QUADRATIC FUNCTIONS AND

THEIR APPLICATIONS IN
ECONOMICS AND BUSINESS
== WEEK 5 ==
INTRODUCTION TO QUADRATIC
FUNCTIONS
• Quadratic function f maps ℝ into ℝ such that f(x) = ax2+bx+c for some constants a, b, c and a 0.
• The graph of a quadratic function is a parabola.
• a > 0  the parabola is concave upward (-shaped)  The parabola has a minimum turning point
• a < 0  the parabola is concave downward (-shaped)  The parabola has a maximum turning point
• Note: the maximum or minimum turning point of a parabola is also called the vertex of the parabola
• c is the vertical intercept: The parabola cuts the y-axis at (0,c)
• D = b2-4ac is called discriminant. It determines at how many points the parabola cuts the x-axis.
• D > 0  the parabola cuts the x-axis at 2 distinct points
• D = 0  the parabola cuts the x-axis at exactly 1 point (It touches the x-axis.)
• D < 0  the parabola does not cut the x-axis
6 CATEGORIES OF PARABOLAE
BASED ON THE ALGEBRAIC SIGNS
OF a AND D
NOTEWORTHY OBJECTS RELATED TO
A PARABOLA
• C : the vertex
• A, D : x-intercepts
• B : y-intercept
• The vertical purple line is called
the axis of symmetry. Its
equation is x = 1.
IMPORTANT FORMULAE RELATED TO
QUADRATIC FUNCTIONS AND
PARABOLAE
• Let the equation of a parabola be y = ax + bx + c; a  0.
2

• Coordinates of the y-intercept: (0,c).

• Coordinates of the vertex: where D is the discriminant
• is called the extreme value of the function. If a > 0, it is the minimum value of the function. If a
< 0, it is the maximum value of the function.
• The equation of the axis of symmetry:
• If D > 0 there are two x-intercepts whose coordinates are (x1,0) and (x2,0) where .
• If D = 0 there is exactly one x-intercept with the coordinates
• If D < 0 there is no point of intersection of the parabola and the x-axis.
EXAMPLE 1:

• D = b2 – 4ac
=
• y-intercept = c = -4
• So, the parabola cuts the y-axis at (0,-4)  B
• The vertex:
•  C
• x-intercepts: =
• x1 = 1+3 = 4 and x2 = 1-3 = -2.
• Therefore the parabola cuts the x-axis at (4,0) and
(-2,0) [i.e. points D and A, respectively]
• The equation of the axis of symmetry: x = 1 (the
abscissa of point C above)
EXAMPLE 2:

• D = b2 – 4ac
=
• y-intercept = c = -4
• So, the parabola cuts the y-axis at (0,-4)  B
• The vertex:
• A
• Since D = 0 the parabola touches the x-axis at .
• So, the parabola touches the x-axis at (3,0)A
• The equation of the axis of symmetry: x = 3 (the
abscissa of point A above)
EXAMPLE 3:

• D = b2 – 4ac = 22 – 412 = -4
• y-intercept = c = 2
• So, the parabola cuts the y-axis at (0,2)  B
• The vertex:
• A
• Since D < 0 the parabola does not cut the x-
axis.
• The equation of the axis of symmetry: x = -1
(the abscissa of point A above)
APPLICATIONS IN ECONOMICS AND
BUSINESS (1)
• Find the equilibrium values of unit price (P) and
quantity (Q) in a competitive market where the
demand schedule is P = $(200/Q)/unit and the
supply function is P = $(30 + 2Q)/unit.
• Answer
• In equilibrium, demand price equals supply
price. Consequently, • As Q  0, we reject Q2.
• So, the quantity demanded at
• Multiply both sides of the equation by Q. equilibrium is 5 unit.
• 200 = 30Q + 2Q2, which is equivalent to
• Q2 + 15Q – 100 = 0 • P = 30 + 2Q = 30 + 25 = 40.
• a = 1, b = 15, c = -100 • Therefore, the equilibrium unit
• D = b2 – 4ac = 152 - 41(-100)=625 price is $40/unit.
APPLICATIONS IN ECONOMICS AND
BUSINESS (2)
• The demand (D) for a certain product • The vertex lies on the axis of
satisfies Q = 200 – 4P where P is the unit
price in $/unit and Q is the quantity symmetry whose equation is P.
demanded if the unit price is P. a) Find P such Therefore, to reach the
that the total revenue is maximized, b) Find maximum total revenue the unit
the maximum total revenue.
• Answer
price must be $25/unit.
• Let the total revenue be TR. • The maximum total revenue is:
• So, TR = PQ
• TRmax = $(20025 - 4252)=
• TR = P(200-4P) = 200P-4P2.
$2500
• Note that TR is quadratic and the graph is a
parabola. As a = -4 (negative) the parabola is
concave downward and the vertex is a
maximum turning point.
APPLICATIONS IN ECONOMICS AND
BUSINESS (3)
• Find the equilibrium values of unit • D = b2-4ac = 52 - 4 1(-14) = 81
price (P) and quantity (Q) in a •
competitive market where the demand
schedule is P = $(-Q2-5Q+52)/unit and
the supply function is P =
$(2Q2+10Q+10)/unit. • As Q  0, we reject Q2.
• Answer • So, the quantity demanded at
• In equilibrium, demand price equals equilibrium is 2 unit.
supply price. Consequently, • P = 2Q2+10Q+10
• -Q2-5Q+52 = 2Q2+10Q+10 • P = 222 + 102 + 10 = 38
• 3Q2 + 15Q – 42 = 0 • Therefore, the equilibrium unit price is
• Q2 + 5Q – 14 = 0 $38/unit.
APPLICATIONS IN ECONOMICS AND
BUSINESS (4)
• If fixed costs are $4, variable costs • Profit () = TR – TC
per unit are $1 and the demand •  = (10Q – 2Q2) - (4+Q)
function is P = $(10-2Q)/unit, find •  = -2Q2 + 9Q – 4
the maximum profit. • Note that  is quadratic and the graph
• Answer is a parabola. As a = -2 (negative) the
• Total Cost = Total Fixed Cost + parabola is concave downward and the
vertex is a maximum turning point. It
Total Variable Cost follows that the ordinate of the vertex,
• TC = 4 + 1Q = 4 + Q , shows the maximum profit. In this
case, D = 92 – 4(-2)(-4) = 81 – 32 = 49.
• Total Revenue (TR) = PQ
Consequently, max = . Hence, the
• TR = (10-2Q)Q = 10Q – 2Q2 maximum profit is $6.125.
APPLICATIONS IN ECONOMICS AND
BUSINESS (5)
• In the previous problem, find the
break-even point (BEP).
• Answer • Therefore, break-even occurs
• At BEP, TC = TR when the quantity sold is 0.5 or
• 4 + Q = 10Q – 2Q2 4 units.
• 2Q2 – 9Q + 4 = 0
• D = (-9)2 - 424 = 49
•