TA session 1 notes: Econ 316

Below is a review of the math you need to know for this course. Anytime I write a letter
like a, b, c this is a constant. A letter like x or y is a variable. Functions are represented by
f, g, and h.
Algebra
ax + b = c x =

cb
a

xa (xb + c) = xa xb + xa c = xa+b + xa c
For example: e2x+5 = e2x e5 = ex+x e5 = ex ex e5 = (ex )2 e5
Remember: ea+b = ea eb but ea eb 6= eab . People will say this on a test!
log(xa ) = a log x
Derivatives:
Whats a derivative? Its the tangent to a curve and it measures the change in y
associated with an infinitesimal change in x. The intuition behind derivatives is
that they are given by y(x)
as x gets really small. For large (x) this looks like
x
yHxL

2.0

1.5

1.0

0.5

0.2

0.4

0.6

0.8

1.0

1.2

the formula for a slope of a line going through your curve. As (x) gets really
small, this becomes the tangent just touching your curve.
yHxL
2.5

2.0

1.5

1.0

0.5

0.2

0.4

0.6

0.8

1.0

1.2

df
Notation for derivatives is f 0 (x) = dx
= f
where we use the symbol in multix
variate settings (well talk about this later).

We are often interested in the derivative with respect to time. In this case, and
this case only, we denote the derivative f 0 (t) = f. Notice that in discrete time,
(t)
(t)
we have t = 1 so that f ft(t) = f (t+1)f
= f (t+1)f
t+1t
1
One example of an important derivative to know is f (x) = b ln(x) f 0 (x) =

b
x

Another important example: f (x) = eax f 0 (x) = aeax .

Perhaps the most example: f (x) = xb f 0 (x) = bxb1
Product Rule: f (x) = g(x)h(x) f 0 (x) = g 0 (x)h(x) + g(x)h0 (x)
Quotient Rule: f (x) =

g(x)
h(x)

f 0 (x) =

g 0 (x)h(x)g(x)h0 (x)
(h(x))2

Chain Rule: f (x) = g(h(x)) f 0 (x) = g 0 (h(x))h0 (x).

For example: f (x) = log(x3 ), so to use the chain rule, let
g(y) = log(y) g 0 (y) =
and
h(x) = x3 g 0 (h(x)) =

1
y

1
1
= 3
h(x)
x

Also,
h0 (x) = 3x2
Then
f 0 (x) = g 0 (h(x))h0 (x) =

3
3x2
=
3
x
x

We can check this easily: 3 log x = log(x3 )!

Partial derivatives: in problems with more than one variable, you want to think
about how changing only one variable effects the outcome.
For example, we have F (K, L) = K L1 and we want to know how production changes with labor, holding K fixed. We do this by treating K as a
(K,L)
=
constant and taking the derivative with respect to L. This gives F L
(1 )K L
Another example: Let f (x, y) = xb (y + 3). We can denote the partial derivative with respect to x multiple ways:
f (x, y)
fx (x, y) = f1 (x, y) =
x

xb
= (y + 3)
|
{z x}

treat (y+3) as a constant

= (y + 3)bxb1

 Then we can take multiple derivates, first with respect to x and then with
respect to y. It turns out that the order in which you do this (generally)
doesnt matter. Letting f (x, y) = xb (y + 3) again, we have
(x,y)
fx
(y + 3)bxb1
=
= bxb1
fxy (x, y) = fyx (x, y) =
y
y

Unconstrained Maximization :
Suppose that for every point in time, a producer wants to choose the optimal
amount of capital to maximize his output (weird problem, I know). Then, if
production was given by y(t) = 3 + 3k(t) k(t)2 , he would solve the problem
max 3 + 3k(t) k(t)2
k(t)

This function looks like: In order to find the maximum, we find the level of k such
yHtL
5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

kHtL

that the derivative of y(t) with respect to k(t) is equal to 0. This gives the first
order condition:
y(t)
= 0 3 2k(t) = 0
k(t)
k(t)optimal =

3
2

We also have to check that this is a maximum rather than a minimum (since
derivatives are zero at both local maxima and local minima. A maximum occurs
anytime the function is concave, like the one I drew above. To see that the point
your getting is a maximum, its enough to draw the picture, or you can check for
concavity. A function is concave when f 00 (x) < 0. In other words, the derivative
is decreasing. In our case, this means
y 0 (k(t)) = 3 2k(t) SOSC: f 00 (k(t)) = 2 < 0
Constrained Maximization:
3

 We will do examples of constrained maximization problems at the next TA session,

so dont panic!
In general if a problem says maximize f (x, y) subject to the constraint that
g(x, y) 0, you will solve the Lagrangian
max L = max f (x, y) + (g(x, y))
x,y

g(x, y) will have x and y enter negatively because its constraining you from
choosing high values of x, y. You will in this case have three equations and three
unknowns, which means you can solve for x, y, and . When the constraint is
binding, these equations will be the three first order conditions of the maximization problem :
L
=0
x
L
=0
y
L
= g(x, y) = 0

We will talk again (in great detail) about the details of maximization and constrained maximization. Now, well do a couple of practice problems similar to whats on your homework.
1. Suppose that to pick coconuts, Robinson Cruso has the following production function:
1
coconuts produced = c(K, L) = 5L L2 + K 2 . Is this production function CRS?
To check this, we need to see if multiplying all the inputs by some positive number
causes the output to multiply by exactly that same number. Notice that
1

c(K, L) = 5L 2 L + 2 K 2
To see that this is not CRS, we have to only give one counterexample. A counterexample is a level of K and L and an at which c(K, L) 6= c(K, L). Let
= 2 and let L = K = 1. Then,
1

c(K, L) = 5L L2 + K 2
c(1, 1) = 5 1 + 1 = 5

c(2, 2) = 10 4 + 2 = 6 + 2
c(2, 2) 6= 2c(1, 1)
1

Thus, the production function c(K, L) = 5L L2 + K 2 is not CRS. We dont

have to consider any special cases in this problem (unlike some of the homework
problems) because there are no parameters free. Next, lets do an example where
we have free parameters.
4

2. Suppose y(K, L) = aK + Lb where a, b are parameters. For which parameter values is

this production function CRS?
Then
y(K, L) = aK + b Lb
Suppose that b = 1, then for all values of a,
y(K, L) = (aK + L) = y(K, L) = (aK + L1 )
Suppose that b 6= 1. Then in order for the production function to be CRS, we
need
y(K, L) = aK + b Lb = y(K, L)
for all values of K and L. Dividing the last two terms by , we can re-write this
condition as
aK + b1 Lb = y(K, L)
Then, substituting in the definition of y(K, L) = aK + Lb , we require
aK + b1 Lb = aK + Lb
which is only true for all values of K and L when b = 1. Thus, this production
function is CRS only when b = 1 (and any a). This is the case of a perfect
substitutes production function.
3. Suppose the growth rate of a variable X rises from time 0 to time T and then stays
constant. Sketch a graph of ln(X(t)) as a function of time.
If the growth rate is rising from time 0 to T , we can use the fact that the growth
rate of a variable is equal to the change in its log over time. In continuous time
this change is measured by a derivative (instantaneous change). So, if the growth
rate is (for example), g(t) = t, then log(X(t)) has derivative equal to g(t) = t.
Thus, log(X(t)) = 21 t2 . After period t, the derivative is 0 (no growth), and so
log(X(t)) = log(X(T )), which is a constant equal to the value of log(X(t)) right
when it stopped growing at time T .