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    Review Question Set #4: Answer Keys

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    keyyongpark
    This document contains the answer keys for a review question set involving concepts in calculus and economics. It addresses the following topics in 8 questions: 1) Applying the implicit function theorem to solve for partial derivatives 2) How output changes with investment based on consumption and import functions 3) Taking derivatives of various functions 4) Finding critical points and inflection points of a function 5) Profit maximization of a firm with increasing or decreasing returns to scale 6) Conditions for a function of a concave function to be concave 7) Utility maximization over time using Jensen's inequality 8) Showing the minimum of two concave functions is concave

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    Review Question Set #4: Answer Keys

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    keyyongpark
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    This document contains the answer keys for a review question set involving concepts in calculus and economics. It addresses the following topics in 8 questions: 1) Applying the implicit function theorem to solve for partial derivatives 2) How output changes with investment based on consumption and import functions 3) Taking derivatives of various functions 4) Finding critical points and inflection points of a function 5) Profit maximization of a firm with increasing or decreasing returns to scale 6) Conditions for a function of a concave function to be concave 7) Utility maximization over time using Jensen's inequality 8) Showing the minimum of two concave functions is concave

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    This document contains the answer keys for a review question set involving concepts in calculus and economics. It addresses the following topics in 8 questions: 1) Applying the implicit function theorem to solve for partial derivatives 2) How output changes with investment based on consumption and import functions 3) Taking derivatives of various functions 4) Finding critical points and inflection points of a function 5) Profit maximization of a firm with increasing or decreasing returns to scale 6) Conditions for a function of a concave function to be concave 7) Utility maximization over time using Jensen's inequality 8) Showing the minimum of two concave functions is concave

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    Download as pdf or txt
    25 views3 pages

    Review Question Set #4: Answer Keys

    Uploaded by

    keyyongpark
    This document contains the answer keys for a review question set involving concepts in calculus and economics. It addresses the following topics in 8 questions: 1) Applying the implicit function theorem to solve for partial derivatives 2) How output changes with investment based on consumption and import functions 3) Taking derivatives of various functions 4) Finding critical points and inflection points of a function 5) Profit maximization of a firm with increasing or decreasing returns to scale 6) Conditions for a function of a concave function to be concave 7) Utility maximization over time using Jensen's inequality 8) Showing the minimum of two concave functions is concave

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    Review Question Set #4 : Answer Keys

    1. Dene G(x, y ) = 2x2 + 6xy + y 2 18 then we have G(x, y ) = 0. Applying the implicit function theorem, we have y x = Gx 4x + 6y = Gy 2y + 6x = 8 5

    (1,2)

    (1,2)

    2. Substitute f (Y ), g (Y ) for C, M and dene H (X, I, Y ) Y f (Y ) + g (Y ) I X = 0. Then Y HI 1 = = I HY 1 f (Y ) + g (Y ) When investment increases, output increases much if f (Y ) (sensitivity of consumption to output) is big, and g (Y ) (sensitivity of import to output) is small.

    3. (a) f (x) = 2 (b) f (x) = 3x2 3 (c) f (x) = 1 1/x2 4. (a) f (x) = 3x2 + 64x 6, f (x) = 6x + 64. (b) x= 64

    642 4 3 6 . 23 f is increasing when f 0. It happens when x is outside of two solutions here. (c) Inection point is where f = 0, In other words, where f changes signs. Then the curve becomes either convex from concave or concave from convex. 1

    Inection point is x = 32/3. 5. (a) Revenue : p x. Cost : w x Prot () : p x wx.

    1 px(1/2) w . Value of marginal product = input factor price (marginal (b) FOC : 2

    cost of adding one unit of input).

    1 (c) SOC : 4 px(3/2) < 0

    (d) () : px2 wx. FOC : 2px w = 0. SOC : 2p > 0. The stationary point is not prot maximizing. Because production function has increasing return to scale, a rm can increase prot whenever level of production increases.

    6. Since f is concave, we have f (x + (1 )y ) f (x) + (1 )f (y ) (*). By denition, g (x + (1 )y ) = af (x + (1 )y ) + b. g is concave if af (x + (1 )y ) + b af (x) + (1 )af (y ) + b Note this is just equivalent to (*) whenever a 0. 7. (a) Dene y =
    T t=1

    yt . Utility from constant consumption :

    1 1 1 1 1 1 1 u( y ) + u( y ) + ... + u( y ) = u( y ) () T T T T T T T Here Jensens inequality is just the property of concave function (u(ax+(1a)y ) au(x)+(1a)u(y )). For any consumption stream c1 = 1 y , c2 = 2 y , ..., cT = T y , 1 1 1 1 1 u( y ) = u( 0 y + ... + T y ) u(0 y ) + ... + u(T y ) T T T T T 2

    1 + 2 + ... + T = 1, we have from Jensens inequality

    Thus lifetime utility is maximized when the consumption is constant for every period. Formally, Jensens inequality states that for a concave function , ai xi ) aj ai (xi ) . aj

    ( (b) We can set up a Lagrangian as


    T

    L:
    t=1

    (1 + r )t u(ct ) + [
    t=1

    (1 + r )t (yt ct )]

    FOC : Lct : u (ct ) = for every t = 1, ..., T , Implying c1 = c2 = ... = cT =


    T t t=1 (1 + r ) yt T t t=1 (1 + r )

    8. h(x) = min{f (x), g (x)}, f and g are concave functions. Then we have f (x + (1 )y ) f (x) + (1 )f (y ) g (x + (1 )y ) g (x) + (1 )g (y ) h(x + (1 )y ) = min{f (x + (1 )y ), g (x + (1 )y )} min{f (x), g (x)} + (1 ) min{f (y ), g (y )} = h(x) + (1 )h(y )

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