# Economics Student Seeks Answer: Derivatives Question

• Jamp
In summary, the derivative of the one variable functions (the convex and concave ones, the indifference curves) is the ratio of the partial derivatives of the original 2 variable function, which is always the same if the second is a monotonous increasing transformation of the first. Evidently, for the first one: (0.5x^-0.5y^0.5)/(0.5x^0.5y^-0.5) = y/x and for the second one 2xy^2/2x^2y = y/x.
Jamp
Hello, I am an economics student but this question is purely mathematical.

Imagine the function U(x,y)=x^0.5y^0.5 ( sqrt(x) times sqrt(y) ) in space. If we then imagine the same function equal to a constant we get the 2d functions corresponding to the intersections of horizontal planes with the original 2 variable function, right? (if anyone here is taking economics, these would be the indifference curves). So that for every constant we get a function that is convex to the origin.
Now imagine the function V=U^4=(x^2)(y^2) in space. If we do the same as above for this one, then for every constant we have a function that is concave to the origin, correct?
The problem arises now. My professor says that, the derivative of the one variable functions (the convex and concave ones, the indifference curves) is the ratio of the partial derivatives of the original 2 variable function, which is always the same if the second is a monotonous increasing transformation of the first. Evidently, for the first one: (0.5x^-0.5y^0.5)/(0.5x^0.5y^-0.5) = y/x and for the second one 2xy^2/2x^2y = y/x. The problem is, if the slopes of the functions are the same for every point, then how come one is convex and the other concave? Can this be true? By drawing the curves I can see that it can, but only if we draw the curves that way. Why is it always true? I need to understand what the ratio of the partial derivatives of the original function means geometrically and logically, what does it represent?

Thanks!

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What do you mean by "concave to the origin" and "convex to the origin"? Note the curve defined by V(x,y) = C for some (positive) constant C is symmetrical in the x-z and y-z planes. The restriction of this curve to the x > 0, y > 0 quadrant of space is THE EXACT SAME THING as the curve defined by U(x,y) = C1/4. So they're basically the same types of curves, and so I would assume their either both "concave to (0,0)" or both "convex to (0,0)".

What I mean is, take the first function:
U(x,y) = (x^0.5)(y^0.5)
For any constant, for example 10: 10=(x^0.5)(y^0.5) <=> y=100/x is convex to (0,0).
However, 10=(x^2)(y^2) <=> y=sqrt(10-x^2) is concave.
These two different functions can not, as far as I can see, have the same slope for all x. However, both have the same ratio of partial derivatives in x over in y (y/x), which is supposed to be the slope of the curves of the original function for some constant. So how can this be true?

Jamp said:
What I mean is, take the first function:
U(x,y) = (x^0.5)(y^0.5)
For any constant, for example 10: 10=(x^0.5)(y^0.5) <=> y=100/x is convex to (0,0).
However, 10=(x^2)(y^2) <=> y=sqrt(10-x^2) is concave.
This is wrong.

$$10 = x^2y^2 \Leftrightarrow y = \pm \frac{\sqrt{10}}{x}$$

I think you confused x2y2 with x2+y2.

Thanks... I was thinking about it again on my way to school today and realized that, don't know how I did that... always a good idea to restart from the beginning.. :shy:

## 1. What are derivatives in economics?

Derivatives in economics are financial instruments that derive their value from an underlying asset. They can be used for hedging against risks or for speculation.

## 2. How are derivatives used in the financial market?

Derivatives are used in the financial market for a variety of purposes, including managing risk, speculating on future market movements, and providing liquidity.

## 3. What are the types of derivatives?

The main types of derivatives are options, futures, forwards, and swaps. Options give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price. Futures and forwards are contracts to buy or sell an asset at a future date at a predetermined price. Swaps involve exchanging cash flows based on different financial instruments.

## 4. What is the role of derivatives in the economy?

Derivatives play an important role in the economy by helping to manage and transfer risk, providing liquidity in financial markets, and allowing investors to speculate on market movements. They also allow for more efficient allocation of capital and can help stabilize financial markets.

## 5. Are derivatives risky?

Derivatives can be risky, as they involve leveraging and can result in significant gains or losses. However, when used properly and with proper risk management strategies in place, they can also help mitigate risk and provide valuable opportunities for investors.

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