Optimization, Mathematics

Optimization is required in situations that frequently arise in finance and other areas. Organizations would like to maximize their profits or minimize their costs at a given level of output. An individual would like to maximize his utility when choosing investment alternatives. If we have a mathematical function, then we can find a solution to the optimization problem using calculus.

Of all the higher order derivatives, the second order derivative is of special interest in problems of optimization.

The first derivative of a function, f'x is the slope of the function f(x), or the rate of change in the value of f(x) per unit change in x. Similarly the second derivative, f''x is the slope of the function f'x or the rate of change in the value of f'x per unit change in x, which is the rate of change of the original function f(x).

The following figures and table show various combinations of signs of f'x and f''x and the implied slope of the graph of f(x).

781_optimization.png

  f'x

  f''x

f(x) is


positive

positive

increasing at an increasing rate

positive

negative

increasing at a decreasing rate

negative

positive

decreasing at an increasing rate

negative

negative

decreasing at a decreasing rate                                          

Posted Date: 9/13/2012 7:14:08 AM | Location : United States







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