MATHEMATICAL ECONOMICS

COURSE: 16-5-2015

Extra Problems: Existence and uniqueness of optimal solution (Section 3)

Problem 1.
Make the following table complete.

Function
q(K,L)=

KL
KL
1

Concave

Quasi-Concave

YES

YES

U(X,Y)= X 2Y 4
1

q(K,L)= K 3 L3
3 XY
3X Y
q(K,L)= K 2 L2

U(X,Y)=

Problem 2.
Given the primal production problem:
Min C(K,L)=2K+3L
u.c. 100= K L .
a.

Derive the formula of the iso-quant L=g(K) from the constraint 100= K L .

b.

Has this problem a unique optimal solution (Kopt,, Lopt) ? Give arguments!

c.

Calculate Kopt, Lopt,, s and Cmin .

Problem 3.
Given the primal production problem:
Min C(K,L)=3K+L
1

u.c. 100= K 3 L3 .
1

a.

Derive the formula of the iso-quant K=h(L) from the constraint 100= K 3 L3 .

b.

Has this problem a unique optimal solution (Kopt,, Lopt) ? Give arguments!

c.

Calculate Kopt, Lopt, s and Cmin.

Problem 4.
Given the dual consumption problem:
2

Max U X 3 Y 3
u.c. 200=X+2Y
a.

Has this problem a unique optimal solution (Xoptd,,Yoptd) ? Give arguments!

b.

Calculate Xoptd,Yoptd, s and Umax.

MATHEMATICAL ECONOMICS

COURSE: 16-5-2015

Extra Problems: Interpretation of the Lagrange multiplier (Section 5)

Problem 1.
Make the following table complete.

Function
q(K,L)=

Homogeneous

Degree

YES

KL
KL
1
2

U(X,Y)= X Y
1

3
2
1

q(K,L)= ( K 3 L3 ) 2
3 XY
3X Y
2
q(K,L)= K L2 +q0
U(X,Y)=

Problem 2.
Given the primal production problem:
Min C(K,L)=2K+3L
u.c. q0= K L .
a.

Calculate Kopt, (q0), Lopt (q0) and s .

b.

Calculate

c.

Calculate Cmin(q0) and verify b.

dCmin
by using chain rule of functions of several variables.
dq0
(Chapter 12 pg 414 or syllabus pg 15).

Problem 3.
Given the primal production problem:
Min C(K,L)=3K+L
1

u.c. q0= K 2 L2 .
a.

Calculate Kopt, (q0), Lopt (q0) and s .

b.

Calculate

c.

dCmin
by using chain rule of functions of several variables.
dq0
Verify if the functions C(K,L) and q(K,L) are homogeneous of degree 1.

d.

Calculate Cmin in case q0=101.

MATHEMATICAL ECONOMICS

COURSE: 16-5-2015

Extra problems: Compensated and uncompensated demand functions (Section 9 and 10)
Problem 1
Given the primal consumption problem:
Min E(X,Y)=PX X+PY Y
2

u.c. u X 3 Y 3
0
a.

Calculate the compensated demand functions

Xcomp =hX (PX, PY , u0.), Ycomp=hY (PX, PY , u0.).

b.

Calculate E(Xcomp ,Ycomp) =E min =W(PX, PY , u0.) the indirect expenditure function.

Problem 2.
Given the dual consumption problem:
2

Max U X 3 Y 3
u.c. e0=PX X+PY Y
a.

Calculate the uncompensated demand functions

Xunc,=dX (PX, PY , e0.) ,Yunc =dY (PX, PY , e0.).

b.

Calculate Umax= U(Xunc,,Yunc) = V(PX, PY , e0.) the indirect utility function.

Extra problems: Symmetry between primal and dual problems (Section 11)
Problem 1
Given the primal consumption problem:
Min E(X,Y)=PX X+PY Y
1

u.c. u X 4 Y 2
0
a.

Calculate the compensated demand functions

Xcomp =hX (PX, PY , u0.), Ycomp=hY (PX, PY , u0.).

b.

Calculate E(Xcomp ,Ycomp) =E min =W(PX, PY , u0.) the indirect expenditure function.

c.

Use shortcut 1 to calculate the indirect utility function V(PX, PY , e0.).

d.

Use shortcut 2 to calculate the uncompensated demand functions

Xunc,=dX (PX, PY , e0.) ,Yunc =dY (PX, PY , e0.).

e.

Verify the alternative of shortcut 2 given by R. Roys identity.

MATHEMATICAL ECONOMICS

COURSE: 16-5-2015

Test problems.
Problem 1.
In a consumption context the following functions are given.
The utility function U ( X , Y ) 2 ln( X ) ln(Y ) with X>1, Y>1, and the expenditure function
E ( X , Y ) PX X PY Y . We assume that the consumer acts optimal.
Questions:
a.
Show that the uncompensated demand function for good X is
2TEgiv
X unc d X ( PX , PY , TEgiv )
.
3PX
4(TEgiv )3

b.

Show that the indirect utility function is U max V ( PX , PY , TEgiv ) ln

c.

Calculate the compensated demand function X comp

d.

Formulate the Slutsky relation for cross-price effects concerning the demand for good
X in terms of elasticitys. Verify this relation by computing all the elements of this
relation.

e.

Compute for U ( X , Y ) 2 ln( X ) ln(Y ) the elasticity of substitution.

.
2
27(
P
)
P
X
Y

hX ( PX , PY , U giv ).

Problem 2.
In a production context the following functions are given.
1

The production function q ( K , L) K 3 L3 and the cost function TC C ( K , L) PK K PL L .

We assume that the producer acts optimal.
Questions:
a.
Show that the uncompensated demand function for capital is
TCgiv
K unc d K ( PK , PL , TCgiv )
.
3PK
Show that the uncompensated demand function for labor is
2TC giv
Lunc d L ( PK , PL , TC giv )
.
3PL

b.

Show that the indirect production function is qmax V ( PK , PL , TC giv )

2 3 TCgiv
.
1
2
3
3
3PK PL

c.
d.

Calculate the compensated demand function K comp hK ( PK , PL , qgiv ).

Formulate the Slutsky relation for cross-price effects concerning the demand for good
X in terms of elasticitys. Calculate e(Kcomp ,PL).

e.

Compute for q ( K , L) K 3 L3 the elasticity of substitution.

f.

Given PK =27 and PL=8.

Compute Long- run total costs LTC as a function of qgiv.
Compute short- run total costs STC as a function of Kgiv and qgiv.