Example 6.2.1. Optimizing Revenue with Two Products.
I have a company that produces two products, widgets and gizmos. The two demand functions are:
\begin{align*}
\PriceGizmo\amp =10-\frac{\QuantityGizmo}{50}=10-\frac{\text{QG}}{50}\\
\PriceWidget\amp =20-\frac{\QuantityWidget}{40}=20-\frac{\text{QW}}{40}\text{.}
\end{align*}
This gives me the following revenue function:
\begin{equation*}
\revenue(\QG,\QW)=10QG-\frac{\QG^2}{50}+20\QW-\frac{\QW^2}{40}\text{.}
\end{equation*}
Look at the functions of one variable obtained by treating either QG or QW as a constant. Use this information to find where we maximize revenue.
Solution.
In terms of the last example, we want to start with a table and a wire frame chart.
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The wires are obtained by intersecting the graph of the function with a plane where QW or QG is held constant.
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Thus, when we treat either QW or QG as a constant we effectively are looking at one of the wires of the wire frame. To illustrate this, we will look at the wires corresponding to \(\QW=400\) and \(\QG=300\text{.}\) When \(\QG=300\text{,}\) our revenue function simplifies to
\begin{align*}
\revenue(300,\QW) \amp =3000-1800+20\text{QW}-\frac{\text{QW}^2}{40}\\
\amp =1200+20\QW-\frac{\QW^2}{40}\text{.}
\end{align*}
Thus, the wire corresponding to \(\QG=300\) is a parabola that bends down.
The interactive below shows how the wireframe is built from cuves defined by slice curves defined by cut planes.
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To find the vertex of the parabola, we take the derivative of our function of QW and set it equal to zero.
\begin{equation*}
\frac{d}{d\QW} \revenue(300,\QW)=20-\frac{\QW}{20}\text{.}
\end{equation*}
This derivative is zero when \(\QW=400\text{.}\) That is the only possible place on this wire where we can have a maximum.
Similarly, when \(\QW=400\text{,}\)
\begin{align*}
\revenue(\QG,400) \amp =10\QG-\frac{\QG^2}{50}+4000\\
\frac{d}{d\QG} \revenue(\QG,400)\amp =10-\frac{\QG}{25}\text{.}
\end{align*}
This derivative is zero when \(\QG=250\text{.}\) That is the only possible place on this wire where we can have a maximum.
Putting the information together, the maximum must occur at \((250,400)\text{.}\) Putting these values back in the original equation gives a maximum of $5250 for the revenue function.