Professional Documents
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An Introduction to
Mathematical
Economics
Part 1
Q2
Loglinear Q1
Publishing
Michael Sampson
Copyright 2001 Michael Sampson.
Loglinear Publications: http://www.loglinear.com Email: mail@loglinear.com.
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Contents
2 Univariate Calculus 9
2.1 Maximization,Minimization, Concavity, Convexity . . . . . . . . 9
2.2 The Perfectly Competitive Firm . . . . . . . . . . . . . . . . . . 18
2.3 Cost Minimization . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.4 Utility Maximization . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.5 Mark Maximization . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.6 Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.7 Price Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.8 Inverse Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2.9 Product, Quotient and Chain Rules . . . . . . . . . . . . . . . . 52
2.10 Polynomials and Taylor Series . . . . . . . . . . . . . . . . . . . . 54
2.11 Exponential Functions and Logarithms . . . . . . . . . . . . . . . 59
2.12 Linear Regression . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
2.13 Maximum Likelihood . . . . . . . . . . . . . . . . . . . . . . . . . 87
3 Matrix Algebra 92
3.1 Multiplication, Transpose, Determinants and Inverse . . . . . . . 92
3.2 Applications to Econometrics . . . . . . . . . . . . . . . . . . . . 98
3.3 Systems of Equations, Cramers Rule . . . . . . . . . . . . . . . . 113
3.4 Quadratic Forms, Eigenvalues and Eigenvectors . . . . . . . . . . 119
i
CONTENTS ii
Answer
p p a
Assume that p is rational so that: p = b where a and b are integers.
Then:
p a
p= =) a2 = b2 p:
b
Now if integer a has r prime factors (for example 30 has r = 3 factors; i:e:;
30 = 2 3 5 ) then a2 has 2r prime factors (for example 302 has r = 3 2
= 6 factors; i:e:; 302 = 2 2 3 3 5 5 ) and so a2 has an even number
of prime factors: 2r. The same argument applies to b2 ; that is b2 must have an
even number of prime factors; say 2s. From this it follows that b2 p has an odd
number of prime factors 2s + 1 since p is odd. But a2 = b2 p and so a2 has an
odd number of prime factors: 2s + 1. Thus we have shown that a2 has both an
even and an odd number of prime factors, which is a contradiction. Therefore
p
p is irrational.
Problem 2 Prove that there are an innite number of prime numbers. Hint:
suppose that pmax is the largest prime number so that the prime numbers are
2; 3; 5; 7; : : : pmax and consider the number:
n = 2 3 5 7 pmax + 1:
1
CHAPTER 1. THE MATHEMATICAL METHOD 2
Answer
Under the assumption that there are a nite number of primes: 2; 3; 5; 7; : : : pmax
construct the number:
n = 2 3 5 7 : : : pmax + 1:
which is not possible. Since 2; 3; 5; 7; : : : pmax is the list of all primes up to pmax
it must be that p^ > pmax ; which contradicts pmax being the largest prime. Thus
we derive a contradiction if either n is prime or not prime. It follows that there
is no largest prime number.
To make the proof a little more concrete, suppose that one thought that 5
was the largest prime number so that the primes are 2; 3; 4 and 5: Then:
n = 2 3 5 + 1 = 31:
But 31 itself is a prime number (no integer besides 31 and 1 divides 31) and is
greater than 5 which contradicts our belief that 5 was the largest prime number.
p
Problem 3 Consider the function y = x which is plotted below:
30
25
20
15
10
Answer
p
Assume to the contrary that x is bounded so that
p
xc
for all x for some c < 1: Now we are free to choose any x we like so let
x = (c + 1)2 : The then have:
q
p
x = (c + 1)2
= c+1
> c
=) 1 > 0:
p
> 0 contradicts the fact that 0 < 1 the assumption that x c is false
Since 1 p
and so x is unbounded.
Answer
Proof by Induction. Let Sn = 12 + 22 + 32 + + n2 : Clearly S1 = 12 = 1:
Now make the induction hypothesis so we assume that the result is true for
3 2
i < n; in particular for we can assume that: Sn1 = (n1) 3 + (n1)
2 + n1
6 :
Thus:
Sn = 12 + 22 + 32 + + (n 1)2 + n2
| {z }
=Sn1
3
(n 1) (n 1)2 n 1
= + + + n2
3 2 6
n3 3n2 + 3n 1 n2 2n + 12 n 1
= + + + n2
3 2 6
n3 n2 n 2 2
1 1 1
= + + + n + n + (n + n) + +
3 2 6 3 2 6
n3 n2 n
= + + :
3 2 6
Problem 5 Show that the sum of the rst n odd numbers is n2 : For example
the sum of the rst 4 odd numbers is 42 = 16 since:
1 + 3 + 5 + 7 = 16:
CHAPTER 1. THE MATHEMATICAL METHOD 4
13 + 23 + 33 + + n3 = (1 + 2 + 3 + : : : + n)2 :
where
0
=1:
0
1
1 1
1 2 1
1 3 3 1
1 4 6 4 1
1 5 10 10 5 1
where the rst row gives 00 = 1 , the second gives 10 and 11 ; the third 20
2 2 n
, 1 and 2 and so on. To illustrate the generation k consider n = 5 and
k = 3: Going to the fth row we nd that:
5 4 4
10 = = + = 4 + 6:
3 3 2
Answer
For n = 0 and k = 0 we have:
0 0! 1
= = = 1:
0 0!0! 11
CHAPTER 1. THE MATHEMATICAL METHOD 5
Problem 9 Use induction and the previous result to prove the binomial theo-
rem; that:
n n n 0 n n1 1 n n2 2 n 0 n
(x + y) = x y + x y + x y + + x y :
0 1 2 n
Answer
It is clearly true for n = 1 since:
1 1 1 0 1 0 1
(x + y) = x + y = x y + x y :
0 1
(x + y)n = (x + y) (x + y)n1
n 1 n1 0 n 1 n2 1 n 1 n3 2 n 1 0 n1
= (x + y) x y + x y + x y + + x y
0 1 2 n1
n1 n 0 n 1 n1 1 n 1 n2 2 n 1 1 n1
= x y + x y + x y ++ x y
0 1 2 n1
n 1 n1 1 n 1 n2 2 n 1 n3 3 n1 0 n
+ x y + x y + x y + + x y
0 1 2 n1
n1 n 0 n1 n1 n1 n1
= x y + + xn1 y 1 + + xn2 y2
0 1 0 2 1
n1 n1 n1 0 n
+ + + x1 yn1 + x y
n2 n1 n1
CHAPTER 1. THE MATHEMATICAL METHOD 6
By multiplying the two terms in brackets you will nd that the coecient on
xnj y j is
n1 n1 n
+ = :
j j 1 j
Thus:
n n 0 n n1 1 n n2 2 n 0 n
(x + y)n = x y + x y + x y + + x y :
0 1 2 n
fn = fn1 + fn2
with f1 = f2 = 1: Thus:
f3 = f2 + f1 = 1 + 1 = 2
f4 = f3 + f2 = 2 + 1 = 3
f5 = f4 + f3 = 3 + 2 = 5
..
.
p
There is a close link between these numbers and = 1+2 5 = 1:618: For example
the ratio of subsequent numbers approaches ; for example ff54 = 53 = 1:6 :
Use proof by induction to show that:
p n p n
1+ 5
2 12 5
fn = p
5
and from this show that:
p
fn 1+ 5
lim = :
n!1 fn1 2
Answer
For n = 1 we have:
p 1 p 1
1+ 5
12 5 p
2 5
p = p = 1 = f1
5 5
CHAPTER 1. THE MATHEMATICAL METHOD 7
and so the result is true for n = 1: Now we assume the result is true for
1; 2; : : : n 1 and attempt to show it is true for n: Thus:
fn = fn1 + fn2
p n1 p n1 p n2 p n2
1+ 5
2 12 5 1+ 5
2 12 5
= p + p
5 5
p p n2 p n1 p n2
n1
1+ 5
2 + 1+2 5 1 5
2 + 12 5
= p
5
p n2 p p n2 p
1+ 5 1+ 5 1 5 1 5
2 2 + 1 2 2 + 1
= p
5
p n2 p p n2 p
1+ 5 3+ 5
2 2 12 5 3 5
2
= p :
5
But since:
p !2 p p !2 p
1+ 5 3+ 5 1 5 3 5
= ; =
2 2 2 2
we have:
p n2 p 2 p n2 p 2
1+ 5 1+ 5
2 2 12 5 1 5
2
fn = p
5
p n p n
1+ 5
2 12 5
= p
5
and the result is proven.
Now we have:
p n p n
1+ 5 1 5
fn 2 2
= p n1 p n1 :
fn1 1+ 5
2 12 5
p p n p n1
Since 12 5 = 0:618 is a fraction, 12 5 ! 0 as n ! 1 and 12 5 !
CHAPTER 1. THE MATHEMATICAL METHOD 8
0 as n ! 1 so that:
p n p n
1+ 5 1 5
fn 2 2
lim = lim p n1
n!1 fn1 n!1 1+p5 n1 1 5
2 2
p n
1+ 5
2
= lim
n!1 1+p5 n1
2
p
1+ 5
= :
2
Chapter 2
Univariate Calculus
for x > 0: Find f 0 (x) and show that f (x) is globally concave. Find the global
maximum x explaining how you know it is a global maximum. Is f (x) globally
increasing or globally decreasing?
Answer
Since:
1 1 3 1
f 0 (x) = x 2 x2
2 2
1 12 3 12
=) f 0 (x ) = 0 =) (x ) (x ) = 0
2 2
1 1 12
=) (x ) 2 = (x )
3
1 1
=) x = (multipling both sides by (x ) 2 )
3
Similarly:
1 3 3 1
f 00 (x) = x 2 x 2 < 0
4 4
3 1
(since x 2 > 0 and x 2 > 0) so that f (x) is globally concave which in turn
implies that x = 13 is a global maximum. Note that f (x) is neither globally
9
CHAPTER 2. UNIVARIATE CALCULUS 10
1
increasing nor decreasing since f 0 (x) > 0 for x < 3 and f 0 (x) < 0 for x > 13 .
See the plot of f (x) = x1=2 x3=2 below:
0.3
0.2
0.1
-0.2
:
1=2 3=2
f (x) = x x
f (x) = 5x4=5 2x
for x > 0: Find f 0 (x) and show that f (x) is globally concave. Find the global
maximum x explaining how you know it is a global maximum. If f (x) = 0
then what is x?
Answer
We have:
1
f 0 (x) = 4x 5 2
1 1
= 4 x 5 (x ) 5
1
so that f 0 (x) > 0 for x < 32 since: x 5 > (x ) 5 while f 0 (x) < 0 for x > 32
1
1
since x 5 < (x ) 5 :
1
16
14
12
10
8
6
4
2
0 20 40 60 80 100
x
f (x) = 5x4=5 2x
Problem 13 Consider the following function:
f (x) = 3x2=3 5x;
for x > 0: Find f 0 (x) and show that f (x) is globally concave. Find the global
maximum x explaining how you know it is a global maximum. If g (x) =
1
1 + x1 and h (x) = g 3x2=3 5x ; then nd the x which solves the rst-
order conditions for h (x) :
CHAPTER 2. UNIVARIATE CALCULUS 12
Answer
Since:
1
f 0 (x) = 2x 3 5
1
=) f 0 (x ) = 0 =) 2 (x ) 3 5 = 0
1 5
=) (x ) 3 =
2
3
5 8
=) x = = :
2 125
Similarly:
2 4
f 00 (x) = x 3 < 0
3
4
(since x 3 > 0 ) so that f (x) is globally concave which in turn implies that
8
x = 125 is a global maximum. Note that f (x) is neither globally increasing
8 8
nor decreasing since f 0 (x) > 0 for x < 125 and f 0 (x) < 0 for x > 125 . See the
plot of f (x) below:
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
| {z }
f 0 (x )
8
=) x =
125
CHAPTER 2. UNIVARIATE CALCULUS 13
so that:
1
h0 (x ) = 0 =) 2 (x ) 3 5 = 0
8
=) x = :
125
Problem 14 Suppose f (x) is given by:
f (x) = x1=2 x
for x > 0: Find f 0 (x) and show that f (x) is globally concave. Determine the
rst-order conditions and use these to nd that x which maximizes f (x) :Prove
that x is a global
p maximum. Is f (x) globally increasing or globally decreasing?
If h (x) = g ( x x) where g (x) is monotonically increasing, nd the value of
x which maximizes h (x) :
Answer
We have:
1 1
f 0 (x) = x 2 1
2
and f (x) is globally concave since for all x:
1 3
f 00 (x) = x 2 < 0:
4
CHAPTER 2. UNIVARIATE CALCULUS 14
Answer
Since:
1
f 0 (x) = 6x 4 3
1
=) f 0 (x ) = 0 = 6 (x ) 4 3
1 3 1
=) (x ) 4 = =
6 2
4
1
=) x = = 16:
2
CHAPTER 2. UNIVARIATE CALCULUS 15
Since f 0 (x) > 0 for x < 16 and f 0 (x) < 0 for x > 16 as illustrated in the graph
below:
0 5 10 15 20 25
x
f 0 (x)
16
14
12
10
8
6
4
10 20 30 40 50
x
3=4
f (x) = 8x 3x
f (x) = xa xb
for x > 0 where 0 < a < 1 and b > 1: Show that f (x) has a unique global
maximum x , nd x ; and show that f (x) is globally concave.
CHAPTER 2. UNIVARIATE CALCULUS 16
Answer
We have:
+ + +
z}|{z }| { z}|{z }| {
00
f (x) = a (a 1)xa2 b (b 1)xb2 < 0
where a 1 < 0 since a < 1 and b 1 > 0 since b > 1. Therefore f (x) is globally
b ab
1
concave so that x = a is a global maximum.
for x > 0 where 0 < a < 1; A > 0; B > 0 and b > 1: Show that f (x) has a
unique global maximum x , nd x ; and show that f (x) is globally concave.
Answer
We have:
where a 1 < 0 since a < 1 and b 1 > 0 since b > 1. Therefore f (x) is globally
1
Bb ab
concave so that x = Aa is a global maximum.
Use rst order conditions to nd the possible local maxima or minima, Use
second order conditions to determine which are local maxima and which are
local minima. Is the function convex or concave and what are the global minima
and maxima?
Answers
We have:
f 0 (x) = 15x2 8x 2
=) f 0 (x ) = 0 = 15(x )2 8(x ) 2
4 1p
=) x = + 46 = 0:71882
15 15
4 1
p
since x = 15 15 46 = 0:18549 is ruled out by the requirement that x > 0:
Now:
f 00 (x) = 30x 8
so that:
5.5
4.5
3.5
0 0.2 0.4 0.6 0.8 1 1.2
x :
3 2
f (x) = 5x 4x 2x + 5
4 1
p
From the graph it is clear that x = 15 + 15 46 is a global minimum and
4 1
p
that f (x) has no global maximum. To prove that x = 15 + 15 46 is a global
minimum note that:
f 0 (x) = 15x2 8x 2
4 1p 4 1p
= 15 x 46 x + 46
15 15 15 15
4 1
p
and that x 15 15 46 > 0 for x > 0: It follows that f 0 (x) < 0 for x <
4 1
p 0
4 1
p
4 1
p
15 + 15 46 and f (x) > 0 for x > 15 + 15 46 so that x = 15 + 15 46
is a global minimum.
Q = f (L) = L2=3 :
Problem 19 What is the marginal product of labour? Show that this production
function satises the assumption of a diminishing marginal product of labour.
Find prots as a function of L or (L) and show that (L) is globally concave.
Derive the rms demand curve for labour L and determine the elasticity of
demand.
CHAPTER 2. UNIVARIATE CALCULUS 19
Answer
We have a positive marginal product of labour since:
+
z}|{
2 1
M PL (L) = f 0 (L) = L 3 > 0
3
and a diminishing marginal product of labour since:
+
z}|{
2 4
M PL0 (L) = f (L) = L 3 < 0:
00
9
Prots as a function of L is found by replacing Q with L2=3 as:
2
(L) = P L 3 W L RK
so that:
2 1
0 (L) = P L 3 W
3
2 4
(L) = P L 3 < 0 =) (L) is globally concave:
00
9
From the rst-order conditions for prot maximization we have for real wage
w= WP :
2 1
0 (L ) = 0 = P (L ) 3 W
3
13 3W 3
=) (L ) = = w
2P 2
3 3
3 3
=) L = w = w3 :
2 2
Since L has the form: y = Axb the elasticity of demand is the exponent on w
or 3:
Answer
By solving for L from Q = L2=3 we have:
Q = L2=3 =) L = Q3=2 :
CHAPTER 2. UNIVARIATE CALCULUS 20
3
The cost function is then found by replacing L with Q 2 to obtain costs as a
function of Q :
3
= W Q 2 + RK:
C (Q) = W L + RK
Since Q has the form y = Axb with p the 0 x0 variable and Q the 0 y 0 variable,
the elasticity of supply is the exponent on p or 2:
Q = f (L) = 9L1=3 :
What is the marginal product of labour? Show that this production function
satises the assumption of a diminishing marginal product of labour. If one
rewrote f (L) in the form: f (L) = ea+b ln(L) , then what are a and b? Derive
(L) (prots as a function of L) and show that it is concave. Derive the rms
demand curve for labour and determine the elasticity of the demand curve.
Answer
The marginal product of labour is
2
MPL (L) = f 0 (L) = 3L 3 :
CHAPTER 2. UNIVARIATE CALCULUS 21
Since
5
M PL0 (L) = f 00 (L) = 2L 3 < 0
24
22
20
18
16
14
12
10
8
6
4
2 4 6 8 10 12 14 16 18 20
L
f (L)
2 4 6 8 10 12 14 16 18 20
L
M PL (L)
If
so that:
2
0 (L) = 3P L 3 W
5
00 (L) = 2P L 3 < 0 ) (L) is globally concave.
Now from
2
0 (L ) 0 = 3P (L ) 3 W
=
2 1W w
=) (L ) 3 = =
3P 3
W
where w = P is the real wage. It follows that:
2
32 w 32
(L ) 3 =
3
32
1
=) L (w) = w :
3
Q = f (L) = 9L1=3
Answer
1
From Q = 9L 3 it follows that:
3
11 1
L = Q =) L (Q) =
3 Q3 :
9 9
1 3
Therefore cost as a function of Q is found by replacing W L with 9 Q3 as:
C (Q) = W L
3
1
= W Q3 :
9
CHAPTER 2. UNIVARIATE CALCULUS 23
Thus:
3
1
M C (Q) = C 0 (Q) = 3W Q2 > 0:
9
so that marginal cost is positive.
Since:
3
1
C 00 (Q) = MC 0 (Q) = 6W Q>0
9
for all Q it follows that C (Q) is globally convex and marginal cost is increasing.
The is illustrated in the plot below for
0.01
0.008
0.006
0.004
0.002
0 0.5 1 1.5 2
Q :
1 3
C (Q) = W 9 Q3
Answer
Marginal MC (Q) and average cost AC (Q) are:
M C (Q) = C 0 (Q) = 20Q3
C (Q) 5Q4 + 120 120
AC (Q) = = = 5Q3 +
Q Q Q
CHAPTER 2. UNIVARIATE CALCULUS 24
and
1200
1000
800
600
400
200
1 2 3 4 5 :
Q
120
AC (Q) = 5Q3 + Q
Now:
-114
-115
-116
-117
-118
-119
-120
3 0 0.2 0.4 0.6 0.8 1 1.2
Q
(Q) = 10Q 5Q4 + 120
Problem 24 Suppose that the rm has a production function Q = f (L) = L
where 0 < < 1: Derive the rms demand curve for labour L = L (w) and
1
show that the elasticity of demand is 1 while the elasticity of supply is 1 :
Answer
We have:
(L) = P L W L
=) (L ) = P (L )1 W = 0
W w
=) (L )1 = =
P
w 1
1 1
1
1 1
=) L = = w 1 :
1
The elasticity of labour demand is then the exponent on the real wage 1 <0
since < 1:
Now
Q = f (L ) = (L )
1
w 1
=
W 1
=
P
1
W
= P 1 :
CHAPTER 2. UNIVARIATE CALCULUS 26
The elasticity of supply is the exponent on P : 1 > 0 since 0 < < 1.
Show that this production function is globally increasing and concave. Show that
the marginal product of labour: M PL (L) is positive and diminishing. Find the
prot maximizing L when the price the rm receives is P and the nominal wage
is W: Find the rms labour demand curve and prove that the labour demand
curve is downward sloping. Is the elasticity constant?
Answer
We have:
2
1 1
f 0 (L) = 1 + 2
L L
1 2 2
= 1+L L
1
2
= 1+L L
1
= (1 + L)2 = > 0:
(1 + L)2
1
Since f 0 (L) = (1+L)2
it follows that:
3 2
f 00 (L) = 2 (1 + L) = < 0:
(1 + L)3
Therefore f (L) is globally concave. Since M PL (L) = f 0 (L) > 0 and M PL0 (L) =
f 00 (L) < 0 by above the marginal product of labour in positive and diminishing.
Since from prot maximization we know that MPL (L ) = w or
1
= w
(1 + L )2
=) (1 + L )2 = w
1
=) (1 + L ) = w 2
1
=) L = w 2 1:
Therefore:
dL 1 3
= w 2 < 0
dw 2
CHAPTER 2. UNIVARIATE CALCULUS 27
so the labour demand curve is downward sloping. The elasticity is not constant
since:
dL w 1 3 w
(!) = = w 2 1
dw L 2 w 2 1
1
1 w 2
=
2 w 12 1
or as illustrated in the plot below:
-2
-4
-6
-8
-10
-12
-14
-16
-18
-20
1.5 2 2.5 3
w
3.5 4 4.5 5 :
1
w 2
(w) = 1
w 2 1
Q = (L1=2 + K 1=2 )2
Problem 26 Find the short-run production function. Show that the marginal
product of labour is positive and that the diminishing marginal product of labour
assumption is satised.
Answer
The short-run production function is:
Therefore:
+
z}|{
1
MPL (L) = f (L) = 1 + 4L 2 > 0
0
CHAPTER 2. UNIVARIATE CALCULUS 28
and
+
z}|{
3
M PL0 (L) = f 00 (L) = 2L 2 < 0:
Answer
From the prot maximizing condition
W
MPL (L ) = w =
P
we have:
1
1 + 4 (L ) 2 = w
1 1
=) (L ) 2 = (w 1)
4
2
1 16
=) L = (w 1) = :
4 (w 1)2
Problem 28 Find the rms cost function C(Q) , marginal cost and show that
C 00 (Q) > 0:
Answer
Solving Q = (L1=2 + 161=2 )2 for L we nd that:
1 2
Q = (L1=2 + 4)2 =) L = Q 2 4
1
=) L = Q 8Q 2 + 16:
1
with Q 8Q 2 + 16 we obtain:
Replacing L in C = W L + RK
1
C (Q) = W Q 8Q 2 + 16 + RK
1
=) M C (Q) = C 0 (Q) = W 1 4Q 2
3
=) M C 0 (Q) = C 00 (Q) = 2W Q 2 > 0:
CHAPTER 2. UNIVARIATE CALCULUS 29
Answer
Simplifying (in excruciating detail) we have:
2
1 ln L10 =80ln L 16 12 ln( 14 )
f (L) = L 4 e ( )
p
= L 4 e10 ln(L)=80+ 16 ln(L)+ln( 4)
1 2
1 1
= L 4 e 4 ln(L)+ln(2)
1 1
= L 4 e 4 ln(L) eln(2)
1
14
= L 4 eln(L) 2
1 1
= 2L 4 L 4
1
= 2L 2 :
Thus f (L) is a disguised Cobb-Douglas production function. Therefore:
1
M PL (L) = f 0 (L) = L 2
and
1 3
M PL0 (L) = f 00 (L) = L 2 < 0
2
so there is a diminishing marginal product of labour. From the prot maximizing
condition:
MPL (L ) = w
we have:
1
(L ) 2 = w
1
=) L = w2 =
w2
so that the elasticity of demand is 2:
Problem 30 Suppose in the short-run a perfectly competitive rm faces a price
P; a nominal wage W; a rental cost of capital R; and a xed amount of capital
The rms short-run production function relating Q output to L labour is
K:
given by:
1
2
Q = f (L) = 1 + L 2 :
CHAPTER 2. UNIVARIATE CALCULUS 30
What is the marginal product of labour? Show that this production function
satises the assumption of a diminishing marginal product of labour. Derive the
rms demand curve for labour L and show that the demand curve for labour
is downward sloping if W > P . Find the rms cost function C (Q), calculate
MC (Q) and show that C (Q) is globally convex. Would the rm ever produce
where Q < 1?
Answer
The derivations are a little easier if f (L) is rst simplied as:
1
2
Q = f (L) = 1 + L 2
1
= 1 + 2L 2 + L:
The marginal product of labour is then given by:
1
MPL (L) = f 0 (L) = 1 + L 2
and the assumption of a diminishing marginal product of labour is satised
since:
+
z}|{
1 3
M PL0 (L) = f 00 (L) = L 2 < 0:
2
1
To nd prots as a function of L replace Q with 1 + 2L 2 + L as:
1
(L) = P 1 + 2L 2 + L W L RK
1
=) 0 (L ) = 0 = P 1 + (L ) 2 W
W
1
=) (L ) 2 = 1 =w1
P
1
=) L = (w 1)2 = :
(w 1)2
Therefore assuming w > 1:
dL 2
= < 0:
dw (w 1)3
To obtain C (Q) note that:
1
2 1 2
Q = 1 + L 2 =) L = Q 2 1
1 2
so that replacing L with Q 2 1 yields cost as a function of Q as:
C (Q) = W L + +RK
1 2
= W Q 2 1 + RK
1
= W Q 2Q 2 + 1 + RK:
CHAPTER 2. UNIVARIATE CALCULUS 31
Thus:
1
M C (Q) = W 1 Q 2
and
1 3
C 00 (Q) = W Q 2 > 0 =) C (Q) is globally convex.
2
Note that M C (Q) < 0 for Q < 1 and since M C (Q) = P > 0 the rm would
always produce at Q > 1:
and is faced with the problem of choosing L and K (we are in the long-run now!)
to minimize cost of producing a xed Q or:
W L + RK:
C (L) = W L + RK
= W L + RQ2 L1 :
Thus:
C 0 (L ) = W RQ2 (L )2 = 0
W
=) (L )2 = Q2
R
1 1
=) L = QW 2 R 2 :
K = Q2 (L )1
1 1
1
= Q2 QW 2 R 2
1 1
= QW 2 R 2 :
CHAPTER 2. UNIVARIATE CALCULUS 32
C = W L + RK
1 1 1 1
= W QW 2 R 2 + RQW 2 R 2
1 1 1 1
= QW 2 R 2 + QW 2 R 2
1 1
= 2QW 2 R 2 :
Note that
dC 1 1
= QW 2 R 2 = L
dW
dC 1 1
= QW 2 R 2 = K
dR
which illustrates Shephards lemma.
Q = L K
and is faced with the problem of choosing L and K (we are in the long-run) to
minimize cost of producing a xed Q or:
W L + RK:
Q = L K =) K = QL
1
=) K = Q L
C (L) = W L + RK
1
= W L + RQ L :
Thus:
1
C 0 (L ) = W RQ (L ) 1 = 0
1 W
=) (L ) 1 = Q
R
(+) 1 W
=) (L ) = Q
R
+ +
W 1
=) L = Q +
R
+
1
=) L = W + R + Q + :
CHAPTER 2. UNIVARIATE CALCULUS 33
The household has income Y = 10; the price of Q1 is P1 and the price of Q2 is
P2 = 5 so that the budget constraint is:
10 = P1 Q1 + 5Q2 :
Answer
From the budget constraint:
10 P1 Q1 P1
Q2 = =2 Q1
5 5
so that
P1
U (Q1 ) = 0:4 ln (Q1 ) + 0:6 ln 2 Q1
5
CHAPTER 2. UNIVARIATE CALCULUS 34
Y = P1 Q1 + P2 Q2 :
Find the utility maximizing Q1 . What is the elasticity of demand for Q1 and
the income elasticity of demand for Q1 ?
Answer
First solve for Q2 as a function of Q1 as:
Y P1 Q1 Y P1
Q2 = = Q1
P2 P2 P2
and use this to write U as a function of Q1 only as:
Y P1
U (Q1 ) = 0:3 ln (Q1 ) + 0:7 ln Q1 :
P2 P2
CHAPTER 2. UNIVARIATE CALCULUS 35
Dierentiating U (Q1 ) with respect to Q1 and using the chain rule for the second
term yields:
0:3 P1 0:7
U 0 (Q1 ) =
Q1 P2 Y
P2 PP2 Q1
1
0:3 P1 0:7
=) =
Q1 P2 P
Y
P2
P2 Q1
1
0:3 0:7
=) = P1
Q1 Y P1 Q1
=) 0:3 (Y P1 Q1 ) = 0:7P1 Q1
=) 0:3Y = P1 Q1
0:3Y
=) Q1 = = 0:3Y 1 P11 :
P1
The income elasticity is the exponent on Y or 1 while the own price elasticity
is the exponent on P1 or 1:
U = ln (Q1 ) + (1 ) ln (Q2 ) :
where: 0 < < 1: The household has income Y; the price of Q1 is P1 and the
price of Q2 is P2 so that the income constraint is:
Y = P1 Q1 + P2 Q2 :
Find the utility maximizing Q1 . What is the elasticity of demand for Q1 and
the income elasticity of demand for Q1 ? What does the taste parameter de-
termine?
Answer
First solve for Q2 as a function of Q1 as:
Y P1 Q1 Y P1
Q2 = = Q1
P2 P2 P2
and use this to write U as a function of Q1 only as:
Y P1
U (Q1 ) = ln (Q1 ) + (1 ) ln Q1 :
P2 P2
CHAPTER 2. UNIVARIATE CALCULUS 36
Dierentiating U (Q1 ) with respect to Q1 and using the chain rule for the second
term yields:
P1 (1 )
U 0 (Q1 ) =
Q1 P2 Y
P2 P P2 Q1
1
P1 (1 )
U 0 (Q1 ) = 0=
Q1 P2 Y
P2P
P2 Q1
1
P1 (1 )
=) =
Q1 P2 Y
P2 P
P2 Q1
1
(1 )
=) = P1
Q1 Y P1 Q1
=) (Y P1 Q1 ) = (1 ) P1 Q1
=) Y = P1 Q1
Y
=) Q1 = = Y 1 P11 :
P1
The income elasticity is the exponent on Y or 1 while the own price elasticity
is the exponent on P1 or 1: Since:
P1 Q1
=
Y
the taste parameter determines the budget share of good 1: Thus if = 0:4
then the household always spends 40% of its income on good 1:
Y = P1 Q1 + P2 Q2 :
Find the utility maximizing Q1 . What is the elasticity of demand for Q1 and
the income elasticity of demand for Q1 ?
Answer
First solve for Q2 as a function of Q1 as:
Y P1 Q1 Y P1
Q2 = = Q1
P2 P2 P2
CHAPTER 2. UNIVARIATE CALCULUS 37
Answer
First solve for Q2 as a function of Q1 as:
Y P1 Q1 Y P1
Q2 = = Q1
P2 P2 P2
CHAPTER 2. UNIVARIATE CALCULUS 38
Dierentiating U (Q1 ) with respect to Q1 and using the chain rule for the second
term yields:
0 0 P1 0 Y P1
U (Q1 ) = U1 (Q1 ) U Q1
P2 2 P2 P2
U10 (Q1 ) U 0 (Q )
= 2 2
P1 P2
or the household allocates goods so that the marginal utility of each good divided
by its price is the same for both goods.
To show that both goods are normal write Q1 (Y ); that is the demand for
good 1 as a function of income Y: From the rst-order condition then we have:
0 P1 0 Y P1
U1 (Q1 (Y )) = U Q (Y ) :
P2 2 P2 P2 1
Dierentiating both sides with respect to Y and using the chain rule yields:
dQ1 (Y ) P1 00 Y P1 1 P1 dQ1 (Y )
U100 (Q1 (Y )) = U2 Q1 (Y )
dY P2 P2 P2 P2 P2 dY
P1 00 Y P1
dQ1 (Y ) (P2 )2 U2 P2 P2 Q1 (Y )
=) = 2
dY
U100 (Q1 (Y )) + P12 U200 PY2 P
P
P2 Q1 (Y )
1
P1 U200 PY2 P P2
1
Q
1 (Y )
= >0
P2 U1 (Q1 (Y )) + P1 U200 PY2 P
2 00 2 1
P2 1Q (Y )
since U100 < 0 and U200 < 0 implies that both the numerator and denominator are
CHAPTER 2. UNIVARIATE CALCULUS 39
= > 0:
P22 U100 (Q1 (Y )) + P12 U200 PY2 P
P2 Q1 (Y )
1
Answer
For question 1:
+
z}|{
M10 (t1 ) = 60et1 > 0 =) marginal mark is positive
+
z}|{
M100 (t1 ) = 60et1 < 0 =) diminishing marginal mark.
M (t1 ) = M1 (t1 ) + M2 (1 t1 )
= 60 1 et1 + 40 1 e(1t1 )
so that:
Thus t2 = 1 t1 = 1 0:702 = 0:297: Thus the student spends about 70% of the
time on question 1 (about 42 minutes) and about 30% of the time on question
2 (about 18 minutes). The student receives a grade of:
M (t1 ) = 60 1 e0:702 + 40 1 e(10:702)
= 40:572
40
38
36
34
32
30
28
26
0 0.2 0.4 0.6 0.8 1
M (t1 ) = 60 (1 et1 ) + 40 1 e(1t1 )
Problem 39 Suppose you are writing an exam with two questions. Let t1 be
the amount of time you spend on question 1 and t2 the amount of time your
spend on question 2: Let M1 (t1 ) = 0:6 ln (t1 ) be the mark you get on question 1
and let M2 (t2 ) = 0:4 ln (t2 ) be the mark you get on question 2 so that your total
grade is:
Let
T = t1 + t2
be the total time you have to write the exam. Find t1 and t2 ; the optimal
amount of time to spend on each question, and prove that what you nd is a
global maximum.
Answer
By replacing t2 with T t1 we have:
so that:
0:6 0:4
M 0 (t1 ) =
t1 T t1
0:6 0:4
=) M 0 (t1 ) = 0 =
t1 T t1
0:6 0:4
=) =
t1 T t1
=) 0:6 (T t1 ) = 0:4t1
=) t1 = 0:6T:
Since t2 = T t1 we have:
t2 = 0:4T
so that it optimal to spend 60% of the time on question 1 and 40% on question
2:
t1 = 0:6T is a global maximum since:
0:6 0:4
M 00 (t1 ) = 2 <0
t1 (T t1 )2
Problem 40 Suppose you are writing an exam with two questions. The mark
you receive on question 1 is M1 (t1 ) and the mark on question 2 is: M2 (t2 )
where t2 is the time spent on question 2: Find rule the optimal amount of time
t1 and t2 that you would spend on each question. Show that the solution to the
rst-order conditions is a global maximum if M1 (t1 ) and M2 (t2 ) are concave.
Show that t1 and t2 are normal goods, that is if T increases (the instructor gives
you more time) then both t1 and t2 increase.
Answer
We have:
t2 = T t1
M (t1 ) = M1 (t1 ) + M2 (T t1 )
so that M (t1 ) is globally concave and the solution to the rst-order conditions
is a global maximum.
We can write t1 (T ) ; that is the optimal amount of time spent on question
1 will depend on the amount of time available. This satises:
Dierentiating both sides with respect to T and using the chain rule we nd
that:
00 dt1 (T ) 00 dt1 (T )
M1 (t1 (T )) = M2 (T t1 (T )) 1
dT dT
dt1 (T ) M200 (T t1 (T ))
=) = 00 >0
dT M1 (t1 (T )) + M200 (T t1 (T ))
since given M100 (t1 ) < 0 and M200 (t2 ) < 0 both the numerator and denominator
dt
1 (T )
are negative. Furthermore since t2 (T ) = T dT we have:
dt2 (T ) dt1 (T )
= 1
dT dT
M200 (T t1 (T ))
= 1
M100 (t1 (T )) + M200 (T t1 (T ))
M100 (T t1 (T ))
= > 0:
M1 (t1 (T )) + M200 (T t1 (T ))
00
2.6 Monopoly
The next two problems are based on the following information: Con-
sider a monopolist who faces an inverse demand function of the form:
so that unlike the perfectly competitive rm a monopolist must reckon with the
fact that selling more will cause the price he receives to drop. Revenue for the
monopolist is given by:
R (Q) = P (Q) Q;
CHAPTER 2. UNIVARIATE CALCULUS 43
Answer
Prots are given by:
(Q) = R (Q) C (Q)
= P (Q) Q C (Q)
so that the rst-order condition for prot maximization is:
0 (Q ) = R0 (Q ) C 0 (Q )
= MR (Q ) MC (Q )
=) MR (Q ) = MC (Q ) :
Problem 42 Use proof by contradiction to show that if P 0 (Q) < 0 then the
monopolist who equates marginal revenue with marginal cost will produce less
output than a perfectly competitive industry where price equals marginal cost.
Answer
Let PM and QM be the monopolists price and output and let PC and QC
be the competitive level of output.
Assume for the sake of argument that QM QC . Since P 0 (Q) < 0 we have:
P (QM ) P (QC )
=) P (QC ) P (QM ) 0:
Since M C 0 (Q) > 0 we have:
QM QC =) M C (QM ) M C (QC ) :
Therefore:
M R (QM ) = M C (QM ) MC (QC ) = P (QC )
=) M R (QM ) = P (QM ) + P 0 (QM ) QM P (QC )
=) P 0 (QM ) QM P (QC ) P (QM ) 0
=) P 0 (QM ) 0:
CHAPTER 2. UNIVARIATE CALCULUS 44
Answer
We have:
(L) = P (Q) Q W L
= A (BL )1 W L
AB 1 L(1) W L
=) 0 (L ) = 0 = (1 ) AB 1 (L )(1)1 W
W
=) (L )(1)1 =
(1 ) AB 1
1(1)
1
W
=) L =
(1 ) AB 1
so that:
Q = B (L )
1(1)
1 !
W
= B :
(1 ) AB 1
1
Problem 44 If the inverse demand is P (Q) = Q 2 ; W = 2 and the monopo-
1
lists technology is Q = f (L) = L 3 nd the prot maximizing level of output.
Answer
We have:
(L) = P (Q) Q W L
1
= L 6 2L
1 56
=) 0 (L ) = 0 = (L ) 2
6
5
=) (L ) 6 = 12
6
=) L = (12) 5
so that:
1
6
13
Q = (L ) 3 = (12) 5
2
= (12) 5 :
CHAPTER 2. UNIVARIATE CALCULUS 45
Problem 45 Given the demand curve: Q = P105 what is the elasticity of de-
mand? Is demand elastic or inelastic? If Q (P ) = P105 + 5 then what is the
elasticity of demand when P = 1? Prove that if revenue is given by: R (P ) =
P Q (P ) then for any demand curve R0 (P ) = Q (P ) (1 + (P )) where (P )
is the elasticity of demand. If a rm maximizes sales (instead of prots) at P ;
then what will the elasticity of demand be?
Answer
The elasticity of demand is = 5: Demand is elastic since < 1:
If Q (P ) = P105 + 5 Solution: then Q0 (P ) = P506 so that:
Q0 (P ) P 50P 5
(P ) = =
Q (P ) 10P 5 + 5
and hence:
50
(1) = = 3:33:
10 + 5
In general (P ) varies with P as shown below:
P
1 2 3 4 5
0
-1
-2
-3
-4
-5
50P 5
Plot of (P ) = 10P 5 +5
Answer
Revenue and marginal revenue are given by:
3
R (Q) = P (Q) Q = 2Q 4
3 1
=) MR (Q) = R0 (Q) = Q 4 :
2
CHAPTER 2. UNIVARIATE CALCULUS 46
The inverse demand curve P (Q) and marginal revenue curve M R (Q) are plot-
ted below:
2.4
2.2
2
1.8
1.6
1.4
1.2
1
0.8
5 10 15 20 25
Q
30
25
20
15
10
5
0.6 0.8 1 1.2 1.4
Q
From M R (Q ) = MC (Q ) we have:
3 14
(Q ) = 15 (Q )2
2
3 1
=) (Q )2+ 4 =
2 15
49
1
=) Q = = 0:36:
10
CHAPTER 2. UNIVARIATE CALCULUS 47
Therefore:
49 ! 14
14 1 1
P = 2 (Q ) =2 = 2 10 9 = 2:5831:
10
R1 (Q1 ) = P1 (Q1 ) Q1 ;
R2 (Q2 ) = P2 (Q2 ) Q2
where 1 (Q1 ) = ~1 < 0 is the elasticity of the inverse demand curve which is
1
the inverse of the elasticity of the demand curve ~1 : Similarly for market 2:
where 2 (Q2 ) = ~1 < 0 is the elasticity of the inverse demand curve which is
2
the inverse of the elasticity of the demand curve ~2 : Suppose that the rm has
already chosen the prot maximizing total level of output Q = Q1 + Q2 :
Problem 47 What rule should the rm use to decide how much of Q to allocate
to the two markets; for example with an airline, how many seats should be
economy and how many should be business class.
CHAPTER 2. UNIVARIATE CALCULUS 48
Answer
Since Q is xed so too are costs. The rm therefore needs to allocate Q
amongst Q1 and Q2 so as to maximize the revenue it makes given by:
R = R1 (Q1 ) + R2 (Q2 ) :
We can write R as a function of Q1 alone using:
Q2 = Q Q1
so that:
R (Q1 ) = R1 (Q1 ) + R2 (Q Q1 ) :
Dierentiating with respect to Q1 and using the chain rule to dierentiate
R2 (Q Q1 ) with respect to Q1 we nd that :
R0 (Q1 ) = R01 (Q1 ) R02 (Q Q1 )
= MR1 (Q1 ) M R2 (Q Q1 )
=) R0 (Q1 ) = 0 = MR1 (Q1 ) M R2 (Q Q1 )
=) MR1 (Q1 ) = M R2 (Q2 )
where: Q2 = Q Q1 : Thus the rst should allocate Q1 and Q2 between the two
markets so as to equate marginal revenue in each market.
This in turn implies that:
P1 (Q1 ) (1 + 1 (Q1 )) = M R1 (Q1 ) = M R2 (Q2 ) = P2 (Q2 ) (1 + 2 (Q2 ))
or:
P1 (Q1 ) (1 + 1 (Q1 )) = P2 (Q2 ) (1 + 2 (Q2 ))
or:
1
P1 (Q1 ) (1 + 2 (Q2 )) 1+
~2
= = :
P2 (Q2 ) (1 + 1 (Q1 )) 1+ 1
~1
From this it follows that if ~2 < ~1 so that demand is more elastic in market
2 than market 1; or equivalently if 1 (Q1 ) > 2 (Q2 ) ; then P2 < P1 : Thus the
rm charges the higher price to the market where demand is more inelastic or
more price insensitive.
Problem 48 Suppose that the inverse demand for economy seats and business
class seats is given respectively by:
14 1
P1 = A1 Q1 , P2 = A2 Q2 2 :
What will P
P2 ; the ratio of the price of economy seats to business class seats be?
1
Answer
Here since the demand curves take the form y = Axb the elasticity of
demand is constant for both markets with ~1 = 4 and ~2 = 2: We therefore
have:
1 1
P1 1 +
~2 1 + 2 2
= = =
P2 1+ 1
1+ 1 3
~1 4
2
so that P1 = 3 P2 :
Thus economy seats will be two-thirds the price of business
class seats.
To calculate Q1 and Q2 we use:
1
A1 Q1 (1 1 ) = A2 (Q Q1 )2 (1 2 )
1
12 A1 (1 1 ) 2
=) (Q1 ) = (Q Q1 )
A2 (1 2 )
1 1
12 A1 (1 1 ) 2 A1 (1 1 ) 2
=) (Q1 ) + Q1 Q=0
A2 (1 2 ) A2 (1 2 )
so that:
1 1
A1 (1 1 ) 2 A1 (1 1 ) 2
(Q1 )2 + Q1 Q = 0:
A2 (1 2 ) A2 (1 2 )
Answer
Dierentiating both sides of f (g (x)) = x with respect to x and using the
chain rule leads to:
f 0 (g (x)) g 0 (x) = 1:
Since f 0 (g (x)) > 0 it follows that
1
g 0 (x) = > 0:
f 0 (g (x))
Dierentiating both sides of f 0 (g (x)) g0 (x) = 1 with respect to x and using
the chain and product rules leads to:
f 00 (g (x)) g 0 (x)2 + f 0 (g (x)) g 00 (x) = 0
+
z }| {z }| {
f 00 (g (x))g 0 (x)2
=) g 00 (x) = > 0:
f 0 (g (x))
| {z }
+
CHAPTER 2. UNIVARIATE CALCULUS 50
Problem 50 If
3
1
f (x) = p
x
then what is the inverse function and what is the elasticity of the inverse func-
tion?
Answer
If
3
1 3
f (x) = p = x 2
x
2
=) g (x) = x 3
since:
3 23 3 2
g (f (x)) = x 2 = x 2 3 = x1 = x
2 32 2 3
f (g (x)) = x 3 = x 3 2 = x1 = x:
Q = Q (P ) = AP
Answer
Here:
1 1
P (Q) = A Q :
Since both Q (P ) and P (Q) have the form Axb the elasticity of Q (P ) is
while the elasticity of P (Q) is 1 :
Answer
Problem 53 If g (x) and f (x) are two functions, then what does the chain rule
give as the derivative of h (x) = f (g (x)) is? If g (x) is the inverse function of
f (x) then what is f (g (x)) equal to? Under what conditions does an inverse
function exist? What is the inverse function of f (x) = x2 for 1 < x < 1?
What is the inverse function of f (x) = x2 for 0 < x < 1? Show that f (x) =
x2 + 3x + 5 for x > 0 has an inverse function. Show that if f (x) is a globally
decreasing and convex function then its inverse function g (x) is convex.
Answer
We have using the chain rule:
and if f (x) and g (x) are inverses then f (g (x)) = x: To have an inverse we
require f 0 (x) > 0 or f 0 (x) < 0 for all x in the domain of f (x) : If f (x) = x2
for 1 < x < 1 then f (x) does not have an inverse since f 0 (x) = 2x > 0 for
x > 0 and f 0 (x) = 2x < 0 for x < 0: For f (x) = x2 with 0 < x < 1 the inverse
1
function is f (x) = x 2 since f 0 (x) > 0 for x > 0:
Now dierentiating both sides of f (g (x)) = x with respect to x we obtain:
f 0 (g (x)) g 0 (x) = 1:
1
Since f 0 (g (x)) < 0 it follows that g0 (x) = f 0 (g(x)) < 0: Again dierentiating
with respect to x we obtain:
f (x) = x2 + 2x + 1:
Answer
Since:
it follows that f (x) has an inverse function. If y = g (x) then f (g (x)) = x or:
f (y) = y 2 + 2y + 1 = x
=) (y + 1)2 = x
1
=) y + 1 = x 2
1
=) g (x) = y = x 2 1:
A more careful analysis would explain why we take the positive and not the
negative square root of x in the third line.
f (x) = x2 2x + 1:
Show that f (x) does not have an inverse function. Show how by restricting the
domain of f (x) further you can allow for the existence of an inverse function.
Answer
Since:
f 0 (x) = 2x 2
so that f 0 (x) < 0 for x < 12 and f 0 (x) > 0 for x > 12 it follows that f (x) is not
monotonic and hence has no inverse function.
If we restrict the domain of f (x) so that x > 12 (or 0 < x < 12 will do too)
then f 0 (x) < 0 and so f (x) is monotonic. If we dene y = g (x) then:
f (y) = y 2 2y + 1 = x
=) (y 1)2 = x
1
=) y 1 = x 2
1
=) g (x) = y = x 2 + 1:
Answer
We have from the chain rule that:
Answer
Dierentiating AC(Q) and using the quotient rule we nd that:
dAC(Q) QC 0 (Q) C (Q)
=
dQ Q2
0 C(Q)
Q C (Q) Q
=
Q Q
M C (Q) AC (Q)
= :
Q
Since the denominator Q is positive we have:
dAC(Q)
> 0 , MC (Q) > AC (Q)
dQ
dAC(Q)
< 0 , MC (Q) < AC (Q) :
dQ
Problem 58 If h (x) = f (g (x)) then what does the chain rule say h0 (x) is?
If h (x) = F (g1 (x) ; g2 (x)) then what is h0 (x)? Suppose Q = f (L) where
f 0 (L) > 0 and f 00 (L) < 0: If the demand for labour is: L = g (w) dened
by: f 0 (g (w)) = w; then show that g0 (w) < 0:
Problem 59 Suppose that W (t) is the nominal wage at time t and P (t) is the
price level at time t so that the real wage at time t is:
W (t)
w (t) = :
P (t)
w0 (t) W 0 (t)
The growth rate of w (t) is ! (t) = w(t) ; the growth rate of W (t) is (t) = W (t)
P 0 (t)
and the growth rate of P (t) (i.e., the rate of ination) is (t) = P (t) : Prove
that:
! (t) = (t) (t) :
using 1) the quotient rule 2) the product rule, and 3) the chain rule. For example
if nominal wages increase by 10% and ination is 4% then real wages increase
by 10% 4% = 6%:
CHAPTER 2. UNIVARIATE CALCULUS 54
Answer
Using the quotient rule we have:
P (t) W 0 (t) W (t) P 0 (t)
w0 (t) =
P (t)2
w0 (t)
=) ! (t) =
w (t)
P (t)W 0 (t)W (t)P 0 (t)
P (t)2
= W (t)
P (t)
0 0
W (t) P (t)
=
W (t) P (t)
= (t) (t) :
To use the product rule write W (t) = w (t) P (t) and apply the product rule.
To use the chain rule apply ln () to both sides of w (t) = W (t)
P (t) to obtain:
Answer
We have using the chain rule that:
+ +
z }| {z }| {
h0 (x) = g0 (f (x))f 0 (x) > 0:
Dierentiating again with respect to x we obtain:
+ +
z }| {z }| { z }| {z }| {
2
h00 (x) = g00 (f (x))f 0 (x) + g 0 (f (x))f 00 (x) < 0:
Answer
We have:
f 0 (x) = 15x2 8x 2
=) f 0 (x ) = 0 = 15 (x )2 8x 2
q
(8) (8)2 4 (15) (2)
=) x =
2 (15)
4 1 p
=) x = + 46 = 0:719:
15 15
4 1
p
The other root: 15 15 46 is negative and hence is not in the domain of f (x) :
Now:
f 00 (x) = 30x 8:
Since:
5.5
4.5
3.5
0 0.2 0.4 0.6 0.8 1 1.2
x :
3 2
f (x) = 5x 4x 2x + 5
From the graph it appears that x is in fact a global minimum even though
f (x) is not globally convex. We can prove this by factoring f 0 (x) as:
f 0 (x) = 15x2 8x 2
4 1p 4 1p
= 15 x + 46 x 46 :
15 15 15 15
CHAPTER 2. UNIVARIATE CALCULUS 56
From this you can show that f 0 (x) < 0 for 0 < x < x since this implies that:
4 1p 4 1p
x + 46 < 0; x 46 >0
15 15 15 15
=) f 0 (x) < 0:
Similarly for x > x we have:
4 1p 4 1p
x + 46 >0; x 46 >0
15 15 15 15
=) f 0 (x) > 0:
4 1
p
Thus x = 15 + 15 46 is a global minimum. (This would not be the case if
the domain were not restricted to x > 0 ):
3
Problem 62 If f (x) = x3 2x2 + 3x + 7 nd the solutions to the rst-order
conditions (i.e., any local maxima or minima). Given any function f (x) what
is the formula for f~ (x): the second order Taylor series approximation of f (x)
around x = xo ? What kind of function is f~ (x)? If f (x) = x2 ex nd the second
order Taylor series approximation f~ (x) around xo = 1:
Answer
Since:
f 0 (x) = x2 4x + 3
=) f 0 (x ) = 0 = (x )2 4x + 3
q
(4) (4)2 4 3
=) x =
2
=) x1 = 1; x2 = 3:
The formula for the second order Taylor series, which is a quadratic or a
second degree polynomial, around x0 is:
f 00 (x0 )
f~ (x) = f (x0 ) + f 0 (x0 ) (x x0 ) + (x x0 )2 :
2
For f (x) = x2 ex and x0 = 1 we have:
f (1) = 12 e1 = e1
f 0 (x) = 2xex x2 ex =) f 0 (1) = 2 1 e1 12 e1 = e1
f 00 (x) = 2ex 4xex + x2 ex =) f 00 (1) = 2 e1 4 e1 + 12 e1 = e1
so that the Taylor series is:
1
e
f~ (x) = e1 + e1 (x 1) (x 1)2
! 2
2
(x 1)
= e1 x :
2
CHAPTER 2. UNIVARIATE CALCULUS 57
The actual function f (x) = x2 ex and the Taylor series around x0 = 1 are
plotted below:
0.4
0.2
x
1 2 3 4 5
0
-0.2
-0.4
-0.6
-0.8
-1
Answer
Since for f (x) = x3 6x2 + 9x + 7
Since:
f 00 (x) = 6x 12
and
f 00 (1) = 6 1 12 = 6 < 0
f 00 (3) = 6 3 12 = 6 > 0
CHAPTER 2. UNIVARIATE CALCULUS 58
11
10
7
0 1 2 3 4
x
f (x) = x3 6x2 + 9x + 7
The formula for the second order Taylor series, which is a quadratic or a
second degree polynomial, around x0 is:
f 00 (x0 )
f~ (x) = f (x0 ) + f 0 (x0 ) (x x0 ) + (x x0 )2 :
2
For f (x) = ln 1 x2 and x0 = 0 we have:
0
f (0) = ln 1 =0
2
1 1 1
f 0 (x) = =) f 0 (0) = =
2 1 12 x 2 1 12 0 2
1 1 1
f 00 (x) = 00
2 =) f (0) = =
1 1 2 4
4 1 2x 4 1 20
plotted below:
0.4
0.2 x
-1.5 -1 -0.5 0.5 1 1.5
0
-0.2
-0.4
-0.6
-0.8
-1
-1.2
-1.4
f (x) = ln 1 x2 and f~ (x)
Answer
We have that f (x) can be simplied since:
3
x
f (x) = ln 4x = 3 ln (x) 4x ln (2) :
2
Therefore:
3
f 0 (x) = 4
x
3
=) f 0 (x ) = 0 = 4
x
3
=) x = = 0:75:
4
Now:
3
f 00 (x) = <0
x2
CHAPTER 2. UNIVARIATE CALCULUS 60
3
so that f (x) is globally concave. It follows that x = 4 is a global maximum.
This is illustrated in the graph below:
-4.6
-4.8
-5
-5.2
-5.4
-5.6
-5.8
-6
-6.2
-6.4
-6.6
0.2 0.4 0.6 0.8 1
x
1.2 1.4 1.6 1.8 2 :
3
x
f (x) = ln 2 4x
Answer
We have:
f 0 (x) = 3e2x 2 (3x 1) e2x
= e2x (5 6x) :
=) f 0 (x ) = 0 = e2x (5 6x )
=) 5 6x = 0
since e2x > 0: Therefore:
5
x = :
6
Now:
f 00 (x) = 12e2x + 4 (3x 1) e2x
= e2x (12x 16)
Since:
5
00
f = e2x (12x 16) jx= 56
6
5
= 6e 3 < 0
CHAPTER 2. UNIVARIATE CALCULUS 61
0.2
x
1 2 3 4
0
-0.2
-0.4
-0.6
-0.8
-1
:
f (x) = (3x 1)e2x
for x > 0: Calculate f 0 (x) and the local maxima or minima of f (x) : Calculate
h (x) = ln (f (x)) ; and h0 (x) : What are the local maxima and minima of h (x) :
Is h (x) concave or convex? Explain. Can this be used to determine which of
the local maxima or minima of f (x) and h (x) are global maxima or minima?
Explain.
Answer
Since:
1 2 1 2
f 0 (x) = 3x2 e 2 x x4 e 2 x
1 2
= x2 e 2 x 3 x2
1 2
=) f 0 (x ) = 0 = (x )2 e 2 (x )
3 (x )2
=) 3 (x )2 = 0
CHAPTER 2. UNIVARIATE CALCULUS 62
2
since (x )2 > 0 and e 2 (x
1
)
> 0 (because x > 0 and ex > 0 for all x): Therefore:
p
x = 3 = 1:7321:
p
Note we exclude x = 3 since the domain is restricted to x > 0: Note that
f (x) is not globally concave since:
1 2 1 2 1 2
f 00 (x) = 6xe 2 x 7x3 e 2 x + x5 e 2 x
1 2
= e 2 x x 6 7x2 + x4
1 2
= e 2 x x x2 1 x2 6 :
1 2
2x
2 x >
Since 20 and e > 0 it follows that the sign of f 00 (x) will depend on
x 1 x 6 : We have:
z }| {z }| {
for 0 < x < 1 =) x2 1 x2 6 > 0 =) f 00 (x) > 0 =) f (x) is convex
+
p z }| {z }| {
for 1 < x < 6 =) x2 1 x2 6 < 0 =) f 00 (x) < 0 =) f (x) is concave
+ +
p z }| {z }| {
for x > 6 =) x2 1 x2 6 > 0 =) f 00 (x) > 0 =) f (x) is convex.
p p
Thus fp(x) is convex for 0 < x < 1 and x > 6 but concave for 1 < x < 6
(note 6 = 2:4495) and hence is neither globally concave nor globally convex.
This is illustrated in the plot below:
0.8
0.6
0.4
0.2
0 1 2 3 4
x
2
f (x) = x3 ex =2
2
Since f (x) = x3 ex =2 is neither
p globally concave nor globally convex, we
dont know at this stage if x = 3 is a global maximum although it certainly
appears so from the graph. We can show that it is a local maximum since:
p 1 2 1 2 1 2
f 00 3 = 6xe 2 x 7x3 e 2 x + x5 e 2 x jx=p3
p 3
= 6 3e 2 < 0:
CHAPTER 2. UNIVARIATE CALCULUS 63
p
We now show that x = 3 is a global maximum for f (x) since it is a global
maximum of h (x) = ln (f (x)) : We have:
h (x) = ln (f (x))
2
= ln x3 ex =2
2
= ln x3 + ln ex =2
x2
= 3 ln (x) :
2
Therefore:
3
h0 (x) = x
x
3
=) h0 (x ) = 0 = x
x
3
=) = x
x
=) 3 = (x )2
p
=) x = 3:
The function h (x) is globally concave since:
3
h00 (x) =
1<0
x2
p
so h (x) is globally concave and hence x = 3 is a global maximum of h (x) :
Since h (x) = ln (f (x)) and since ln (x) is monotonically increasing, that is
d ln(x) p
dx = x1 > 0 for x > 0 it follows that x = 3 is a global maximum of
2
f (x) too. Alternatively, while f (x) = x3 ex =2 is not globally concave it is
globally quasi-concave and so the solution to the rst-order conditions yields
2
a global maximum. This is illustrated in the plots of f (x) = x3 ex =2 and
2 p
h (x) = 3 ln (x) x2 where both curves reach a maximum at x = 3 :
0.5
01 1.5 2 2.5 3
x
-0.5
-1
Answer
This is just an ordinary Cobb-Douglas production function since:
f (L) = eln(L)+ln(A)
= eln(A) ln(L)
e
= A eln(L)
= AL :
Therefore:
f 0 (L) = AL1 > 0
=) > 0 since A > 0 and L1 > 0:
Similarly:
f 00 (L) = ( 1) AL2 < 0
=) 1 < 0 since A > 0; > 0 and L2 > 0
=) < 1:
Alternatively you could work directly with f (L) = eln(L)+ln(A) using the
chain rule as:
f 0 (L) = eln(L)+ln(A) > 0
L
=) > 0
since eln(L)+ln(A) > 0 and L > 0: Similarly:
2
f 00 (L) = eln(L)+ln(A) eln(L)+ln(A) 2
L L
eln(L)+ln(A)
= ( 1) < 0
L2
=) < 1:
Problem 68 Derive (L) (prots as a function of L) and show that it is con-
cave. Derive the rms demand curve for labour, show that it is downward
sloping, and determine the elasticity of the demand curve.
CHAPTER 2. UNIVARIATE CALCULUS 65
Answer
W
We have with real wage w = P :
(L) =
P AL W L RK
=) 0 (L ) = 0 = P A (L )1 W
1 W 1
=) (L )1 = = w
A P A
1
1
1 1
=) L = (w) 1
A
1
so the elasticity of labour demand is 1 < 0 since < 1: Since the elasticity
is negative the labour demand curve is downward sloping. Alternatively:
1
1
dL 1 1 1
= (w) 1 1 < 0:
dw 1 A
Problem 69 Suppose a function f (x) has the property that
f (x)
f (x) = x:
Show that
1
1 ln (x)
f 0 (x) = 1+ :
x f (x)
Answer
f (x)
Take the ln ( ) of both sides of f (x) = x to yield:
ln(x)
since from ln (f (x)) f (x) = ln (x) we have: ln (f (x)) = f (x) :
Problem 70 Prove that f (x) = ln x7 for x > 0 is globally increasing and
concave.
CHAPTER 2. UNIVARIATE CALCULUS 66
Answer
The calculations are easier if you rst simplify as
f (x) = ln x7 = 7 ln (x) :
Thus:
7
f 0 (x) = >0
x
since x > 0: Similarly:
7
f 00 (x) = <0
x2
so that f (x) = ln x7 is globally concave. This is illustrated in the plot below:
10
5
x
1 2 3 4 5
0
-5
-10
-15
:
f (x) = ln x7
Answer
For f (x) = e3x we have using the chain rule:
+
z}|{
f (x) = 3e3x > 0
0
Answer
Problem 73 If f (x) is globally increasing and convex, and g (x) is globally
increasing and convex, prove that h (x) = f (g (x)) is globally increasing and
convex.
Answer
Problem 74 Suppose that f (x) is given by:
!
10000xx x3 + 3 e0 ln e2
f (x) = ln :
e3 ln(x)
Calculate f 0 (x) , nd x ; the global maximum and show that f (x) is globally
convex.
CHAPTER 2. UNIVARIATE CALCULUS 68
Answer
Here things are much easier if you simplify rst. We have:
0 0 11
1 2
z}|{ z }|
{
B 10000xx B @x3 + 3 e0 ln e2 A C
C
B C
B C
B C
f (x) = ln BB C
3 ln(x)
e| {z } C
B C
B C
@ x3 A
10000xx x3
= ln
x3
= ln (10000) + ln (xx )
= ln (10000) + x ln (x) :
Therefore:
f 0 (x) = 1 + ln (x)
=) f 0 (x ) = 0 = 1 + ln (x )
=) ln (x ) = 1
=) x = e1 :
Furthermore:
1
f 00 (x) = > 0 since x > 0
x
so that f (x) is globally convex and x = e1 is a global minimum. This is
illustrated in the plot below:
10.6
10.4
10.2
10
9.8
9.6
9.4
9.2
9
Answer
1 2
de 2 x 1 2
Using the product and chain rules (note that dx = xe 2 x ) we have:
1 2 1 2
f 0 (x) = 4x3 e 2 x x5 e 2 x
1 2
= x3 e 2 x 4 x2 :
Therefore:
1 2
f 0 (x ) = 0 =) (x )3 e 2 (x )
4 (x )2 = 0
1 2
=) 4 (x )2 = 0; since (x )3 > 0 and e 2 (x )
>0
2
=) (x ) = 4
=) x = 2; since x = 2 is ruled out by the domain restriction x > 0:
Note that since 4 x2 > 0 for x < 2 and 4 x2 < 0 for x > 2 it follows that
x = 2 is a global maximum.
If h (x) = ln (f (x)) then:
1 2
h (x) = ln x4 e 2 x
1 2
= ln x4 + ln e 2 x
1
= 4 ln (x) x2
2
then:
4 4
h0 (x) = x =) h0 (x ) = 0 = x
x x
=) x = 2:
Furthermore
4
h00 (x) = 1<0
x2
so that h (x) is globally concave. It follows that x = 2 is a global maximum of
h (x) and since h (x) = ln (f (x)) and ln (x) is monotonically increasing ( d ln(x)
dx =
1 4 12 x2
x > 0) that x = 2 is a global maximum of f (x) = x e (or that f (x) is
CHAPTER 2. UNIVARIATE CALCULUS 70
1.5
0.5
01 1.5 2 2.5 3
x
-0.5
:
12 x2 1 2
f (x) = x4 e ; h (x) = ln x4 e 2 x
Problem 76 Prove that f (x) = ln 3x2 20x is globally concave. Find x ;
the global maximum of f (x) :
Answer
First simplify as:
f (x) = ln 3x2 20x
= ln (3) + ln x2 20x
= ln (3) + 2 ln (x) 20x:
Thus:
2
f 0 (x) = 20
x
2
=) f 0 (x ) = 0 = 20
x
2
=) = 20
x
2 1
=) x = = :
20 10
Also since for all x
2
f 00 (x) = <0
x2
1
it follows that f (x) = ln 3x2 20x is globally concave and hence x = 10 is
a global maximum. This is illustrated in the plot of f (x) below:
CHAPTER 2. UNIVARIATE CALCULUS 71
-6
-8
-10
-12
-14
-16
Answer
For f (x) = e3x 2x we have :
f 0 (x) = 3e|{z}
3x
2 <0
+
f 00 (x) = 9e|{z}
3x
>0
+
so that f (x) is globally convex. It does not have a global minimum since
f 0 (x) < 0 implies that f 0 (x ) has no solution. This is illustrated in the plot
below:
1
x
0.5 1 1.5 2 2.5 3
0
-1
-2
-3
-4
-5
-6
f (x) = e3x 2x
CHAPTER 2. UNIVARIATE CALCULUS 72
2
Problem 78 Consider the function f (x) = x4 ex+3 ln(x ) for x > 0: Calculate
f 0 (x) ; and from f 0 (x) nd x ; the global maximum of f (x). Prove that x is
a global maximum. If h (x) = ln (f (x)) where f (x) is given above, nd h0 (x),
the global maximum: x ; and prove that x is a global maximum using h00 (x) :
Answer
Simplifying f (x) we nd that:
Thus:
Answer
Simplifying we have:
x3
f (x) = ln 5x
2ex
= ln x3 ln 2ex 5x
= 3 ln (x) ln (2) ln ex 5x
= 3 ln (x) 5x + x ln (2)
= 3 ln (x) 4x ln (2) :
Therefore:
3
f 0 (x) = 4
x
3
=) f 0 (x ) = 0 = 4
x
3
=) x = :
4
Now:
3
f 00 (x) =
<0
x2
so clearly f 00 34 < 0 and x = 34 is a local maximum. We can say much more
though since f (x) is globally concave and hence x = 34 is a global maximum.
This is illustrated in the plot below:
-4.6
-4.8
-5
-5.2
-5.4
-5.6
-5.8
-6
-6.2
-6.4
-6.6
0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2
x
x3
f (x) = ln 2ex 5x
Problem 80 Consider the following function dened on x > 0:
f (x) = (3x 1)e2x
Use rst order conditions to nd the possible local maxima or minima. Use
second order conditions to determine which are local maxima and which are
local minima. Is the function convex or concave and what are the global minima
and maxima?
CHAPTER 2. UNIVARIATE CALCULUS 74
Answer:
Using the chain and product rules we have:
f 0 (x) = 3e2x 2 (3x 1) e2x
= e2x (5 6x)
=) f 0 (x ) = 0 = e2x (5 6x )
=) 5 6x = 0 since e2x > 0
5
=) x = :
6
Now:
f 00 (x) = 2e2x (5 6x) 6e2x
= e2x (12x 16)
so that:
5 5 5
f 00 = e2 6 12 16
6 6
5
= 6e 3 < 0
so that x = 56 is a local maximum.
The function is neither globally concave nor convex since f 00 (x) < 0 for
x < 16 4 00 4 4
12 = 3 and f (x) > 0 for x > 3 with x = 3 and inection point where
f (x) changes from being concave to convex. This is illustrated in the plot below:
0.25
0.2
0.15
0.1
0.05
Answer
Changing from base x to base e we have:
x
f (x) = xx = eln(x) = ex ln(x) :
Now:
+
{z }| { z}|{z }| {
+ + +
z }|
1 x ln(x)
f (x) = (1 + ln (x))2 ex ln(x) +
00
e >0
x
so clearly f 00 e1 > 0 and x = e1 is a local minimum. We can say much more
though since f (x) is globally convex and hence x = e1 is a global maximum.
This is illustrated in the plot below:
0.95
0.9
0.85
0.8
0.75
0.7
0 0.2 0.4 0.6 0.8 1
x
f (x) = xx
Problem 82 If population grows at 1:8% per year, then what are A and ?
How long will it take for the worlds population to double? When will the worlds
CHAPTER 2. UNIVARIATE CALCULUS 76
population reach twenty billion (using the conventional dating system, e.g. 1998
etc. ). Suppose you wanted to, by say introducing family planning measures,
reduce the population growth rate so that in the year 2100 there were no more
than ten billion people on the earth. What population growth rates would be
consistent with this objective?
Answer
Here A = 6 (billion) and = 0:018 so that Y (t) = 6e0:018t : If Y (t) = 12
then:
12 = 6e0:018t
12
=) e0:018t = =2
6
=) 0:018t = ln (2)
ln (2)
=) t = = 38:508
0:018
or it will take 38:5 years for the population to double. If Y (t) = 20 then:
20 = 6e0:018t
20
=) e0:018t =
6
20
=) 0:018t = ln
6
ln 20
6
=) t = = 66:887
0:018
or it will take 67 years for the population to reach 20 billion. double.
If t = 100 and
Y (100) 10 = 6e100
=
10 5
=) e100 = =
6 3
5
=) 100 = ln
3
5
ln 3
=) = = 0:0051
100
Problem 83 How long ago was it that the rst person appeared on the earth?
The second person?
CHAPTER 2. UNIVARIATE CALCULUS 77
Answer
If Y (t) = 6e0:018t and then:
1
Y (t) = = 6e0:018t
6000000000
1
=) e0:018t =
6 6000000000
1
=) 0:018t = ln
6 6000000000
1
ln 66000000000
=) t = = 1350
0:018
or about 1350 years ago. Similarly if there were 2 people then
2
Y (t) = = 6e0:018t
6000000000
2
=) e0:018t =
6 6000000000
2
=) 0:018t = ln
6 6000000000
2
ln 66000000000
=) t = = 1312:
0:018
The fact that we historically that people have been around much longer than
1300 years illustrates the grave problems with project exponential growth too
far into either the past or future.
Problem 84 Prove that f (x) = ln (x) is globally increasing and concave
while
1
y = e3x globally decreasing and convex. Prove that f (x)
= ln x2 is globally
decreasing and convex. Prove that f (x) = exp 13 ln (x) is globally increasing
2
and concave. If f (x) = x8 ex show that f (x) is quasi-concave. Find x ; the
global maximum of f (x) and prove that x is a global maximum.
Answer
For f (x) = ln (x) with x > 0
1
f 0 (x) = > 0 =) f (x) is globally increasing
x
1
f 00 (x) = 2 < 0 =) f (x) is globally concave.
x
1
For f (x) = ln x2 = 2 ln (x) and with x > 0
2
f 0 (x) = > 0 =) f (x) is globally decreasing
x
2
f 00 (x) = < 0 =) f (x) is globally convex.:
x2
CHAPTER 2. UNIVARIATE CALCULUS 78
1 1
For f (x) = exp 3 ln (x) = x 3
1 2
f 0 (x) = x 3 > 0 =) f (x) is globally increasing
3
2 5
f 00 (x) = x 3 < 0 =) f (x) is globally concave. :
9
2
For f (x) = x8 ex we have:
with
8
h00 (x) = 2 < 0:
x2
Since ln (x) is globally increasing and h (x) is globally concave it follows that
2
f (x) = x8 ex is quasi-concave.
Using the appropriate rst order conditions nd any local maxima or minima.
From the appropriate second order conditions determine whether these solutions
are local maxima or minima. Determine whether if the function is convex or
concave.
Answer
Using the chain rule:
2
f 0 (x) = (2x + 2) ex +2x4
2
) +2x 4
=) f 0 (x ) = (2x + 2) e(x
2
) +2x 4
=) 2x + 2 = 0 since: e(x >0
=) x = 1:
Furthermore:
2 2
f 00 (x) = 2ex + (2x + 2)2 ex +2x4
+2x4
2
= ex +2x4 (2x + 2)2 2
2
=) f 00 (1) = ex +2x4 (2x + 2)2 2 jx=1 = 2e3 < 0
x2 + 2x 4 = (x 1)2 3
so that:
2
f (x) = ex +2x4
2
= e(x1) 3
2
= e(x1) e3 :
2
The term e(x1) 1 with equality only when x = 1 since for x 6= 1 it is the
2
case that (x 1) < 0 and the exponent is negative and ex for any negative x
is always less than 1: Thus x = 1 is a global maximum.
The second approach is to show that ln (f (x)) is globally concave and hence
f (x) is quasi-concave. Thus:
h (x) = ln (f (x)) = x2 + 2x 4
=) h0 (x ) = 0 = 2x + 2 =) x = 1
=) h00 (x) = 2 < 0
so that x = 1 is the global maximum for h (x) and f (x) as illustrated in the
CHAPTER 2. UNIVARIATE CALCULUS 80
graph below:
0.05
0.04
0.03
0.02
0.01
-1 0 1 2 3
x
2
f (x) = ex +2x4
-3
-4
-5
-6
-7
-1 0 1 2 3
x
h (x) = x2 + 2x 4
Finally note that:
2
f 0 (x) = (2x + 2) ex +2x4
+
z }| {
2
= 2 (x 1) ex +2x4
so that f 0 (x) > 0 for x < 1, f 0 (x) < 0 for x > 1 so that x = 1 is a global
maximum.
Problem 86 Prove that f (x) = ln 5x2 + 5 for x > 0 is globally increasing
and concave. If
0vu !1
u x3 ln (x2 ) eln(x5 ) + 7 e0 ln (e6 )
f (x) = ln @texp A
ln ex7
calculate f 0 (x) and f 00 (x) : Find x , the solution to the rst-order conditions,
and show that x is a global maximum.
CHAPTER 2. UNIVARIATE CALCULUS 81
Answer
For f (x) = ln 5x2 + 5 we have:
so that:
2
f 0 (x) = > 0:
x
so that f (x) is globally increasing and
2
f 00 (x) = <0
x2
so that f (x) is globally concave. (Alternatively, if we work directly with the
original form then using the chain rule we have:
1 2
f 0 (x) = 10x = ):
5x2 x
For the complicated expression we obviously need to simplify. We have:
7 5
ln ex = x7 ; ln x2 = 2 ln (x) ; eln(x ) = x5
e0 = 1; ln e6 = 6
so that:
0vu !1
u x 3 ln (x2 ) eln(x5 ) + 7 e0 ln (e6 )
f (x) = ln @texp A
ln ex7
0 !! 12 1
x3 ln (x) x5 + 7 1 6
= ln @ exp 2 A
x7
!!
1 x3 ln (x) x5 + 7 1 6
= ln exp 2
2 x7
1 ln (x) x3 x5
= 2
2 x7
= x ln (x) :
Therefore:
f 0 (x) = 1 + ln (x)
=) f 0 (x ) = 0 = 1 + ln (x )
=) ln (x ) = 1
=) x = e1 :
CHAPTER 2. UNIVARIATE CALCULUS 82
k
Pr [Y = k] = e :
k!
If = 2 calculate the probability that there will be 0; 1; 2; 3 and 4 accidents in the
intersection. Show that the sum of the probabilities is 1 (Hint: use the Taylor
series for ex ):
Answer
We have
20 2
Pr [Y = 0] = e = 0:135
0!
1
2 2
Pr [Y = 1] = e = 0:271
1!
22 2
Pr [Y = 2] = e = 0:271
2!
23 2
Pr [Y = 3] = e = 0:180
3!
24 2
Pr [Y = 4] = e = 0:090:
4!
Note that these probabilities do not sum to 1 since:
as follows. We have:
0 1 2
Pr [Y = 0] + Pr [Y = 1] + Pr [Y = 2] + = e + e + e +
0! 1! 2!
1 2
= e 1 + + +
1! 2!
| {z }
=e
= e e
= e+
= e0
= 1:
lim xx :
x!0
Answer
This is not directly in the form with which we can use LHpitals rule.
Consider though rewriting it xx as:
ln(x)x ln (x)
e = exp 1
x
so that:
ln (x)
lim xx = exp lim 1 :
x!0 x!0
x
1
Since limx!0 ln (x) = 1 and limx!0 x = 1 we can apply LHpitals rule as:
1
ln (x) x
lim 1 = lim = lim x = 0
x!0 x!0 12 x!0
x x
so that:
x ln (x)
lim x = exp lim 1 = e0 = 1:
x!0 x!0
x
CHAPTER 2. UNIVARIATE CALCULUS 84
0.95
0.9
0.85
0.8
0.75
0.7
0.2 0.4 0.6 0.8 1
x :
x
f (x) = x as x ! 0
lim xex = 0:
x!1
Answer
Since
x
lim xex = lim ;
x!1 x!1 ex
limx!1 x = 1 and limx!1 ex = 1; we can use LHpitals rules as:
x 1
lim xex = lim = lim = 0:
x!1 x!1 ex x!1 ex
Problem 90 Show that for all n:
lim xn ex = 0:
x!1
lim xn ln (x) = 0:
x!0
Answer
Note that it is that approaches 0 here and not x: We have: f () =
eln(x) 1 and g () = since:
x 1 eln(x) 1
lim = lim :
!0 !0
Using the chain rule: f 0 () = ln (x) eln(x) and g0 () = 1 so that:
x 1 eln(x) 1
lim = lim
!0 !0
ln (x) eln(x)
= lim
!0 1
= ln (x)
since lim!0 eln(x) = 1:
S 00 () = 2 + 2 + + 2
| {z }
n times
= 2n > 0:
It follows that S 00 () > 0 for all and hence S () is globally convex and is
a global minimum.
^ )2 + (Y2
S () = (Y1 ^ )2 + + (Yn
^ )2
^ )2 :
+n (
Yi = Xi + ei ; i = 1; 2; : : : n:
^ minimizes:
The least squares estimator
n
X
S () = (Yi Xi )2
i=1
Find the rst-order conditions for minimizing S () : Show from the rst-order
conditions that
Pn
^ Xi Yi X1 Y1 + X2 Y2 + + Xn Yn
= Pi=1
n 2 = :
X
i=1 i X12 + X22 + + Xn2
Show that S () is globally convex as long as one Xi is not equal to zero and
^ is a global minimum.
that
Answer
Using the chain rule to dierentiate (Yi Xi )2 with respect to we have:
Find
^ and show how you can construct a 95% condence interval for : If
Y1 = 5:5; Y2 = 3:3; Y3 = 7:1; Y4 = 9:2 and Y5 = 4:1; nd
^ and construct a
95% condence interval for :
CHAPTER 2. UNIVARIATE CALCULUS 88
Answer
The log-likelihood is given by:
n 1
l () = ln (L ()) = ln (2) (Y1 )2 + (Y2 )2 + + (Yn )2
2 2
so that:
dl ()
= (Y1 ) + (Y2 ) + + (Yn )
d
dl (^
)
=) = 0 = (Y1 ^ ) + (Y2
^ ) + + (Yn
^)
d
=) Y1 + Y2 + + Yn = n^
Y1 + Y2 + + Yn
=)
^= = Y :
n
To calculate a condence interval we have:
d2 l ()
= 1 + 1 + + 1
d2
= n
so that:
= ( (n))1
1
= :
n
Thus a 95 % condence interval takes the form:
r
1
^ 1:96 :
n
In the example n = 5 and
5:5 + 3:3 + 7:1 + 9:2 + 4:1
^ =
5
= 5:84
6:213 0:877:
CHAPTER 2. UNIVARIATE CALCULUS 89
Problem 98 Suppose that Yi N 0; 2 so that Yi has a mean of zero and
a standard deviation of : (Here we use the traditional notation: which is
the standard deviation, instead of : ) We wish to estimate using maximum
likelihood from a sample Y1 ; Y2 ; : : : ; Yn : The likelihood function is:
n 2 2 2
L () = (2) 2 n e 22 (Y1 +Y2 ++Yn ) :
1
Find ^ and show how you can construct a 95% condence interval for the un-
known : If Y1 = 5:5; Y2 = 3:3; Y3 = 7:1; Y4 = 9:2 and Y5 = 4:1; nd ^ and
construct a 95% condence interval for :
Answer
The log-likelihood is given by:
n 1
l () = ln (L ()) = ln (2) n ln () 2 Y12 + Y22 + + Yn2
2 2
so that:
dl () n 1
= + 3 Y12 + Y22 + + Yn2
d
dl (^
) n 1
=) = 0 = + 3 Y12 + Y22 + + Yn2
d ^
^
1 2 2 2
n
=) 3 Y1 + Y2 + + Yn =
^ ^
2 2 2
Y + Y2 + + Yn
=) ^2 = 1
r n
2 2
Y1 + Y2 + + Yn2
=) ^= :
n
To calculate a condence interval we have:
d2 l () n 1
2
= 2 3 4 Y12 + Y22 + + Yn2
d
so that:
2 1
d l (^
)
=
d 2
0 11
B n 1 C
= @ 2 + 3 4 Y12 + Y22 + + Yn2 A
^ ^ |
{z }
2
=n^
1
n 2
n^
= 2 +3 4
^ ^
12
n
= 2 2
^
^2
= :
2n
CHAPTER 2. UNIVARIATE CALCULUS 90
Answer
The log-likelihood is given by:
l () = ln (L ()) = (Y1 + Y2 + + Yn ) ln () n
so that:
dl () (Y1 + Y2 + + Yn )
= n
d
dl (^
) (Y1 + Y2 + + Yn )
=) =0= n
d ^
(Y1 + Y2 + + Yn )
=) =n
^
Y1 + Y2 + + Yn
=)
^= = Y
n
CHAPTER 2. UNIVARIATE CALCULUS 91
^2
= :
n
Thus a 95 % condence interval takes the form:
s
^2
^ 1:96 :
n
4:2 3:68:
Chapter 3
Matrix Algebra
Answer
AB is not dened since A is 3 2 and B is also 3 2:
2 3
6 4
T 3 1 1 4 5 22 22
A B = 2 6 = :
2 3 2 22 34
2 4
2 3 2 3
6 4 26 18 14
3 1 1
AB T = 4 2 6 5 = 4 18 20 14 5 :
2 3 2
2 4 14 14 10
92
CHAPTER 3. MATRIX ALGEBRA 93
Answer
We have:
2 3
1 1
T 1 1 1 4 5 3 6
A A = 1 2 = :
1 2 3 6 14
1 3
2 3 2 3
1 1 2 3 4
1 1 1
AAT = 4 1 2 5 = 4 3 5 7 5:
1 2 3
1 3 4 7 10
1 7
T 1 3 6 1 14 6 1
A A = = = 3 :
1
6 14 3 14 6 6 6 3 1 2
Answer
We have:
2 3 2 3
1 1 2 1 4
1 1 1
AB = 4 2 0 5 = 4 2 2 2 5
1 2 3
3 1 4 1 6
2 3T 2 3
2 1 4 2 2 4
B T AT = (AB)T = 4 2 2 2 5 = 4 1 2 1 5
4 1 6 4 2 6
2 3
1 1
1 2 3 4 14 4
AT A = 2 0 5=
1 0 1 4 2
3 1
1 1
T
1 14 4 13
A A = = 6 :
4 2 13 7
6
Answer
2 3 2 3
2 2 4 6
XY = 4 2 5 1 2 3 =4 2 4 6 5
2 2 4 6
2 3
2
YX = 1 2 3 4 2 5 = 12
2
Y X T is not dened. X 1 is not dened since only square matrices have inverses.
2 3
2 4 6
det [XY ] = det 4 2 4 6 5 = 0
2 4 6
det [Y X] = det [12] = 12:
CHAPTER 3. MATRIX ALGEBRA 95
Since det [XY ] = 0 it follows that (XY )1 does not exist. (Y X)1 = 121 = 1
12 .
1 5 2
1 3 2 13 13
A = = 1 3
1 5 13 13
T
T 1 T 5 2
13 5 1
13
A = A1 = 13
1 3 = 13
2 3 :
13 13 13 13
Problem 104 Given the two matrices A and B and the vector x:
2 3 2 3
1 1 1
2 2 2
A= ; B = 4 1 2 5 ; x = 4 2 5
2 4 6
1 3 1
T T T 1
calculate
h i A B; BA and B A : What is (AB) : Calculate: det [AB] ;
AB,
det (AB)1 ; and det [A] : Calculate: BAx = 0 and use this result to calculate
det [BA] : Calculate Ax and use this result to calculate det [BA] :
Answer
3 2
1 1
4 2 2 2
5 6 12
AB = 1 2 =
2 4 6 12 28
1 3
T
T T T 6 12 6 12
B A = (AB) = =
12 28 12 28
2 3 2 3
1 1 4 6 8
2 2 2
BA = 4 1 2 5 =4 6 10 14 5 :
2 4 6
1 3 8 14 20
AT B is not dened.
1 7
6 12 1 28 12 12
(AB)1 = = = 6
12 28 24 12 6 12 1
4
6 12
det [AB] = det = 24
12 28
h i 1 1
det (AB)1 = =
det [AB] 24
and det [A] is not dened since A is not square.
2 3
1
2 2 2 4 5 0
Ax = 2 =
2 4 6 0
1
=) BAx = B0 = 0
=) det [BA] = 0
since if for any square matrix C if Cx = 0 for x 6= 0 implies that C is singular
and hence det [C] = 0:
CHAPTER 3. MATRIX ALGEBRA 96
2 3
9 18
3 3 3
A= ; B = 4 3 6 5;
12 4 4
4 8
Answer
2 3
9 18
3 3 3 4 3 6 5= 48 96
AB =
12 4 4 104 208
4 8
T
T 48 96 48 104
B T AT = (AB) = =
104 208 96 208
2 3 2 3
9 18 243 99 45
4 3 6 5 3 3 3
BA = = 4 81 33 15 5
12 4 4
4 8 108 44 20
48 96
det [AB] = det = 0:
104 208
Answer
Since A is upper triangular its determinant is the product of the diagonal
elements so that:
2 3
3 1 0
det 4 0 4 0 5 = 3 4 5 = 60 = det AT :
0 0 5
1 1
det A1 = =
det [A] 60
T r [A] = 3 + 4 + 5 = 12
2 3
20 5 0
1 4 0 15 0 5 :
A1 =
60 0 0 12
CHAPTER 3. MATRIX ALGEBRA 97
nd det [A] using the Laplace expansion by: 1) going across the rst row, 2)
going down the second column. Calculate the cofactor matrix C and the adjoint
1
matrix adj [A] : Calculate adj [A] A and Aadj [A] : Calculate A1 and AT :
Answer
Going across the rst row we nd:
2 3
1 2 4
det [A] = det 4 2 3 2 5
3 1 3
3 2 2 2 2 3
= 1 det 2 det + 4 det
1 3 3 3 3 1
= 13:
so that:
2 3T 2 3
7 12 11 7 2 8
adj [A] = C T = 4 2 9 5 5 = 4 12 9 10 5 :
8 10 7 11 5 7
Thus adj [A] A and Aadj [A] are given by direct calculation as:
2 32 3 2 3
7 2 8 1 2 4 13 0 0
4 12 9 10 5 4 2 3 2 5 = 4 0 13 0 5 = det [A] I
11 5 7 3 1 3 0 0 13
2 32 3 2 3
1 2 4 7 2 8 13 0 0
4 2 3 2 5 4 12 9 10 5 = 4 0 13 0 5 = det [A] I
3 1 3 11 5 7 0 0 13
which illustrates the general fact that adj [A] A = Aadj [A] = det [A] I since
det [A] = 13: Finally:
1
A1 = adj [A]
det [A]
2 3 2 7 2 8
3
7 2 8 13
1 4 5 4 12
13
9
13
10 5:
= 12 9 10 = 13 13 13
13 11 5 7
11 5 7 13 13 13
Answer
T T T T
First X T X = X T X T = X T X (since (AB) = B T AT and X T =
X ). Now:
0 1T
PT XT A
= @X(X T X)1 |{z}
| {z }
A B
0 1T
T T
= X @ X (X T X)1 A ; since (AB)T = B T AT
|{z}| {z }
A B
T T
= X (X T X)1 X T ; since (AB)T = B T AT and AT = A
0 11
B C T 1
= X @(X T X)T A X T ; since A1 = AT
| {z }
=X T X
= X(X X) X T
T 1
= P by denition.
A = X(X T 1 X)1 X T 1
B = X(X T 1 X)1 X T
C = (RX T 1 XRT )1
D = (RT X T 1 XR)1
Problem 114 Find the dimensions of the matrices A ; B and C: What can you
say about the matrix D? Which matrices are symmetric? Which are idempotent?
Answer
A is n n; B is n n; C is r r and D is not dened since XR and RT X T
are not dened. The matrices B and C are symmetric while the matrix A is
idempotent.
T T
Problem 115 Determine AB; BA; B T A; AB T ; B T AT and AT B T :
Make any possible simplications , and if possible avoid any unnecessary work
in your derivations.
Answer
We have:
Answer
AT = (X T X)T
T
= (X)T X T T
since (EF ) = F T E T
T
= X T X since E T =E
= A =) A is symmetric
1 T 1 T 1
A = AT ; since E 1 = E T
= A1 ; since A = AT from above.
= X(X T 1 X)1 X T
For B we have:
T
B T = (X T 1 X)1
1 T 1
= (X T 1 X)T since E 1 = E T
T 1 T
= (X T X T 1 since (EF ) = F T E T
T T T 1
= (X T 1 X ) since (EF )T = F T E T
1 1 T 1 T
= (X T T X since E 1 = E T and E T =E
= (X T 1 X)1 since symmetric =) = T
= B =) B is symmetric.
1 T 1
For C = X X T 1 X X we have:
1 T 1 T 1 1 T 1
CC = X X T 1 X X X X X X
| {z }
=I
1
= X X T 1 X IX T 1
1 T 1
= X X T 1 X X =) C is idempotent.
Answer
2 3
1 1
6 2 2 7
1 2 3 4 5 6 7 55 15
XT X = 6 3 3 7 =
1 2 3 4 5 6 7 15 55
4 4 4 5
5 5
2 3 2 3
1 1 2 0 6 0 10
6 2 2 7 6 0 8 0 16 0 7
6 7 1 2 3 4 5 6 7
XX T = 6 7
6 3 3 7 1 2 3 =66 6 0 18 0 30 7
7
4 4 4 5 4 5 4 0 16 0 32 0 5
5 5 10 0 30 0 50
1 11
T 1 55 15 3
560
X X = = 560
3 11
15 55 560 560
h
T i 55 15
det X T X = det X T X = det = 2800
15 55
h 1 i 1 1
det X T X = T
=
det [(X X)] 2800
T 1 T h 1
i 1
det X X = det X T X =
2800
T 55 15
Tr X X = Tr = 55 + 55 = 110
15 55
T r XX T = 2 + 8 + 18 + 32 + 50 = T r X T X = 110:
T 1 T T T 1 T
To calculate T r X X X X X X X X you could calculate
1 T T 1 T
X XT X X X XT X X and sum the diagonal elements. It
1 T
would however be easier and faster to notice that X X T X X is symmetric
T 1 T
and idempotent and just to calculate X X X X so that:
2 3
1 1
6 2 2 7
T 1 T 6 7 55 15 1 1 2 3 4 5
X X X X 6
= 6 3 3 7 7
4 4 4 5 15 55 1 2 3 4 5
5 5
2 1 3
3
35 0 35 0 17
6 0 1 0 2 0 7
6 3 5 9 5 3 7
= 6 6 35 02 35 04 7 7
7
4 0 0 5 0 5
5
1
7 0 37 0 57
CHAPTER 3. MATRIX ALGEBRA 103
Answer
2 3
X1
6
6 X2 7
7
XT X = X1 X2 Xn 6 .. 7
4 . 5
Xn
= X12 + X22 + + Xn2 a scalar.
Therefore
T 1
P = X X X XT
| {z }
1
= 2 +X 2 ++X 2
X1 2 n
1
= 2 2 XX T
X1 + X2 + + Xn2
2 3
X1
6 X 7
1 6 2 7
= 6 . 7 X1 X2 Xn
X1 + X2 + + Xn 4 ..
2 2 2 5
Xn
2 3
X12 X1 X2 X1 Xn
6 X1 X2 X22 X2 Xn 7
1 6 7
= 6 .. .. .. .. 7
X12 + X22 + + Xn2 4 . . . .X
n
5
X1 Xn X2 Xn Xn2
so that:
Xi Xj
pij = :
X12 + X22 + + Xn2
The following three problems are based on the following informa-
tion:Suppose Q is an n n matrix and X is a n p matrix. Consider the
matrices:
A = X(X T Q1 X)1 X T Q1
B = X(X T Q1 X)1 X T
CHAPTER 3. MATRIX ALGEBRA 104
Problem 119 Find the dimensions of the matrices A and B: What is the rank
of Q? What is the rank of X T Q1 X? Show that (X T Q1 X)1 is symmetric.
Show that A is idempotent but not symmetric while B is symmetric but not
idempotent.
T
Problem 120 Determine AB; BA; B T A; AB T ; AT B; B T A; B T AT and
T T T
A B : Make any possible simplications , and if possible avoid any unnec-
essary work in your derivations.
Answer
A matrix A is symmetric if and only if A = AT :
Since A and B are symmetric we have: AT = A and B T = B so that:
(A + B)T = AT + B T
= A+B
=) A + B is symmetric
(ABA)T = AT B T AT
= ABA
=) ABA is symmetric
(AB)T = B T AT
= BA 6= AB
=) AB is not in general symmetric
Also:
(I P ) (I P ) = II IP P I + P P
= I P P + P since P is idempotent
= I P
=) I P is idempotent.
A1 necessarily exist then? Suppose that the column vectors of X are all linearly
independent, or that rank [X] = p; or that Xc = 0 implies c = 0 where c is a
p 1 vector. Show that in this case A is positive denite. Does A1 necessarily
exist then?
Answer
Let y be any p 1 vector. Then:
y T Ay = y T X T Xy
= zT z
T
where z = Xy and z T = (Xy) = yT X T and since X is n p and y is p 1 it
follows that z is an n 1 column vector. Thus:
y T Ay = zT z
2 3
z1
6
6 z2 7
7
= z1 z2 zn 6 .. 7
4 . 5
zn
= z12 + z22 + + zn2
0
yT Ay 0
=) A is positive semi-denite.
y T Ay = 0 =) y = 0:
yT Ay = z T z = 0:
z = 0 =) Xy = 0 =) y = 0
Answer
Let y be any p 1 vector. Then:
yT Ay = yT y
= z T z
0 (since is postive denite)
=) A = X T X is positive semi-denite.
Problem 127 Recall from statistics that the sample mean and variance are
Pn 1 Pn
given by: Y = n1 i=1 Yi and s2 = n1 2 : Let Y = [Yi ] be an
i=1 Yi Y
n 1 vector and let be an n 1 vector with each element equal to 1: Let P = n1
T : Show that P and I P are symmetric and idempotent, that Y = n1 T Y and
Y T (IP )Y
that s2 = n1 :
Answer
First note that T = n since:
2 3
1
6
6 1 7
7
T = 1 1 1 6 .. 7
4 . 5
1
2 2 2
= 1 +1 + +1
= n:
CHAPTER 3. MATRIX ALGEBRA 108
(I P ) (I P ) = II IP P I + P P
= I P P +P
= I P =) I P is idempotent.
Furthermore:
1 T
(I P ) Y = Y Y
n
1 T
= Y Y
n
| {z }
=Y
= Y Y
2 3
Y1 Y
6 Y2 Y 7
6 7
= 6 .. 7:
4 . 5
Yn Y
CHAPTER 3. MATRIX ALGEBRA 109
Therefore:
2 3T 2 3
Y1 Y Y1 Y
6 Y2 Y 7 6 Y2 Y 7
6 7 6 7
((I P ) Y )T ((I P )) Y = 6 .. 7 6 .. 7
4 . 5 4 . 5
Yn Y Yn Y
2 2 2
= Y1 Y + Y2 Y + + Yn Y
= (n 1) s2 :
((I P ) Y )T ((I P )) Y = Y T (I P )T (I P ) Y
= Y T (I P ) (I P ) Y
= Y T (I P ) Y
so that:
Y T (I P ) Y = (n 1) s2
Y T (I P ) Y
=) s2 = :
n1
Problem 128 Suppose P is an nn idempotent matrix. What does that mean?
If x is an eigenvector of P and is an eigenvalue of P; what relationship exists
between P; x; and ? Prove that either = 0 or = 1.
Answer
Idempotent means that P P = P: If x is an eigenvector of P and is an
eigenvalue of P then for x 6= 0
P x = x:
PPx = P x = 2 x
PPx = P x = x
=) 2 x = x
=) x (1 ) = 0:
Since x 6= 0 either = 0 or = 1:
Answer
Problem 130 If Q is a n n symmetric matrix, and X is an n p ma-
1 1
trix, show that X T Q1 X
h is symmetric and that
i X X T Q1 X XQ1 is
1
idempotent. What is T r X X T Q1 X XQ1 ?
Y = X + e
^
Problem 131 Calculate
Answer
^ we have:
From the formula for
2 3
10 100
6 25 355 7
6 7
6 7 10 7
6 7
6 41 50 7
6 7
10 25 7 41 10 75 21 77 21 71 6 6 10 3 7
7
XT X =
100 355 10 50 3 860 62 107 10 45 6
6 75 860 7
7
6 21 62 7
6 7
6 77 107 7
6 7
4 21 10 5
71 45
20032 89471
=
89471 895652
CHAPTER 3. MATRIX ALGEBRA 111
while:
2 3
22
6 88 7
6 7
6 7 7
6 7
6 29 7
6 7
10 25 7 41 10 75 21 77 21 71 6 6 8 7
7
XT Y =
100 355 10 50 3 860 62 107 10 45 6
6 217 7
7
6 35 7
6 7
6 61 7
6 7
4 11 5
52
29368
= :
232751
^ is given by:
Thus the least squares estimator
T 1 T
^
= X X X Y
1
20032 89471 29368
=
89471 895652 232751
0:5514
= :
0:2048
^ 1 = 0:5514
The estimated marginal propensity to consume out of income is:
while the estimated marginal propensity to consume out of wealth is: ^2 =
0:2048
^
Problem 132 Calculate the least squares residual: e^ = Y X .
Answer
We have:
2 3 2 3 2 3
22 10 100 3:994
6 88 7 6 25 355 7 6 1:511 7
6 7 6 7 6 7
6 7 7 6 7 10 7 6 1:0922 7
6 7 6 7 6 7
6 29 7 6 41 50 7 6 3:8474 7
6 7 6 7 6 7
6 8 7 6 10 3 7 0:5514 6 1:8716 7
e^ = 6
6
76
7 6
7 6
7 0:2048 = 6
7:
7
6 217 7 6 75 860 7 6 :483 7
6 35 7 6 21 62 7 6 10:723 7
6 7 6 7 6 7
6 61 7 6 77 107 7 6 3:3714 7
6 7 6 7 6 7
4 11 5 4 21 10 5 4 2:6274 5
52 71 45 3:6346
Answer
We have:
2 3 2 3
10 100 25:994
6 25 355 7 6 86:489 7
6 7 6 7
6 7 10 7 6 5:9078 7
6 7 6 7
6 41 50 7 6 32:847 7
6 7 6 7
6 10 3 7 0:5514 6 6:1284 7
Y =6
^
6
7 6
7 0:2048 = 6
7:
7
6 75 860 7 6 217:48 7
6 21 62 7 6 24:277 7
6 7 6 7
6 77 107 7 6 64:371 7
6 7 6 7
4 21 10 5 4 13:627 5
71 45 48:365
Problem 134 Prove that e^ and Y^ are always orthogonal. Is this the case in
the above example?
Answer
We have:
Y^ = P Y; e^ = (I P ) Y
1 T
where P = X X T X X and (I P ) are symmetric and idempotent. There-
fore:
e^T Y^ = ((I P ) Y )T (P Y )
= Y T (I P )T P Y
= Y T (I P ) P Y since I P is symmetric
= Y T (P P P ) Y
= Y T (P P ) Y since P is idempotent
= Y T 0Y
= 0 =) e^ and Y^ are orthogonal.
For this particular example we have:
2 3T 2 3
3:994 25:994
6 1:511 7 6 86:489 7
6 7 6 7
6 1:0922 7 6 5:9078 7
6 7 6 7
6 3:8474 7 6 32:847 7
6 7 6 7
6 1:8716 7 6 6:1284 7
e^ Y = 6
T ^
6 :483
7
7
6
6
7
7
6 7 6 217:48 7
6 10:723 7 6 24:277 7
6 7 6 7
6 3:3714 7 6 64:371 7
6 7 6 7
4 2:6274 5 4 13:627 5
3:6346 48:365
= 3:3454:
CHAPTER 3. MATRIX ALGEBRA 113
Note that it is not numerically equal to zero even though we proved it must be
zero!! The reason for this is that we have rounded the decimal expansion of the
numbers we have used (we have only worked with numbers up to one decimal
place) so that rounding error is the cause of the discrepancy.
Answer
Putting the X 0 s on the left-hand side we can rewrite the equations as:
3X1 + 5X2 2X3 = 7
X1 4X2 + 3X3 = 4
X1 X2 + X3 = 10
or in matrix notation as:
2 32 3 2 3
3 5 2 X1 7
4 1 4 3 5 4 X2 5 = 4 4 5 :
1 1 1 X3 10
Neither A nor b is symmetric since:
2 3T 2 3T
3 5 2 7
AT = 4 1 4 3 5 6= A; bT = 4 4 5 = 7 4 10 6= b:
1 1 1 10
We have:
2 3
3 5 2
4 3 1 3 1 4
det 4 1 4 3 5 = 3 det 5 det + 2 det
1 1 1 1 1 1
1 1 1
= 1:
Since det [A] 6= 0; it follows that A is invertible, has full rank, that is rank [A] =
3; and that AX = 0 =) X = 0; that is X1 = 0; X2 = 0 and X3 = 0:
1
Problem 136 Calculate A1 using determinants. Calculate AT : Calcu-
late A1 b: Solve the above system of equations using Cramers rule. The last
two answers you give should be identical. What is b1 ?
CHAPTER 3. MATRIX ALGEBRA 114
Answer
The adjoint of A is given by:
2 3T
4
3 1 3 1 4
2 3 6 det det det 7
3 5 2 6 1
1 1 1 1 1 7
6 25 3 2 3 5 7
4
adj 1 4 3 5 = 6
6 det det det 7
7
6 11 1 1 1 1 7
1 1 1 4 5
25 3 2 3 5
det det det
43 1 3 1 4
2 3
1 3 7
= 4 2 5 11 5 :
3 8 17
1
Since A1 = det[A] adj [A] and det [A] = 1 it follows that for this matrix A1 =
adj [A] so that:
2 3
1 3 7
A1 = 4 2 5 11 5 :
3 8 17
Therefore:
2 32 3 2 3
1 3 7 7 51
X = A1 b = 4 2 5 11 5 4 4 5 = 4 76 5
3 8 17 10 117
Answer
Taking transposes of both sides of Y AT = bT we obtain:
AY T = b
so that Y T = X or
Y = XT = 51 76 117 :
4x1 + 2x2 = 3
5x1 + 6x2 = 7:
Write these in matrix notation in the form Ax = b: Calculate det [A] and based
on this determine how many, if any, solutions to this model exist and whether
A1 exists. Calculate x1 and x2 using Cramers rule.
Answer
We have:
4 2 x1 3
=
5 6 x2 7
4 2
det [A] = det = 14:
5 6
Since det [A] = 14 6= 0 it follows that exactly one solution to these equations
exists and that A1 exists. Using Cramers rule we nd that:
3 2 4 3
det det
7 6 2 5 7 13
x1 = = ; x2 = = :
4 2 7 4 2 14
det det
5 6 5 6
write this out as three linear equations with three unknowns. Find x using the
value of A1 you calculated in the previous problem. Now calculate x2 and x3
using Cramers rule.
CHAPTER 3. MATRIX ALGEBRA 116
Answer
We have:
x1 + 2x2 + 4x3 = 1
2x1 + 3x2 + 2x3 = 5
3x1 + x2 + 3x3 = 3
Thus x = A1 b or:
2 3 2 7 2 8
32 3 2 27 3
x1 13 13 13 1 13
4 x2 5 = 4 12 9 10 5 4 5 5 = 4 63 5
13 13 13 13
11 5 7
x3 13 13 13 3 35
13
27 63
so that x1 = 13 ; x2 = 13 and x3 = 35
13 : Using Cramers rule we nd that:
2 3
1 1 4
det 4 2 5 2 5
3 3 3 63
x2 = = ;
13 13
2 3
1 2 1
det 4 2 3 5 5
3 1 3 35
x3 = = :
13 13
Problem 140 Consider the following system of linear equations:
8x1 + 4x2 = 6
5x1 + 3x2 = 15
Write these in matrix notation as Ax = b: Calculate det [A] and based on this
determine how many, if any, solutions to this model exist and whether A1
exists. Calculate x1 and x2 using A1 . Solve the following equations for y1 and
y2
4
e6 y12 y2 = 1
15 5 3
e (y1 ) (y2 ) = 1:
Answer
We have:
8 4 x1 6
=
5 3 x2 15
8 4
det [A] = det = 4:
5 3
CHAPTER 3. MATRIX ALGEBRA 117
Since det [A] = 4 6= 0 it follows that exactly one solution to these equations
exists and that A1 exists. Using Cramers rule we nd that:
6 4
det
15 3 42 21
x1 = = = ;
8 4 4 2
det
5 3
8 6
det
5 15 90 45
x2 = = = :
8 4 4 2
det
5 3
Taking ln () of both sides of
4
e6 y12 y2 = 1
15 5 3
e (y1 ) (y2 ) = 1
we nd that:
4
ln e6 y12 y2 = ln (1) =) 8 ln (y1 ) + 4 ln (y2 ) = 6
5 3
ln e15 (y1 ) (y2 ) = ln (1) =) 5 ln (y1 ) + 3 ln (y2 ) = 15:
Answer
We have:
3 4 x1 6
=
5 6 x2 15
3 4
det [A] = det = 2:
5 6
Since det [A] = 2 6= 0 it follows that exactly one solution to these equations
exists and that A1 exists. Using Cramers rule we nd that:
6 4 3 6
det det
15 6 24 5 15 15
x1 = = = 12; x2 = = :
3 4 2 3 4 2
det det
5 6 5 6
(w1 )3 (w2 )4 = e6
(w1 )5 (w2 )6 = e15
we nd that:
ln (w1 )3 (w2 )4 = ln e6 =) 3 ln (w1 ) + 4 ln (w2 ) = 6
5 6
ln (w1 ) (w2 ) = ln e15 =) 5 ln (w1 ) + 6 ln (w2 ) = 15:
3x1 + 4x2 = 6
5x1 + 6x2 = 15
4x1 3x2 = 7
5x1 + 2x2 = 1;
Answer
4 3 x1 7
=
5 2 x2 1
2 3
A1 = 23 23
5 23 4
2317
x1 23
= :
x2 31
23
Answer
9 3 x1
xT Ax = x1 x2
3 5 x2
= 9x21 + 6x1 x2 5x22 :
To nd the eigenvalues of A note that:
9 3 1 0
det [A I] = det
3 5 0 1
= 36 + 14 + 2 = 0
p
=) 1 = 7 + 13 = 3:3944 < 0
p
=) 2 = 7 13 = 10:606 < 0:
Since 1 < 0 and 2 < 0 it follows that A is negative denite.
Using determinants or leading principal minors we nd that:
M1 = det [9] = 9 < 0
9 3
M1 = det = 36 > 0:
3 5
CHAPTER 3. MATRIX ALGEBRA 120
Since they alternate in sign with the rst being negative, it follows that A is
negative denite.
Answer
We have:
det [A] = det CC 1
= det [C] det [] det C 1 since det [ABC] = det [A] det [B] det [C]
= det C 1 det [C] det [] since the determinant is a scalar
1 1
= det [C] det [] since det B 1 =
det [C] det [B]
= det [] = 1 2 n since is a diagonal matrix.
Similarly:
2 E F 3
z}|{z}|{
T r [A] = T r 4 C C 5
= T r C 1 C since T r [EF ] = T r [F E]
= T r []
= 1 + 2 + + n :
A1 = C1 C 1
since
C1 C 1 A = C1 C 1 CC 1
= C1 C 1
= CC 1
= I:
xT A1 x = y T Ay 0
AB = CC 1 CC 1
= CC 1 :
Note that is a diagonal matrix with the ith diagonal element equal to i i > 0
which are the eigenvalues of AB: Therefore AB is positive denite. Note that
in general the product of two positive denite matrices is not positive denite.
Answer
The eigenvalues of A are the roots of the equation:
det [A I] = 0:
T
We know that det [B] = det B so that:
h i
T
det [A I] = 0 , det (A I) = 0:
(A I)T = AT I T = AT I
so that:
det [A I] = 0 , det AT I = 0:
Answer
Since A1 exists all eigenvalues are nonzero. We have:
Ax = x
1
=) A1 x = x
CHAPTER 3. MATRIX ALGEBRA 122
1
so that is an eigenvalue of A if and only if is an eigenvalue of A1 : For
example given the matrix:
5 1
A=
2 4
1
has eigenvalues: 1 = 3 and 2 = 16 :
lim Ar = 0:
r!1
Answer
If is diagonal then:
2 3
1 0 0
6 0 2 0 7
6 7
=6 .. .. .. .. 7
4 . . . . 5
0 0 n
CHAPTER 3. MATRIX ALGEBRA 123
and
2 32 3
1 0 0 1 0 0
6 0 2 0 76 0 2 0 7
6 76 7
= 6 .. .. .. .. 76 .. .. .. .. 7
4 . . . . 54 . . . . 5
0 0 n 0 0 n
2 3
21 0 0
6 0 22 0 7
6 7
= 6 .. .. .. .. 7
4 . . . . 5
0 0 2n
by multiplying each row and column one sees that only the diagonal elements
are non-zero. Using mathematical induction, we see that the result is true for
r = 1: Assume it is true for r 1 so that:
2 r1 3
1 0 0
6 0 r1 0 7
6 2 7
r1 = 6 . .. .. .. 7
4 .. . . . 5
0 0 r1
n
then:
r = r1
2 r1 32 3
1 0 0 1 0 0
6 0 r1 0 76 0 2 0 7
6 2 76 7
= 6 . .. .. .. 76 .. .. .. .. 7
4 .. . . . 54 . . . . 5
0 0 r1
n 0 0 n
2 3
r1 0 0
6 0 r2 0 7
6 7
= 6 .. .. .. .. 7:
4 . . . . 5
0 0 rn
Thus the result is true for all r:
If j i j< 1 ; i = 1; 2; : : : n then clearly ri ! 0 as r ! 1 so that: r ! 0 as
r ! 1 and hence:
lim Ar = C lim r C 1
r!1 r!1
= C0C 1
= 0:
Problem 149 What will the matrices (I ) and (I )1 be equal to? Show
1
that I A = C (I ) C 1 ; dene the matrix B = C (I ) C 1 and show
1
that B = (I A) : Why do you have to assume that no eigenvalue of A is
equal to one?
CHAPTER 3. MATRIX ALGEBRA 124
Answer
2 3 2 3
1 0 0 1 0 0
6 0 1 0 7 6 0 2 0 7
6 7 6 7
(I ) = 6 .. .. .. .. 76 .. .. .. .. 7
4 . . . . 5 4 . . . . 5
0 0 1 0 0 n
2 3
1 1 0 0
6 0 1 2 0 7
6 7
= 6 .. .. .. .. 7:
4 . . . . 5
0 0 1 n
Since (I ) is diagonal its inverse is simply the inverse of its diagonal elements
so that:
2 31
1 1 0 0
6 0 1 2 0 7
6 7
(I )1 = 6 .. .. .. . 7
4 . . . .. 5
0 0 1 n
2 1 3
11 0 0
6 0 1
0 7
6 12 7
= 6 .. .. .. .. 7 :
4 . . . . 5
1
0 0 1n
If i = 1 then 1
1i = 1
11 = 1 and so (I )1 would not be dened.
Now:
I A = I CC 1
= CC 1 CC 1
= C (I ) C 1
1
If B = C (I ) C 1 then:
BA = C (I )1 C 1 (I A)
=I
z }| {
1
= C (I ) C 1 C (I ) C 1
= C (I )1 (I ) C 1
= CC 1
= I
so that: B = (I A)1 :
Problem 150 The geometric series says that for j j< 1 that
1
= 1 + + 2 + 3 + :
1
CHAPTER 3. MATRIX ALGEBRA 125
(I A)1 = I + A + A2 + A3 + :
Answer
Since
2 1 3
11 0 0
6 0 1
0 7
6 12 7
(I )1 = 6 .. .. .. .. 7
4 . . . . 5
1
0 0 1n
2 3
1 + 1 + 21 + 0 0
6 0 1 + 2 + 22 + 0 7
6 7
= 6 .. .. .. .. 7
4 . . . . 5
0 0 1 + n + 2n +
= I + + 2 + :
1
Since (I A) = C (I )1 C 1 we have:
1
(I A) = C (I )1 C 1
= C I + + 2 + C 1
= CC 1 + CC 1 + C2 C 1 +
= I + A + A2 + :
Problem 151 Let X and Y be two random variables. Let 2x be the variance of
X; let 2y be the variance of Y; and let xy be the covariance between X and Y:
The correlation coecient is then dened as: = xxy y : The variance covariance
matrix for X and Y is then dened to be:
2
x xy
= :
xy 2y
Using the fact that this matrix is positive semi-denite, show that 1 1
and that the matrix is positive denite as long as 6= 1:
Answer
Recall that det [] = 1 2 where 1 and 2 are the eigenvalues of : Since
is positive semi-denite, det [] = 1 2 0 since the determinant is the
CHAPTER 3. MATRIX ALGEBRA 126
product of the eigenvalues which are greater than equal to zero. Thus:
2
x xy
det [] = det
xy 2y
= 2x 2y ( xy )2
!
2 2 (xy )2
= xy 1 2 2
x y
0 1
B 2 C
B xy C
= 2x 2y B1 C
@ xy A
| {z }
=
= 2x 2y
1 2 0
=) 1 2 0
=) 2 1
=) 1 1:
If 6= 1 then
det [] = 1 2 = 2x 2y 1 2 > 0
Answer
First multiply the three matrices together to verify the result. Now:
" #
p1 p1
C = p12 p1
2
2 2
CHAPTER 3. MATRIX ALGEBRA 127
The eigenvalues of A are the diagonal elements of the matrix in the middle;
i.e., 1 = 3 and 2 = 7:
The columns of C are orthogonal since if c1 is the rst column and c2 is the
second as:
" # " #
p1 p1
c1 = p12 ; c2 = p1
2
2 2
then:
" #
h i p1
cT1 c2 = p1 p1 2 = 0:
2 2 p12
= q
1
jjc2 jj = cT2 c2
v " #
uh i
u p1
= t p1 p12 2
2 p12
= 1:
Taking the rst column of C and multiplying by A as Ac1 we nd that:
Ac1 = 3c1
" p1 # " p3 # "
p1
#
5 2 2 2 2
p1
= p3 = 3 p1
2 5 2 2 2
Answer
Problem 154 If
2 3
1 1
X = 4 1 2 5
1 3
Problem 160 If
2 3
1 1
X = 4 1 2 5
1 3
Answer
Since A is symmetric we can write A as:
A = CC T
where C is orthogonal or C T = C 1 and is diagonal with the eigenvalues of
A along the diagonal or:
2 3
1 0 0
6 0 2 0 7
6 7
=6 . .. .. .. 7:
4 .. . . . 5
0 0 0 n
and where i 0 since A is positive semi-denite. Since i 0 we can take the
positive square root of each of the eigenvalues. Therefore dene B by:
1
B = C 2 C T
where:
2 1 3
12 0 0
6 1 7
6
1 0 n2 0 7
=6
2
6 .. .. .. ..
7:
7
4 . . . . 5
1
0 0 0 n2
You can then verify that B is symmetric, positive semi-denite and that:
1 1 1 1
BB = C 2 C T C 2 C T = C 2 2 C T = CC T = A:
Problem 164 We have for the matrix A below the representation A = CC T
given by:
" p1 # " p1 #
5 2 2
p12 3 0 2
p1
2
A= = p1 p1
:
2 5 2 2
0 7 p12 p12
Answer
We have:
" # p " p1 #
p1 p123 p0 p1
B = 2 2 2
p1
p1 0 7 p1 p1
22 2 2
1p 1
p 1
p 1
p
2p3 + 2p 7 2p 3 2p 7
= 1 1 1 1 :
2 3 2 7 2 3+ 2 7
Answer
Since A is symmetric we can write A as:
A = CC T
Answer
We have:
" # p
p1 p12 3 p0
B = 2
p1 p1 0 7
2 2
" p p #
p3 p72
= p2 p :
p3 p7
2 2
We have:
" p p #" p p #T
p3 p72 p3 p72
T p2 p2
BB = p p
p3 p7 p3 p7
2 2 2 2
5 2
= :
2 5
Answer
Since B is positive denite we can write it as B = DDT : We then have:
det [A B] = det [A B ( 1) B]
= det A B ( 1) DDT
h 1 i
= det D D1 (A B) DT ( 1) I DT
h T i
= det [D] det D1 (A B) D1 ( 1) I det DT
h T i
= det DDT det D1 (A B) D1 ( 1) I
h T i
= det [B] det D1 (A B) D1 ( 1) I
Multivariate Calculus
Calculate
@f (x1 ; x2 ) @f (x1 ; x2 )
; ;
@x1 @x2
@ 2 f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @ 2 f (x1 ; x2 )
; ; and :
@x21 @x1 @x2 @x2 @x1 @x22
Find the Hessian and use this to determine if f (x1 ; x2 ) is concave or convex.
Find the x1 and x2 which solve the rst-order conditions using Cramers rule
and decide if this is a global minimum or maximum.
Answer
We have for 3x21 6x1 x2 + 5x22 4x1 2x2 + 8 that:
133
CHAPTER 4. MULTIVARIATE CALCULUS 134
@f (x1 ; x2 )
= 6x1 6x2 4
@x1
@f (x1 ; x2 )
= 6x1 + 10x2 2
@x2
@ 2 f (x1 ; x2 ) @
= (6x1 6x2 4) = 6
@x21 @x1
2
@ f (x1 ; x2 ) @
= (6x1 + 10x2 2) = 10
@x22 @x2
2
@ f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @
= = (6x1 6x2 4) = 6
@x2 @x1 @x1 @x2 @x2
@
= (6x1 + 10x2 2) = 6 ( i.e., Youngs theorem).
@x1
Therefore the Hessian is given by:
6 6
H (x1 ; x2 ) = :
6 10
Since:
M1 = det [6] = 6 > 0
6 6
M1 = det = 24 > 0
6 10
it follows that H (x) is positive denite for all x and hence f (x1 ; x2 ) is globally
convex. This is illustrated in the plot below:
1600
1400
1200
1000
800
600
400
200
0
-5
0
5
-5
10 0
5
15 15 10
:
f (x1 ; x2 ) = 3x21 6x1 x2 + 5x22 4x1 2x2 + 8
The rst-order conditions then are:
@f (x1 ; x2 )
= 6x1 6x2 4 = 0
@x1
@f (x1 ; x2 )
= 6x1 + 10x2 2 = 0
@x2
CHAPTER 4. MULTIVARIATE CALCULUS 135
Answer
The rst order conditions are:
@f (x1 ; x2 ) 2 1
= =0
@x1 x1 1 x1 x2
@f (x1 ; x2 ) 3 1
= = 0:
@x2 x2 1 x1 x2
These can be rewritten as:
2 (1 x1 x2 ) = x1
3 (1 x1 x2 ) = x2
or:
3x1 + 2x2 = 2
3x1 + 4x2 = 3
so that in matrix notation:
3 2 x1 2
= :
3 4 x2 3
Using Cramers rule we nd that:
2 2 3 2
det det
3 4 1 3 3 1
x1 = = ; x2 = = :
3 2 3 3 2 2
det det
3 4 3 4
CHAPTER 4. MULTIVARIATE CALCULUS 136
To see that this is negative denite for all (x1 ; x2 ) we calculate the leading
principle minors and show that M1 < 0 and M2 > 0 as:
" #
2 1 2 1
M1 = det 2 2 = 2 <0
x1 (1 x1 x2 ) x1 (1 x1 x2 )2
" #
x22 (1x 1x )2 (1x 1x )2
M2 = det 1 1 2 1 2
(1x 1x )2 x32 (1x 1x )2
1 2 1 2
! 2 !
2 1 3 1
= 2 2
x1 (1 x1 x2 )2 x2 (1 x1 x2 )2
!2
1
(1 x1 x2 )2
6 2 1 3 1
= + + > 0:
x21 x22 x21 (1 x1 x2 )2 x22 (1 x1 x2 )2
Note. It is not clear that the second line of M2 is positive. The key part of the
derivation which shows that M2 > 0 is to show that the negative term
!2
1
(1 x1 x2 )2
-6.3
-6.4
-6.5
-6.6
-6.7
-6.8
-6.9
0.46 0.3
0.48 0.32
0.5 0.34
0.52 0.36
0.54 0.38
0.4
f (x1 ; x2 )
The following 3 problems are based on the function:
1=4 1=2
f (x1 ; x2 ) = x1 x2 3x1 2x2 ;
where x1 > 0 and x2 > 0:
Problem 170 Calculate the gradient of f (x1 ; x2 ) and from this nd the rst
order conditions for a minimum or maximum. Using the ln ( ) function, convert
the rst-order conditions into a system of two equations with unknowns y1 =
ln (x1 ) and y2 = ln (x2 ) : Solve this system of equations using Cramers rule and
calculate x1 and x2 :
Answer
We have:
@f (x1 ; x2 ) 1 3=4 1=2
= x x2 3
@x1 4 1
@f (x1 ; x2 ) 1 1=4 1=2
= x x 2
@x2 2 1 2
so that the rst-order conditions are:
@f (x1 ; x2 ) 1 3=4 1=2
= (x ) (x2 ) 3 = 0
@x1 4 1
@f (x1 ; x2 ) 1 1=4 1=2
= (x ) (x2 ) 2=0
@x2 2 1
so that:
3=4 3 1
(x1 ) (x2 )1=2 = 12 =) ln (x1 ) + ln (x2 ) = ln (12)
4 2
1=4 1 1
(x1 ) (x2 )1=2 = 4 =) ln (x1 ) ln (x2 ) = ln (4)
4 2
CHAPTER 4. MULTIVARIATE CALCULUS 138
so that:
3 1
y1 + y = ln (12)
4 2 2
1 1
y y = ln (4)
4 1 2 2
or in matrix notation:
34 1
2 y1 ln (12)
1 1 =
4 2 y2 ln (4)
Since
34 1
2
1
det [A] = det 1 1 = 6= 0:
4 2 4
it follows that exactly one solution to these equations exists and that A1 exists.
Using Cramers rule we nd that:
1
ln (12) 2
det
ln (4) 12
ln (x1 ) = y1 = 3 1
= 2 ln (12) 2 ln (4) ;
4 2
det 1
12
34
4 ln (12)
det 1
ln (4)
ln (x2 ) = y2 = 43 1
= 3 ln (4) ln (12) :
4 2
det 1
4 12
1 1
Thus x1 = ey1 = e2 ln(12)2 ln(4) = 2304 and x2 = ey2 = e3 ln(4)ln(12) = 768 :
The function is plotted below:
0
-0.005
-0.01
-0.015
-0.02
-0.025
-0.03
0 0
0.002 0.002
0.004 0.004
0.006 0.006
0.008 0.008
0.01 0.01
:
1=4 1=2
f (x1 ; x2 ) = x1 x2 3x1 2x2
Problem 171 Calculate the Hessian. Solve for the numerical value of the
eigenvalues of the Hessian, and use this to show that x is a local maximum.
Now show that the Hessian is negative denite for all x using determinants and
use this to show that f (x) is globally concave and that x is a global maximum.
CHAPTER 4. MULTIVARIATE CALCULUS 139
Answer
1=4 1=2
To nd the Hessian we need to calculate second derivatives of x1 x2
3x1 2x2 as:
@ 2 f (x1 ; x2 ) 3 7=4 1=2
= x x2
@x21 16 1
@ 2 f (x1 ; x2 ) 1 1=4 3=2
= x1 x2
@x22 4
2
@ f (x1 ; x2 ) 1 3=4 1=2
= x x2
@x1 @x2 8 1
so that the Hessian is given by:
" #
3 7=4 1=2 1 3=4 1=2
16 x1 x2 8 x1 x2
H (x1 ; x2 ) = 1 3=4 1=2 1=4 3=2 :
x
8 1 x2 14 x1 x2
1 1
Thus substituting x1 = 2304 and x2 = 768 into H (x1 ; x2 ) we nd that:
1 1
H (x1 ; x2 ) = H ; =
2304 768
" 1 7=4 1 1=2 1 1 3=4 1 1=2 #
3
16
= 1
12304
3=4 1768
1=2 8 1 2304
1 1=4 768
1 5=2
8 2304 768 4 2304 768
5184 1152
=
1152 58982
which has eigenvalues of 1 = 5159:3 < 0 and 2 = 59007 < 0 found by
calculating the roots of:
2 + 64166 + 304435 = 0
1 1
so that H (x1 ; x2 ) is negative denite and hence 2304 ; 768 is a local maximum.
We can in fact prove that H (x1 ; x2 ) is negative denite for all x using
determinants since if
" #
3 7=4 1=2 1 3=4 3=2
16 x1 x2 x
8 1 x 2
H (x1 ; x2 ) = 1 3=4 3=2 1=4 3=2
8 x1 x2 14 x1 x2
then:
3 7=4 1=2 3 7=4 1=2
M1 = det x1 x2 = x1 x2 < 0
16 16
" #
3 7=4 1=2 1 3=4 1=2
16 x1 x2 x
8 1 x2
M2 = det 1 3=4 1=2 1=4 3=2
8 x1 x2 14 x1 x2
3 3=2 1 1 3=2
= x1 x2 x1 x1 2
64 64
2 3=2 1
= x x2 > 0
64 1
CHAPTER 4. MULTIVARIATE CALCULUS 140
1 1
so that f (x1 ; x2 ) is globally concave so that 2304 ; 768 is a global maximum.
This is illustrated in the plot of f (x1 ; x2 ) below:
0.001
0
-0.001
-0.002
-0.003
-0.004
-0.005
-0.006
0 0
0.0005 0.0005
0.001 0.001
0.0015 0.0015
0.002 0.002
:
1=4 1=2
f (x1 ; x2 ) = x1 x2 3x1 2x2
Problem 172 Consider the function:
1 1
f (x1 ; x2 ) = exp ln (x1 ) + ln (x2 ) 3eln(x1 ) 2eln(x2 ) :
4 2
@f (x1 ;x2 )
Simplify the function so there are no exp0 s or ln0 s: Calculate @x1 and
@f (x1 ;x2 )
@x2 and write down the rst-order conditions for a minimum or maximum.
Using the ln ( ) function convert the rst-order conditions into a system of two
equations with unknowns w1 = ln (x1 ) and w2 = ln (x2 ) : Solve this system of
equations using Cramers rule and calculate x1 and x2 :
Answer
Simplifying we have:
1 1
f (x1 ; x2 ) = exp ln (x1 ) + ln (x2 ) 3eln(x1 ) 2eln(x2 )
4 2
1 1
= exp ln (x1 ) exp ln (x2 ) 3x1 2x2
4 2
1 1
= exp ln x14 exp ln x22 3x1 2x2
1 1
= x14 x23 3x1 2x2
which is the identical function considered in the previous two questions and so
there is no need to repeat the work we did there.
Problem 173 Write this function using matrix notation as f (x) = aT x+xT Ax
where x and a are 2 1 vectors and A is a symmetric 2 2 matrix. Calculate
@f (x1 ;x2 )
@x1 and @f (x1 ;x2 )
@x2 and write down the rst-order conditions. Solve the rst-
order conditions using Cramers rule to nd x1 and x2 :
Answer
We can write f (x) as:
x1 5 3 x1
f (x) = 2 3 + x1 x2 :
x2 3 4 x2
Now:
@f (x1 ; x2 )
= 10x1 6x2 2
@x1
@f (x1 ; x2 )
= 6x1 + 8x2 3:
@x2
The rst-order conditions then are:
@f (x1 ; x2 )
= 10x1 6x2 2 = 0
@x1
@f (x1 ; x2 )
= 6x1 + 8x2 3 = 0
@x2
so that in matrix notation:
10 6 x1 2
=
6 8 x2 3
so that:
2 6 10 2
det det
3 8 17 6 3 21
x1 = = ; x2 = = :
10 6 22 10 6 22
det det
6 8 6 8
Problem 174 Calculate the Hessian of f (x1 ; x2 ). Show that H (x1 ; x2 ) is al-
ways positive denite using determinants and using eigenvalues. Show that
f (x1 ; x2 ) is globally convex. Show that the solution to the rst-order conditions
x1 ; x2 is a global minimum.
CHAPTER 4. MULTIVARIATE CALCULUS 142
Answer
@ 2 f (x1 ; x2 ) @
= (10x1 6x2 2) = 10
@x21 @x1
2
@ f (x1 ; x2 ) @
= (6x1 + 8x2 3) = 8
@x22 @x2
@ 2 f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @
= = (10x1 6x2 2) = 6
@x2 @x1 @x1 @x2 @x2
@
= (6x1 + 8x2 3) = 6 ( i.e., Youngs theorem).
@x1
Therefore the Hessian is given by:
10 6
H (x1 ; x2 ) = :
6 8
Since:
M1 = det [10] = 10 > 0
10 6
M1 = det = 44 > 0
6 8
it follows that H (x) is positive denite for all x and hence f (x1 ; x2 ) is globally
convex. This is illustrated in the plot below:
3000
2500
2000
1500
1000
500
0
-15
-10
-5
0
5 -10 -15
10 0 -5
10 5
15 15
Answer
We have
@f (x1 ; x2 )
= 3 + 8x1 + 4x2
@x1
@f (x1 ; x2 )
= 2 + 4x1 + 12x2
@x2
2
@ f (x1 ; x2 ) @
= (3 + 8x1 + 4x2 ) = 8
@x21 @x1
@ 2 f (x1 ; x2 ) @
= (3 + 4x1 + 12x2 ) = 12
@x22 @x2
@ 2 f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @
= = (3 + 8x1 + 4x2 ) = 4
@x2 @x1 @x1 @x2 @x2
@
= (3 + 4x1 + 12x2 ) = 4 ( i.e., Youngs theorem).
@x1
Therefore the Hessian is given by:
8 4
H (x1 ; x2 ) = :
4 12
Since:
it follows that H (x) is positive denite for all x and hence f (x1 ; x2 ) is globally
convex. This is illustrated in the plot below:
18
16
14
12
10
8
6
4
2
0
-1
-0.5
0
0.5 -1
-0.5
0
1 1 0.5
:
f (x1 ; x2 ) = 3x1 + 2x2 + 4x21 + 6x22 + 4x1 x2
CHAPTER 4. MULTIVARIATE CALCULUS 144
so that:
3 4 8 3
det det
2 12 7 4 2 1
x1 = = ; x2 = = :
8 4 20 8 4 20
det det
4 12 4 12
7 1
Since f (x1 ; x2 ) is globally convex, it follows that x1 = 20 ; x2 = 20 is a
global minimum.
Answer
First simplifying we have:
6 5=6 1=6 1
f (x1 ; x2 ) = ln x1 x2 ln (x1 ) 5x1 4x2
5 5
6 1
5=6 1=6
= ln x1 + ln x2 ln (x1 ) 5x1 4x2
5 5
6 5 1 1
= ln (x1 ) + ln (x2 ) ln (x1 ) 5x1 4x2
5 6 6 5
1 1
= ln (x1 ) ln (x1 ) + ln (x2 ) 5x1 4x2
5 5
4 1
= ln (x1 ) + ln (x2 ) 5x1 4x2 :
5 5
CHAPTER 4. MULTIVARIATE CALCULUS 145
Thus:
@f (x1 ; x2 ) 4 1
= 5
@x1 5 x1
@f (x1 ; x2 ) 1 1
= 4
@x2 5 x2
@ 2 f (x1 ; x2 ) @ 4 1 4 1
= 5 = 2
@x21 @x1 5 x1 5 x1
2
@ f (x1 ; x2 ) @ 1 1 1 1
= 4 = 2
@x22 @x2 5 x2 5 x2
2
@ f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @ 4 1
= = 5 =0
@x2 @x1 @x1 @x2 @x2 5 x1
@ 1 1
= 4 = 0 ( i.e., Youngs theorem).
@x1 5 x2
-3.2
-3.4
-3.6
-3.8
-4
-4.2
0.02 0.02
0.04
0.04 0.06
0.08
0.06 0.1
0.12
0.08 0.14
0.16
0.18
0.1 0.2
4 1
f (x1 ; x2 ) = 5 ln (x1 ) + 5 ln (x2 ) 5x1 4x2
CHAPTER 4. MULTIVARIATE CALCULUS 146
Answer
We have
@f (x1 ; x2 )
= 3x2 6x1 2
@x1
@f (x1 ; x2 )
= 3x1 10x2 3
@x2
@ 2 f (x1 ; x2 ) @
= (3x2 6x1 2) = 6
@x21 @x1
2
@ f (x1 ; x2 ) @
= (3x1 10x2 3) = 10
@x22 @x2
2
@ f (x1 ; x2 ) @ 2 f (x1 ; x2 ) @
= = (3x2 6x1 2) = 3
@x2 @x1 @x1 @x2 @x2
@
= (3x1 10x2 3) = 3 ( i.e., Youngs theorem).
@x1
Therefore the Hessian is given by:
6 3
H (x1 ; x2 ) = :
3 10
Since:
it follows that H (x) is negative denite for all x and hence f (x1 ; x2 ) is globally
concave This is illustrated in the plot below:
8
6
4
2
0
-2
-4
-1
-0.5
0
0.5 -1
-0.5
0
1 1 0.5
:
f (x1 ; x2 ) = 3x1 x2 3x21 5x22 2x1 3x2 + 7
so that:
2 3 6 2
det det
3 10 29 3 3 8
x1 = = ; x2 = = :
6 3 51 6 3 17
det det
3 10 3 10
Since f (x1 ; x2 ) is globally concave it follows that x = 29 8
51 ; 17 is a global
maximum.
Answer
Simplifying we have:
6
f (x1 ; x2 ) = ln e3 ln(x1 ) e5 ln(x2 ) e0 eln(x1 ) x2
6
= ln e3 ln(x1 ) e5 ln(x2 ) + ln (1 x1 x2 )
= 3 ln (x1 ) + 5 ln (x2 ) + 6 ln (1 x1 x2 ) :
3 (1 x1 x2 ) = 6x1
5 (1 x1 x2 ) = 6x2
or:
9x1 + 3x2 = 3
3x1 + 11x2 = 5
so that:
9 3 x1 3
=
3 11 x2 5
so that:
3 3 9 3
det det
5 11 1 3 5 2
x1 = = ; x2 = = :
9 3 5 9 3 5
det det
3 11 3 11
The Hessian is
" #
x32 (1x 6x )2 (1x 6x )2
1 1 2 1 2
(1x 6x )2 x52 (1x 6x 2
1 2 2 1 2)
CHAPTER 4. MULTIVARIATE CALCULUS 149
so that:
" #
3 6 3 6
M1 = det 2 2 = 2 <0
x1 (1 x1 x2 ) x1 (1 x1 x2 )2
" #
x32 (1x 6x )2 (1x 6x )2
M2 = det 1 1 2 1 2
(1x 6x )2 x52 (1x 6x )2
1 2 2 1 2
! !
3 6 5 6
= 2 2
x1 (1 x1 x2 )2 x2 (1 x1 x2 )2
!2
6
(1 x1 x2 )2
15 18 1 30 1
= + + > 0:
x21 x22 x21 (1 x1 x2 )2 x22 (1 x1 x2 )2
The key part of the derivation is that the negative term
!2
6
(1 x1 x2 )2
drops out in the simplication.
Therefore H is negative denite for all x so that f (x1 ; x2 ) is globally concave
and so x1 = 13 ; x2 = 12 is a global maximum. See the graph of f (x1 ; x2 ) below:
-15.5
-16
-16.5
-17
-17.5
-18
-18.5
0.36 0.1
0.38 0.15
0.4 0.2
0.42 0.25
0.44 0.3
f (x1 ; x2 )
Answer
We have:
@F (L; K) 1 1 1 1 1
MPL (L; K) = =1+ L 2 K 4 > 0 since L 2 > 0; K 4 > 0
@L 2
@F (L; K) 1 1 3 1 3
MPK (L; K) = =1+ L 2 K 4 > 0 since L 2 > 0; K 4 > 0:
@K 4
@MPL (L;K)
Also there is a diminishing marginal product of labour and capital since: @L =
2 2
@ F (L;K) @MPK (L;K) @ F (L;K)
@L2 < 0 and @K = @K 2 < 0 since:
@M PL (L; K) @ 2 F (L; K) 1 3 1 3 1
= 2
= L 2 K 4 < 0 since L 2 > 0; K 4 > 0
@L @L 4
@MPK (L; K) @ 2 F (L; K) 3 1 7 1 7
= = L 2 K 4 < 0 since L 2 > 0; K 4 > 0:
@K @K 2 16
To show F (L; K) we need to calculate the Hessian. Since the diagonal
2 2
elements: @ F@L
(L;K)
2 and @ F@K(L;K)
2 have already been calculated we just need the
o-diagonal element:
@ 2 F (L; K) 1 1 3
= L 2 K 4 > 0:
@L@K 8
2
(Since @MP@K
L (L;K)
= @ @L@K
F (L;K)
> 0, and increase in capital increases the marginal
product of labour.) The Hessian is:
1 3 1 1 12 3
4L 2 K 4 8 L K 4
H (L; K) = 1 1 3 3 1 7 :
8L
2K 4 16 L 2 K 4
We need to show that H is negative denite for all L and K: Using principle
minors we nd that:
1 3 1
M1 = L 2 K 4 < 0
4
2
1 3 1 3 1
7 1 1
3
M2 = L 2K4 L2 K 4 L 2K 4
4 16 8
3 2 6 1 2 6
= L 2 K 4 L 2 K 4
64 64
3 2 6
= L 2K 4 > 0
64
1 1
so that H is negative denite and hence F (L; K) = L + K + L 2 K 4 is globally
concave.
CHAPTER 4. MULTIVARIATE CALCULUS 151
Problem 180 Find the rst order conditions for prot maximization. Show
that these require that: w > 1 and r > 1: Using the ln ( ) function, convert the
rst order conditions into a set of linear equations involving l = ln (L) and
k = ln (K ) and solve these equations using Cramers rule. Show that @l
@w < 0:
Will the second order conditions for prot maximization be satised?
Answer
The prot function is:
1 1
(L; K) = P L + K + L 2 K 4 W L RK
since w > 1:
The next 2 problems are based on the following information: Sup-
pose that a perfectly competitive has a production function given by:
2 1
Q = L5 K 5
where L is labour, K is capital and Q is output. The price of Q is P; the nominal
wage is W and the rental cost of capital is R: Prots are
2 1
(L; K) = P L 5 K 5 W L RK:
Problem 181 Calculate the marginal product of labour and capital. Prove there
is a positive and diminishing marginal product of labour and a positive and
diminishing marginal product of capital. Prove that the production function is
concave.
Answer
We have
@F (L; K) 2 3 1
MPL (L; K) = = L 5K5 > 0
@L 5
@F (L; K) 1 2 4
M PK (L; K) = = L5 K 5 > 0
@K 5
We have diminishing marginal products since:
@MPL (L; K) @ 2 F (L; K) 6 8 1
= = L 5 K 5 < 0
@L @L2 25
@M PK (L; K) @ 2 F (L; K) 4 2 9
= = L 5 K 5 < 0:
@K @K 2 25
To show F (L; K) is concave we need to calculate the Hessian. Since the
2 2
diagonal elements: @ F@L
(L;K)
2 and @ F@K(L;K)
2 have already been calculated we just
need the o-diagonal element:
@ 2 F (L; K) 2 3 4
= L 5 K 5 > 0:
@L@K 25
2
(Since @MP@K
L (L;K)
= @ @L@K
F (L;K)
> 0, an increase in capital increases the marginal
product of labour.) The Hessian is:
6 85 1 2 35 4
25 L K 5 25 L K 5
H (L; K) = 2 35 4 4 2 9 :
25 L K 5 25 L 5 K 5
Using principle minors we nd that:
6 8 1
M1 = L 5 K 5 < 0
25
2
6 8 1 4 2 9 2 3 4
M2 = L 5 K 5 L 5 K 5 L 5K 5
25 25 25
4 6 8
= L 5K 5 > 0
125
CHAPTER 4. MULTIVARIATE CALCULUS 153
Problem 182 Find the rst-order conditions for prot maximization letting
L and K denote the prot maximizing amount of labour and capital. Letting
l = ln (L ) and k = ln (K ) ; transform the rst-order conditions to obtain
two linear equations. Write these linear equations in matrix form, solve for l
using Cramers rule and show that:
@l
< 0:
@w
Answer
The rst-order conditions are:
@ (L ; K ) 2 2 1
= 0 = P (L ) 5 1 (K ) 5 W = 0
@L 5
5
3 1 5
=) (L ) (K ) 5 = w
2
3 1 5
=) ln (L ) + ln (K ) = ln
w
5 5 2
3 1 5
=) l + k = ln w
5 5 2
@ (L ; K ) 1 2 4
= 0 = P (L ) 5 (K ) 5 R = 0
@K 5
25 4
=) (L ) (K ) 5 = 5r
2 4
=) ln (L ) + ln (K ) = ln (5r)
5 5
2 4
=) l + k = ln (5r) :
5 5
Thus in matrix notation we have:
3 1
5
5 5 l ln 2 w
2 =
5 45 k ln (5r)
CHAPTER 4. MULTIVARIATE CALCULUS 154
Answer
We have
@F (L; K)
M PL (L; K) = = L1 K > 0 =) > 0 since L1 > 0 and K > 0
@L
@F (L; K)
MPK (L; K) = = L K 1 > 0 =) > 0 since L > 0 and K 1 > 0
@K
CHAPTER 4. MULTIVARIATE CALCULUS 155
@M PL (L; K) @ 2 F (L; K)
= = ( 1) L2 K < 0
@L @L2
=) < 1 since > 0; L2 > 0 and K > 0
@M PK (L; K) @ 2 F (L; K)
= = ( 1) L K 2 < 0
@K @K 2
=) < 1 since > 0; L > 0 and K 2 > 0:
@ 2 F (L; K)
= L1 K 1 > 0:
@L@K
2
(Since @MP@K
L (L;K)
= @ @L@K
F (L;K)
> 0, an increase in capital increases the marginal
product of labour.) The Hessian is:
( 1) L2 K L1 K 1
H (L; K) = :
L1 K 1 ( 1) L K 2
We need to show that if + < 1 then H is negative denite for all L and K:
Using principle minors we nd that:
Problem 184 Find the rst-order conditions for prot maximization letting
L and K denote the prot maximizing amount of labour and capital. Letting
l = ln (L ) and k = ln (K ) ; transform the rst-order conditions to obtain
two linear equations. Write these linear equations in matrix form, solve for l
using Cramers rule and show that:
@l
< 0:
@w
CHAPTER 4. MULTIVARIATE CALCULUS 156
Answer
The prot function is:
(L; K) = P L K W L RK
or:
(1)
w 1
l r 1
L = e =
1
(1)
k w 1 r
K = e = :
Using the chain rule we have:
@l ( 1) 1
= < 0 since 0 < < 1 and + < 1:
@w 1 w
Problem 185 Suppose the rms production function is given by:
p
Q = F (L; K) = L + K + 2 LK
Answer
We have:
@F (L; K) 1 1 1 1
MPL (L; K) = = 1 + L 2 K 2 > 0 since L 2 > 0; K 2 > 0
@L
@F (L; K) 1 1 1 1
M PK (L; K) = = 1 + L 2 K 2 > 0 since L 2 > 0; K 2 > 0:
@K
Also there is a diminishing marginal product of labour and capital since: since:
@MPL (L; K) @ 2 F (L; K) 1 3 1 3 1
= 2
= L 2 K 2 < 0 since L 2 > 0; K 2 > 0
@L @L 2
@M PK (L; K) @ 2 F (L; K) 1 1 3 1 3
= = L 2 K 2 < 0 since L 2 > 0; K 2 > 0:
@K @K 2 2
To nd if F (L; K) is concave we need to calculate the Hessian. Since the
2 2
diagonal elements: @ F@L
(L;K)
2 and @ F@K
(L;K)
2 have already been calculated we just
need the o-diagonal element:
@ 2 F (L; K) 1 1 1
= L 2 K 2 > 0:
@L@K 2
2
(Since @MP@K
L (L;K)
= @ @L@K
F (L;K)
> 0, and increase in capital increases the marginal
product of labour.) The Hessian is:
1 3 1 1 1 1
L 2K2 L 2K 2
H (L; K) = 1 2 1 1 2 1 1 3 :
2L K 2L2 K 2
2 2
CHAPTER 4. MULTIVARIATE CALCULUS 158
We need to show that H is negative denite for all L and K: Using principle
minors we nd that:
1 3 1
M1 = L 2 K 2 < 0
2
2
1 3 1 1 1 3 1 1 1
M2 = L K 2 2 L K
2 2 L K
2 2
2 2 2
1 1 1 1 1 1
= L K L K
4 4
= 0:
Since M2 = 0 (and not M2 > 0 as required) the Hessian is not negative denite.
The next 3 problems are based on the following information: Sup-
pose that a rm has the following prot function:
where L is the amount of labour and K the amount of capital the rm hires.
Problem 186 If L and K are the optimal levels of labour and capital, what
are the rst order conditions for prot maximization?
Answer
We have:
@ (L; K) 1 3=4 1=4
= L K 3
@L 2
@ (L; K) 1 1=4 3=4
= L K 4
@K 2
so that the rst-order conditions become:
@ (L ; K ) 1 3=4
= (L ) (K )1=4 3 = 0
@L 2
@ (L; K) 1 1=4
= (L ) (K )3=4 4 = 0:
@K 2
Problem 187 Using the ln ( ) function, transform the rst order conditions
in a) to obtain a system of 2 equations in 2 unknowns where the unknowns are
l = ln (L ) and k = ln (K ) : Solve for these using Cramers rule and give L
and K :
CHAPTER 4. MULTIVARIATE CALCULUS 159
Answer
We have from the rst rst-order condition:
1 3=4 1=4
(L ) (K ) 3 = 0
2
=) (L )3=4 (K )1=4 = 6
3 1
=) ln (L ) + ln (K ) = ln (6)
4 4
3 1
=) l + k = ln (6)
4 4
while the second yields:
1 1=4
(L ) (K )3=4 4 = 0
2
=) (L )1=4 (K )3=4 = 8
1 3
=) ln (L ) ln (K ) = ln (8)
4 4
1 3
=) l k = ln (8) :
4 4
Combining these two results and using matrix notation we nd that:
3 1
4 4 l ln (6)
1 =
4 34 k ln (8)
so that:
p
3 1 3
L = el = e 2 ln(6) 2 ln(8) =
72
p
3 1 3
K = ek = e 2 ln(8) 2 ln(6) = :
96
Problem 188 Show that (L; K) is strictly concave and that the second order
conditions are satised.
CHAPTER 4. MULTIVARIATE CALCULUS 160
Answer
We have:
@ 2 (L; K) 3 @ 2 (L; K) 1
= L7=4 K 1=4 ; = L3=4 K 3=4
@L2 8 @L@K 8
2
@ (L; K) 3
= L1=4 K 7=4
@K 2 8
so that the Hessian is:
38 L7=4 K 1=4 1 3=4 3=4
8L K
H (L; K) = 1 3=4 3=4 :
8L K 38 L1=4 K 7=4
This is negative denite for all L and K since:
3 7=4 1=4 3
M1 = det L K = L7=4 K 1=4 < 0
8 8
3 7=4 1=4 1 3=4 3=4
L K L K
M2 = det 1 8 3=4 3=4 8 3 1=4 7=4
8 L K 8 L K
9 6=4 6=4 1
= L K L6=4 K 6=4
64 64
8 6=4 6=4
= L K > 0:
64
p p
3 3
Therefore F (L; K) is globally concave and L = 72 ; K
= 96 is a global
maximum. The prot function is plotted below:
0.1
0
-0.1
-0.2
-0.3
-0.4
0 0
0.02 0.02
0.04 0.04
L0.06 0.06K
0.08 0.08
0.1 0.1
Answer
F (L; K) is concave if its Hessian given by:
" 2 2
#
@ F (L;K) @ F (L;K)
HF (L; K) = @L2 @L@K
@ 2 F (L;K) @ 2 F (L;K)
@L@K @K 2
(L; K) = P F (L; K) W L RK
where:
@ 2 (L; K) @ 2 F (L; K) @ 2 (L; K) @ 2 F (L; K)
= P ; =P
@L2 @L 2 @L@K @L@K
2
@ (L; K) @ 2 F (L; K)
= P
@K 2 @K 2
so that:
" #
@ 2 (L;K) @ 2 (L;K)
H (L; K) = @L2 @L@K
@ 2 (L;K) @ 2 (L;K)
@L@K @K 2
" 2 2
#
P @ F@L (L;K)
2 P @ @L@K
F (L;K)
= @ 2 F (L;K) @ 2 F (L;K)
P @L@K P @K 2
" 2 #
@ F (L;K) @ 2 F (L;K)
= P @L2 @L@K
@ 2 F (L;K) @ 2 F (L;K)
@L@K @K 2
= P HF (L; K) :
Since HF (L; K) is negative denite for all (L; K) (since F (L; K) is concave),
and since P > 0; it follows that H (L; K) is also negative denite for all (L; K).
Thus any (L ; K ) which solves the rst-order conditions is the unique prot
maximizing amount of labour and capital.
CHAPTER 4. MULTIVARIATE CALCULUS 162
Show that:
P Pn Pn Pn
( ni=1 Yi ) 2
i=1 Xi ( i=1 Xi ) ( i=1 Xi Yi )
^ = P P 2
n ni=1 Xi2 ( ni=1 Xi )
Pn Pn Pn
^ n i=1 Xi Yi ( i=1 Xi ) ( i=1 Yi )
= P P 2 :
n ni=1 Xi2 ( ni=1 Xi )
Show that S (; ) is globally convex as long as the Xi 0 s are not all identical.
Answer
We have using the sum and chain rules that:
n
X
@S (; )
= 2 (Yi Xi )
@ i=1
Xn
@S (; )
= 2 Xi (Yi Xi )
@ i=1
or in matrix notation:
Pn Pn
Pnn Pn
i=1 Xi
^ Pn i=1 Yi
2 ^ = :
i=1 Xi i=1 Xi i=1 Xi Yi
As long as the Xi0 s are not all identical the two columns of X are linearly
independent and hence the rank of X is 2: From this it follows that X T X is
positive denite and so S (; ) is globally convex. Thus ^ is a unique global
^;
minimum.
Problem 191 Let Y^i = ^ i be the tted value and let e^i = Yi
^ + X ^ i=
^ X
^
Yi Yi be the least squares residual. Show that:
n
X
e^i = 0; Y = ^X
^ +
i=1
n
X n
X
Xi e^i = 0; Y^i e^i = 0:
i=1 i=1
Answer
From the rst-order conditions we have:
e^i
@S ^
^; X z
n }| { n
X
= 2 Yi ^
^ Xi = 0 =) e^i = 0
@ i=1 i=1
n ! n
X X
=) n^
+ ^=
Xi Yi =) Y = ^ X;
^ +
i=1 i=1
e^i
@S ^
^; n
X z
}| { n
X
= 2 Xi Yi ^ i = 0 =)
^ X Xi e^i = 0:
@ i=1 i=1
Therefore:
n
X n
X
Y^i e^i = ^ i e^i
^ + X
i=1 i=1
Xn n
X
=
^ ^
e^i + Xi e^i = 0:
i=1 i=1
Now:
But:
n
X n
X n
X
Y^i Y e^i = Y^i e^i Y e^i = 0
i=1 i=1 i=1
so that:
n
X n 2 X
n
2 X
Yi Y = Y^i Y + e^2i :
i=1 i=1 i=1
Therefore:
Pn 2
+ Pn e^2 Pn 2
^
i=1 Yi Y i=1 i e^
1= Pn 2 = R + Pn i=1 i 2
2
i=1 Yi Y i=1 Yi Y
CHAPTER 4. MULTIVARIATE CALCULUS 165
Pn ^ 2
0 and Pn Yi Y 2 > 0 we have:
so that since: i=1 Yi Y i=1
Pn 2
Y^i Y
i=1
R2 = Pn 0
2
i=1 Yi Y
Pn
and since ^2i
i=1 e 0 we have:
Pn
e^2
R = 1 Pn i=1 i 2 1:
2
i=1 Yi Y
Problem 192 Now consider the weighted sum of squares function given by:
n
X
SW (; ) = wi (Yi Xi )2
i=1
Pn ^ minimizes SW (; ) ;
where the weights wi satisfy: i=1 wi = n: Show that if
then:
P P P
^ n ni=1 wi Xi Yi ( ni=1 wi Xi ) ( ni=1 wi Yi )
= P P 2 :
n ni=1 wi Xi2 ( ni=1 wi Xi )
Answer
We have using the sum and chain rules that:
n
X
@S (; )
= 2 wi (Yi Xi )
@ i=1
Xn
@S (; )
= 2 wi Xi (Yi Xi )
@
i=1
or in matrix notation:
Pn Pn
Pn n Pni=1 wi X2i
^ P i=1 wi Yi
^ = n :
i=1 wi Xi i=1 wi Xi i=1 wi Xi Yi
Answer
The log-likelihood is given by:
l (p1 ; p2 ; : : : pm ) = n1 ln (p1 ) + n2 ln (p2 ) + + nm ln (pm ) :
We need to maximize this but the proportions must sum to 1 so that we con-
struct the Lagrangian:
L (; p1 ; p2 ; : : : pm ) = n1 ln (p1 ) + n2 ln (p2 ) + + nm ln (pm )
+ (1 p1 p2 pm )
which leads to the rst order conditions:
@L ;^ p^1 ; p^2 ; : : : p^m
= 1 p^1 p^2 p^m
@
@L ;^ p^1 ; p^2 ; : : : p^m
n1 ^ ^ p1 = n1
= = 0 =) ^
@p1 p^1
@L ;^ p^1 ; p^2 ; : : : p^m
n2 ^ ^ p2 = n2
= = 0 =) ^
@p2 p^2
..
.
^
@L ; p^1 ; p^2 ; : : : p^m nm ^ ^ pm = nm :
= = 0 =) ^
@pm p^m
We therefore have:
^ pj =
^ nj for j = 1; 2; : : : m
0 1
^ @p^1 + p^2 + + p^m A = n1 + n2 + + nm
=)
| {z } | {z }
=1 =n
^=n
=)
CHAPTER 4. MULTIVARIATE CALCULUS 167
and so
nj
p^j = :
n
Thus if for n = 2000 people interviewed, n1 = 525 support the Blue party,
n2 = 1022 support the Green Party and n3 = 473 support the Red party then
the maximum likelihood estimates are:
525 1022
p^1 = = 0:263; p^2 = = 0:511;
2000 2000
453
p^3 = = 0:226
2000
so that an estimated 26% of the population support the Blue party, and esti-
mated 51% the Green party and an estimated 23% the Red party.
Answer
Dierentiating both sides of
U (Q1 ; h (Q1 )) = c
so that:
" @2U @2 U
# T
0
@Q21 @Q1 @Q2 1
1 h (Q1 ) @2U @2 U h0 (Q1 )
00 @Q1 @Q2 @Q21
h (Q1 ) = @U
:
@Q2
Answer
We have:
1=3 1=3
L (; Q1 ; Q2 ) = 3Q1 + 3Q2 + (Y P1 Q1 P2 Q2 )
so that
@L (; Q1 ; Q2 )
= Y P1 Q1 P2 Q2
@
@L (; Q1 ; Q2 ) 2=3
= Q1 P1
@Q1
@L (; Q1 ; Q2 ) 2=3
= Q2 P2
@Q2
CHAPTER 4. MULTIVARIATE CALCULUS 169
so that:
2 3
0 P1 P2
6 5=3 7
det [H (; Q1 ; Q2 )] = det 4 P1 23 Q1 0 5
5=3
P2 0 23 Q2
2 2 5=3 2 2 5=3
= P Q + P2 Q1 >0
3 1 2 3
so that the second order conditions are satised.
Answer
We have:
2=3 32
Q1 P1 = 0 =) Q1 = ( P1 )
3 12
=) P1 Q1 = 2 P1
CHAPTER 4. MULTIVARIATE CALCULUS 170
and
2=3 32
Q2 P2 = 0 =) Q2 = ( P2 )
3 12
=) P2 Q2 = 2 P2
Therefore:
3 32
Q1 = 2 P1
32
Y P1
= 1
1
P1 2 + P2 2
and
3 32
Q2 = 2 P2
32
Y P2
= 1 :
1
P1 2 + P2 2
Problem 197 Suppose the individual was thrown in prison. By law the prison
must insure that the individual obtain enough Q1 and Q2 to obtain Umin units
of utility. The cost of Q1 and Q2 will then be P1 Q1 + P2 Q2 which the prison
wishes to minimize. Write down the Lagrangian and the rst-order conditions
for this cost minimization problem. Solve for ; Q1 and Q2 from the rst-order
conditions.
Answer
The constraint is that
1=3 1=3
Umin = U (Q1 ; Q2 ) = 3Q1 + 3Q2
and the objective function is now expenditure or P1 Q1 +P2 Q2 ; which the warden
attempts to minimize subject to the constraint. The Lagrangian is therefore:
1=3 1=3
L (; Q1 ; Q2 ) = P1 Q1 + P2 Q2 + Umin 3Q1 3Q2
CHAPTER 4. MULTIVARIATE CALCULUS 171
so that
@L (; Q1 ; Q2 ) 1=3 1=3
= Umin 3Q1 3Q2
@
@L (; Q1 ; Q2 ) 2=3
= P1 Q1
@Q1
@L (; Q1 ; Q2 ) 2=3
= P2 Q2
@Q2
so that the rst-order conditions are:
@L ( ; Q1 ; Q2 ) 1=3 1=3
= Umin 3Q1 3Q2 =0
@
@L ( ; Q1 ; Q2 ) 2=3
= P1 Q1 =0
@Q1
@L ( ; Q1 ; Q2 ) 2=3
= P2 Q2 = 0:
@Q2
Thus:
2=3 3=2
P1 = Q1 =) Q1 = 3=2 P1
2=3 3=2
P2 = Q2 =) Q2 = 3=2 P2 :
and:
3=2
Q2 = 3=2 P2
2 2 3=2
Umin 1=2 1=2 3=2
=) Q2 = P1 + P2 P2
9
(Umin )3 1=2 1=2
3
3=2
=) Q2 = P1 + P2 P2 :
27
The next 3 problems are based on the following information: Con-
sider a household with the utility function:
1=2 1=2
U (Q1 ; Q2 ) = 2Q1 + 2Q2 :
The household has income Y; the price of good 1 is P1 and the price of good 2
is P2 so that the budget constraint is:
Y = P1 Q1 + P2 Q2 :
Problem 198 What is the Lagrangian for the utility maximization problem that
the household faces? From this nd the rst order conditions. Show that the
second order conditions will be satised.
Answer
We have:
1=2 1=2
L (; Q1 ; Q2 ) = 2Q1 + 2Q2 + (Y P1 Q1 P2 Q2 )
so that
@L (; Q1 ; Q2 )
= Y P1 Q1 P2 Q2
@
@L (; Q1 ; Q2 )
= (Q1 )1=2 P1
@Q1
@L (; Q1 ; Q2 )
= (Q2 )1=2 P2
@Q2
the rst-order conditions are:
@L ( ; Q1 ; Q2 )
= Y P1 Q1 P2 Q2 = 0
@
@L ( ; Q1 ; Q2 )
= (Q1 )1=2 P1 = 0
@Q1
@L ( ; Q1 ; Q2 )
= (Q2 )1=2 P2 = 0:
@Q2
CHAPTER 4. MULTIVARIATE CALCULUS 173
so that:
2 3
0 P1 P2
6 1 3=2 7
H (; Q1 ; Q2 ) = 4 P1 2 Q1 0 5
3=2
P2 0 12 Q2
so that:
2 3
0 P1 P2
6 3=2 7
det [H (; Q1 ; Q2 )] = det 4 P1 12 Q1 0 5
1 3=2
P2 0 2 Q2
1 2 3=2 1 2 3=2
= P Q + P2 Q1 >0
2 1 2 2
so that the second order conditions are satised.
1
Problem 199 From the rst-order conditions show that P1 Q1 = ( )2 P1
and
1
that P2 Q2 = ( )2 P2
. Now use this to nd Q1 , Q2 and (the Lagrange
multiplier). Show that the budget share of Q1 will be P1P+P
2
2
:
Answer
We have:
2 1
(Q1 )1=2 P1 = 0 =) Q1 = ( P1 ) = 2
( ) P12
1
=) P1 Q1 = 2
( ) P1
and
2 1
(Q2 )1=2 P2 = 0 =) Q2 = ( P2 ) = 2
( P2 )
1
=) P2 Q2 = 2
( ) P2
CHAPTER 4. MULTIVARIATE CALCULUS 174
Therefore:
1 1 Y 1
Q1 = 22 =
P
( ) 1 1
+ 1 P12
P1 P2
P1 Q1 1 1
=) =
Y 1
+ 1 P1
P1 P2
1 P2
= =
P1
1 + P2 P1 + P2
and
1 1 Y 1
Q2 = 22 =
P
( ) 2 1
+ 1 P22
P1 P2
P2 Q1 1 1
=) =
Y 1
+ 1 P2
P1 P2
1 P1
= = :
P2
1 + P1 P1 + P2
where: i 0,
1 + 2 + + n = 1
Y = P1 Q1 + P2 Q2 + + Pn Qn :
Answer
The Lagrangian is:
L (; Q1 ; Q2 ; : : : Qn ) = 1 ln (Q1 ) + 2 ln (Q2 ) + + n ln (Qn )
+ (Y P1 Q1 P2 Q2 Pn Qn )
so that the rst-order conditions are:
@L ( ; Q1 ; Q2 ; : : : Qn )
= 0 = Y P1 Q1 P2 Q2 Pn Qn
@
@L ( ; Q1 ; Q2 ; : : : Qn ) 1
= 0= P1 =) 1 = P1 Q1
@Q1 Q1
@L ( ; Q1 ; Q2 ; : : : Qn ) 2
= 0 = P2 =) 2 = P2 Q2
@Q2 Q2
..
.
@L ( ; Q1 ; Q2 ; : : : Qn ) n
= 0 = Pn =) n = Pn Qn :
@Qn Qn
Adding up the last n rst-order conditions we have:
1 + 2 + + n = P1 Q1 + P2 Q2 + + Pn Qn
=) 1 + 2 + + n = (P1 Q1 + P2 Q2 + + Pn Qn )
| {z } | {z }
=1 =Y
1
=) = :
Y
It then follows that:
i = Pi Qi
Pi Qi
=
Y
i Y
=) Qi = :
Pi
Problem 201 The indirect utility function is dened as:
U (P1 ; P2 : : : ; Pn ; Y ) = U (Q1 ; Q2 ; : : : Qn ) :
Find the indirect utility function for the Cobb-Douglas utility function using
your answer from the previous problem. Verify that:
@U (P1 ; P2 : : : ; Pn ; Y )
=
@Y
so that the Lagrange multiplier is the marginal utility of income (this is always
true for all utility functions, not just Cobb-Douglas!) and that:
@U (P1 ;P2 ::: ;Pn ;Y )
@Pi
Qi = @U (P1 ;P2 ::: ;Pn ;Y )
@Y
CHAPTER 4. MULTIVARIATE CALCULUS 176
which is known as Roys identity (again, this is always true!). Roys identity
allows you to calculate the demand curve from the indirect utility function.
Answer
We have:
where the coecient on ln (Y ) is one since the i 0 s sum to 1 and the constant
c:
c = 1 ln (1 ) + 2 ln (2 ) + + n ln (n )
~ = AQ1 Q 2 Qnn
U 1 2
where A > 0 and i 0 and i > 0 for at least one i: Show that this is
equivalent to maximizing the Cobb-Douglas utility function given in the previous
two questions where:
with i 0 and
1 + 2 + + n = 1:
CHAPTER 4. MULTIVARIATE CALCULUS 177
Answer
Dene as the sum of the i 0 s or:
= 1 + 2 + + n > 0:
1 i
where B = A > 0 and i = : We then have: i 0 and
1 + 2 + + n
1 + 2 + + n =
1 + 2 + + n
= = 1:
1 + 2 + + n
1
Now since g (x) = ln (x) ln (B) is monotonically increasing (i.e., g0 (x)
= x >
~ is equivalent to maximizing U = ln U
0 ) it follows that maximizing U ^ where:
U ^ ln (B)
= ln U
= ln (BQ 2 n
1 Q2 Qn ) ln (B)
1
1 + 2 + + n = 1
This includes the Cobb-Douglas as a special case where = 1 since from LHpitals
rule it follows that:
Q1
i 1
lim = ln (Qi ) :
!1 1
(This mathematical fact is the basis for the Box-Cox transformation often used
in econometrics). Calculate the demand functions Qi for the CES utility func-
tion.
CHAPTER 4. MULTIVARIATE CALCULUS 178
Answer
The Lagrangian is:
! !
Q1
1 1 Q1
2 1 Q1
n 1
L (; Q1 ; Q2 ; : : : Qn ) = 1 + 2 + + n
1 1 1
+ (Y P1 Q1 P2 Q2 Pn Qn )
Y = P1 Q1 + P2 Q2 + + Pn Qn
1
1 1 1 1 1
1 1 1 1
1 1
= 1 P1 + 2 P2 + + n Pn
1
1 1 1 1
1 1 1
1 1
= 1 P1 + 2 P2 + + n Pn
1 Y
=) = 1
1 1 1
1 1 1
1 1
1 P1
+ 2 P2
+ + n Pn
0 1
Y
=) = @ 1
1 1 1
1 1 1
1 1
A :
1 P1
+ 2 P2
+ + n Pn
Once we have the Lagrange multiplier we can calculate the demand curves using:
1
1 1
i (Qi ) Pi = 0 =) Qi = i Pi
1
1
i Pi Y
=) Qi = 1
1 1 1
1 1 1 1 :
(1 ) (P1 )
+ (2 ) (P2 )
+ + (n ) (Pn )1
where L is labour and K is capital. Suppose that the wage is W; and the rental
cost of capital is R: Set up the Lagrangian for the problem of nding that amount
of labour L and that amount of capital K which minimizes the cost of pro-
ducing Q units of output. Find the rst-order conditions from this Lagrangian
(you do not have to actually solve them) . Write down what the second order
conditions require.
Answer
We have:
p
L (; L; K) = W L + RK + Q L K 2 LK
so that:
@L (; L; K) p
= Q L K 2 LK
@
@L (; L; K) 1 1
= W 1 + L 2 K 2
@L
@L (; L; K) 1 1
= R 1 + L 2 K 2
@K
so that the rst-order conditions are:
@L ( ; L ; K ) p
= Q L K 2 L K = 0
@
@L ( ; L ; K ) 1 1
= W 1 + (L ) 2 (K ) 2 = 0
@L
@L ( ; L ; K ) 1 1
= R 1 + (L ) 2 (K ) 2 = 0
@K
The second-order conditions require that we calculate the second derivatives
of the Lagrangian as:
@ 2 L (; L; K) @ 2 L (; L; K) @ 2 L (; L; K)
12 1 1 1
2 K 2
= 0; = 1 + L K 2 ; = 1 + L ;
@2 @@L @@K
@ 2 L (; L; K) 1 3 1 @ 2 L (; L; K) 1 1 1
2
= L 2 K 2 ; = L 2 K 2
@L 2 @L@K 2
@ 2 L (; L; K) 1 1 3
2
= L 2 K 2
@K 2
so that the Hessian of L (; L; K) evaluated at ; L ; K is:
2 1 1
1 1
3
0 1 + L 2 K 2 1 + L 2 K 2
6 7
6 1 1 1 32 12 1 12 12 7
H ( ; L ; K ) = 6 1 + L 2 K 2 2 L K 2 L K 7
4 1 1
1 1 1 3
5
1 + L 2 K 2 12 L 2 K 2 1
2 L K
2 2
2 3
0 W R
= 4 W 12 L 2 K 2 5
1 3 1 1 1
2
2 L K 2
R 1 12 12 1 12 32
2 L K 2 L K
CHAPTER 4. MULTIVARIATE CALCULUS 180
= <0
2
(this takes some work!) where > 0 since again from the rst-order conditions:
W 1
2
1
= 1 + (L ) (K ) 2 > 0:
Problem 205 Suppose the rms production function is given by:
p
Q = F (L; K) = L + K + 2 LK
where L is labour and K is capital. Suppose you wanted to prove that increasing
W would reduce the cost minimizing amount of labour L (W ). Show how this
could be done by dierentiating the rst order conditions, obtaining a system
of 3 equations in 3 unknowns and using Cramers rule to solve these equations
for the appropriate partial derivative (you dont have to actually evaluate the
determinants or prove the result).
Answer
Using the multivariate version of the chain rule on the rst-order conditions
and dierentiating both sides of the rst-order conditions with respect to W;
and remembering that (W ) ; L (W ) and K (W ) are all functions of W we
nd that:
2 3
1
0 1 + L 2 K 2
1 1
1 + L 2 K 2
1
2 @ 3 2 3
6 7 @W 0
6 7
K 2 7 4 @L 5 = 4 1 5
1 1 3 1 1 1
6 1 + L 2 K 2 12 L 2 K 2 1
2 L
2
@W
4 1 1
1 1 1 3
5 @K 0
1 2
1 + L 2 K 2 2 L K 2 12 L 2 K 2 @W
CHAPTER 4. MULTIVARIATE CALCULUS 181
1 = x21 + x22 :
Find x and f (x ) :
Answer
The Lagrangian for this problem is:
L (; x1 ; x2 ) = a11 x21 + 2a12 x1 x2 + a22 x22 + 1 x21 x22
Writing the last two conditions in matrix notation after cancelling the 20 s we
nd that:
a11 a12 x1 x1
=
a12 a22 x2 x2
or:
Ax = x :
f (x ) = (x )T Ax
f (x ) = (x )T x :
T
However the constraint require that jjx jj = (x ) x = 1 so that:
f (x ) = :
1 = x21 + x22 :
Find x and f (x ) :
CHAPTER 4. MULTIVARIATE CALCULUS 183
Answer
The Lagrangian for this problem is:
L (; x1 ; x2 ) = 10x21 + 14x1 x2 + 6x22 + 1 x21 x22
Ax = x :
2 16 + 11 = 0
or:
p
1 = 8 + 53 = 15:28
p
2 = 8 53 = 0:72:
Since we are maximizing f (x1 ; x2 ) it turns out that is the largest eigen-
value so that: = 15:28: Thus:
f (x ) = = 15:28:
Ax = x
20x1 + 14x2 2 x1 = 0
p
=) 20 2 8 + 53 x1 = 14x2 = 14
so that:
14
x1 = p = 1:3257:
20 2 8 + 53
We thus have:
x1 1:3257
x = =
x2 1
as a solution to Ax = x :
This is not the x which we are looking for since the constraint requires that
jjx jj = 1 but for the above x :
q
jjx jj = (1:3257)2 + 12 = 1:6606:
f (x ) = f (0:79833; 0:60219)
T
0:79833 10 7 0:79833
=
0:60219 7 6 0:60219
= 15:28 = :
xT Ax
xT x = 1:
Show, both with and without calculus that x is the eigenvector of A associated
with the maximum (minimum) eigenvalue of A; normalized so that kx k = 1:
CHAPTER 4. MULTIVARIATE CALCULUS 185
Answer
With calculus: The Lagrangian for this problem is:
L (; x) = xT Ax + 1 xT x
Ax = x =) xT Ax = Ax = (x )T x =
yT y = xT CC T x = xT x = 1
=) y12 + y22 + + yn2 = 1