiable function f (x) is likewise a function f � (x). Often, we
are interested in whether f � (x) is differentiable. By definition of the derivative, we have that

d � f � (x + h) − f � (x)
[f (x)] = lim .
dx h→0 h
d
Given that this limit exists, we write dx [f � (x)] = f �� (x), read “f double prime of x.” Continuing
in this fashion, we may consider third-, fourth-, and higher-order derivatives. We write f �� (x) for
the second derivative, f ��� (x) for the third derivative, f (4) (x) for the fourth derivative, and in gen-
eral, we write f (n) (x) for the nth derivative of f (x). Like before, it is convenient to use equivalent
d2 y �� d3 y ��� dn y
notation dx 2 (or y ), dx3 (or y ), and dxn (or y
(n)
) for f �� (x), f ��� (x), and f (n) (x), respectively.

Higher-Order Derivatives of a Polynomial. Compute the derivatives of all orders of the

polynomial function f (x) = x5 − 3x4 + 4x3 − 2x2 + x − 8.

Solution. We have that

f � (x) = 5x4 − 2x3 + 12x2 − 4x + 1;

d �
f �� (x) = [f (x)] = 20x3 − 36x2 + 24x − 4;
dx

d ��
f ��� (x) = [f (x)] = 60x2 − 72x + 24;
dx

d ���
f (4) (x) = [f (x)] = 120x − 72;
dx

d (4)
f (5) (x) = [f (x)] = 120; and
dx

f (n) (x) = 0 for all n ≥ 6. �

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