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Introduction Quiz A

The topics for quiz A are: 1. Mathematical Vocabulary and Denitions (useful topic, quiz A questions 1 - 3) 2. Introduction to Dierentiation (essential topic, quiz A questions 4-7) 3. Calculus, Functions and Graphs (essential topic, quiz A questions 8 - 13) Correct answers are shown in boxes.

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2.1
2.1.1

Quiz A
Topic 1: Mathematical Vocabulary and Denitions (useful topic, quiz A questions 1 - 2)
Quiz A question 1: sets

If A = {10, 11, 12, 13} and B = {12, 13, 14, 15} click the correct statements 1. A B is the intersection of A and B , A B is the union of A and B . 2. A B is the intersection of A and B , A B is the union of A and B . 3. A B = {10, 11, 12, 13, 14, 15} 4. A B = {10, 11, 12, 13, 14, 15} 5. A B = {12, 13} 6. A B = {12, 13} 7. A B A B Answer A B , the intersection of A and B, is the set of all the elements that are in both A and B so statement 5 is right and statement 3 is wrong. A B , the union of A and B, is the set of all the elements that are in either A or B or in both A and B so statement 4 is right and statement 6 is wrong. Thus statement 1 is right and statement 2 is wrong. As all elements of A B are in both A and B statement 7 is right. 2.1.2 Quiz A question 2; intervals

Note that R is the set of real numbers. Click the correct statements. 1. (3, 6) = {x : x R, 3 x 6} 2. (3, 6) = {x : x R, 3 < x < 6} 3. [3, 6] = {x : x R, 3 x 6} 4. (3, 6] = {x : x R, 3 < x 6} 5. R+ = {x : x R, 0 < x} 6. (0, ) = {x : x R, 0 < x}

Answer The two numbers a and b in (a, b) [a, b] etc are the end points of the intervals, so the interval contains all x with a < x < b. If there is a round bracket ( or ) the relevant endpoint is not in the interval. If the bracket is square [ or ] the endpoint is in the interval. Intervals of the form (, b) or (, b] contain all points x < b, whether they contain b or not depends on whether the bracket is round ) or square ]. Similarly (a, ) is all points with x > a and [a, ) is all points with x a. R+ is the set of numbers with x 0. 2.1.3 Quiz A question 3; functions

In the statement ln x : R++ R

1. R++ is the set of non negative numbers satisfying x 0

3. R++ is the domain of the function ln x 4. R++ is the target of the function ln x 5. R is the domain of the function ln x 6. R is the target of the function ln x Answer R++ is dened as the set of strictly positive numbers satisfying x > 0. The functions ln x is dened as the solution to the equation ey = x. As ey > 0 for all real y, this equation has no real solution unless x > 0, so the domain (the set on which the function is dened) has to be R++ . The target of a funtion f (x) is the set that contains all the values of f (x) when x is in the domain of x. The standard notation is f : D T where D is the domain of the function and T is the target. Here both are subsets of the real numbers R.

2.2
2.2.1

Topic 2: Introduction to Dierentiation (essential topic, quiz A questions 4 - 7)

Consider the straight line passing through (1, 5) and (7, 23) . Click the correct statements. 1. The slope of the line is 2. 2. The slope of the line is 3. 3. The equation of the line is y 23 = 3 (x 7) . 4. The equation of the line is y 5 = 3 (x 1) . 5. The equation of the line is y = 3x + 5 6. The equation of the line is y = 3x + 2. Answer Letting (x1 , y1 ) = (1, 5) and (x2 , y2 ) = (7, 23) gives the slope of the line as 23 5 y2 y1 = = 3. x2 x1 71 If you had written (x2 , y2 ) = (1, 5) and (x1 , y1 ) = (7, 23) you get the same answer. The general equation of a line through (x1 , y1 ) with slope m is y y1 = m (x x1 ) 2

so in this case y 5 = 3 (x 1) or y = 3x + 2. If you had written (x1 , y1 ) = (7, 23) you would have got y 23 = 3 (x 7) which also gives y = 3x + 2. 2.2.2 Quiz A question 5; derivatives

If f (x + h) = f (x) + 3hx2 + 3h2 x + h3 what is the derivative f 0 (x) of f (x)? 1. x 2. 2x 3. 3x 4. x2 5. 2x2 6. 3x2 Answer The derivative of f (x) is the limit of f (x + h) f (x) h as h tends to 0. In this case f (x + h) f (x) 3hx2 + 3h2 x + h3 = = 3x2 + 3hx + h2 h h which tends to 3x2 as h tends to 0, so the derivative f 0 (x) = 3x2 . 2.2.3 Quiz A question 6; xed proportion production function

Consider the xed proportion production function F (K, L) = min (4K, 3L) . Suppose that K = 6. Think about the function g (L) dened as g (L) = min (24, 3L). Draw a graph of this function. Click the correct statements.
0 1. If L = 2 g (L) = 3

2. If L = 2 g 0 (L) = 0 3. The function g (L) has no derivative at L = 2. 4. If L = 8 g 0 (L) = 3 5. If L = 8 g 0 (L) = 0 6. The function g (L) has no derivative at L = 8. Answer See Figure 1. If L < 8 then 3L < 24 so g (L) = 3L and g 0 (L) = 3, in particular when L = 2 g 0 (L) = 3. If L > 8 then 3L > 24 so g (L) = 24 and g 0 (L) = 0. The function has no derivative at L = 8.

30 25 20 15 10 5 0

10

15

20

25 L

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Figure 1: Question 6: graph of g (L) = min (24, 3L)

Figure 2: Question 7

2.2.4

Quiz A question 7

Look at the graph of the function f (x) in Figure 2. For what values of x does this function not have a derivative? 1. 1 2. 2 3. 3 4. 4 5. 5 6. 6 2.2.5 Answer

At x = 1 the function is a straight line with slope 1 so the derivative is 1. At x = 3, 5 and 6 the function is a straight line with slope 0 so the derivative is 0. The function has no derivative at x = 2 where there is a kink, and no derivative at x = 4 where there is a discontinuity.

2.3
2.3.1 If y =

Topic 3: Calculus, Functions and Graphs (essential topic, questions 8 13)

what is the rst derivative

dy dx ?

1. 2. 3. 4. 5.

dy 4a2b dx = (4xb)2 dy dx dy dx dy dx dy dx

= = = =

4a2b (4xb) 2xa (4xb)2 (2xa)2 (4xb)2 (2xa)2 (4xb)

6. none of the above

Answer The obvious way of dierentiating y =

(2xa) (4xb)

uses the quotient rule

dy dx

= = =

d d (2x a) (2x a) dx (4x b) (4x b) dx (4x b)2 (4x b)2 (2x a)4 (4x b)2 4a 2b . (4x b)2

It is sometimes helpful to simplify a function before starting to dierentiate it. In this case y = = so using the chain rule dy dx 1 = 4(a b)(4x b)2 2 4a 2b = 2. (4x b)
1 (4x b) a + 1 (2x a) 2b = 2 (4x b) (4x b) 1 1 (a b)(4x b)1 2 2

Used correctly both routes give the same answer. 2.3.2 Quiz A question 9; the second derivative (2x a) d2 y ? what is the second derivative (4x b) dx2 8(b 2a)2 d2 y = dx2 (4x b) 8(b 2a)2 d2 y = dx2 (4x b)2 d2 y 16(b 2a)2 = 2 dx2 (4x b) d2 y 16(b 2a) = dx2 (4x b)2

If y =

1. 2.

3.

4.

16(b 2a) d2 y = 2 (4x b)3 5. dx 6. none of the above dy 4a 2b 2 the chain rule implies that = 2 = (4a 2b) (4x b) dx (4x b) d2 y dx2 = 8(4a 2b)(4x b)3 =
(2xa) (4xb)

Answer As

16(b 2a) (4x b)3

2.3.3

Graph Sketching y =

Use your answers to quiz questions 8 and 9 to draw a graph of y =

(2x a) , assuming that 0 < 2a < b. (4x b)

 0 y = ( 2x a) ( 4x b) a b

Figure 3: Drawing the graph of y =

1. Thinking about the sign of y = If x <

a b < both numerator and denominator are negative so y > 0. 2 4 a If x = then y = 0. 2 a b If < x < then the numerator is positive and the denominator is negative so y < 0. 2 4 b As x tends to from below y tends to - innity. 4 b If < x then y > 0. 4 b As x tends to from above y tends to + innity. 4 a 1 < . b 2 (2x a) dy 4a 2b , that is = 2. (4x b) dx (4x b)

2. When x = 0 y =

3. Thinking about the rst derivative of y =

b where (4x b)2 = 0. 4 The numerator 4a 2b < 0 because by assumption 2a < b. The denominator (4x b)2 > 0 except at x =

 Thus

dy 4a 2b = 2 < 0 and the function is downward sloping except at x = dx (4x b) is undened. 16(b 2a) (2x a) d2 y = . , that is 2 (4x b) dx (4x b)3
b 4

b 4

where

dy dx

4. Thinking about the second derivative of y =

d2 y < 0 when x < dx2 so the function is concave in this region. As by assumption b > 2a As by assumption b > 2a

d2 y b > 0 when x > so the function is convex in this region. dx2 4 2 (2x a) = (4x b) 4
a x b x

5. Thinking about values as x tends to innity y = and b 2 1 tend to 0, so y tends to = . x 4 2

so as x tends to innity

a x

2.4
2.4.1

Utility functions and coecients of risk aversion

You will learn about expected utility functions u (w) . The usual assumption is that u0 (w) > 0 so utility is increasing, and u00 (w) < 0 so u is concave which implies risk aversion. The coecient of absolute risk aversion is dened as (CARA) utility function is u00 (w) . The constant absolute risk aversion u0 (w)

u (w) = aebw . For what values of a and b is u (w) increasing and concave? 1. a > 0 and b > 0 2. a > 0 and b < 0 3. a < 0 and b > 0 4. a < 0 and b < 0 Answer If u (w) = aebw . Then using the chain rule u0 (w) = abebw and u00 (w) = ab2 ebw . Thus if u00 (w) < 0 then ab2 < 0 so a < 0. If u0 (w) > 0 then ab > 0 so if a < 0 then b < 0. Multiplying a utility function by a positive constant makes no dierence to the behaviour it implies, so it is usual to assume that a = 1, and let k = b so u (w) = ekw . It is easy to check that the coecient of absolute risk aversion is u00 (w) k= 0 . u (w )

0 -1 w

u(w) = - e- k w

Figure 4: The CARA (constant absolute risk aversion ) utility function ekw 2.4.2 Graph Sketching u (w) = ekw

Sketch the graph of u (w) = ekw where k > 0. 1. The function ex is positive for any real x so u (w) = ekw is negative for all w. 2. u0 (w) = kekw > 0 for all w so u (w) is an increasing function of w. 3. u00 (w) = k2 ekw < 0 for all w so u (w) is a concave function of w. 4. u (0) = 1. 5. As ex tends to + innity as x tends to + innity and tends to 0 as x tends to - innity, u (w) = ekw tends to 0 as w tends to + innity and to - innity as x tends to - innity. 2.4.3 Quiz A question 11; relative risk aversion u00 (w)w . What is u0 (w)

The coecient of relative risk aversion of the utility function u (w) is dened as the coecient of relative risk aversion of the utility function u (w) = ln w? 1. 2 2. 1 3. 0 4. 1 5. 2 6. none of the above

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0.5

1.5 w

-1

u = ln w

-2

Figure 5: Answer If u (w) = ln w, u0 (w) = 1 1 and u00 (w) = 2 so w w

2.4.4

Graph Sketching u (w) = ln w

Sketch the graph of u (w) = ln w for w > 0 and bring it with you to class. Drawing the graph of u (w) = ln w for w > 0. 1. The sign of ln w. The function ln w is negative for 0 < w < 1. eln w < 1 which implies that ln w < 0. ln 1 = 0. This is because eln 1 = 1 so ln 1 = 0. The function ln w is positive for 1 < w. which implies that ln w > 0. This is because eln w = w so if w < 1 then

This is because eln w = w so if w > 1 eln w > 1

2. u0 (w) =

1 > 0 so ln w is an increasing function of w for all w > 0. w 1 < 0 so ln w is a concave function of w for all w > 0. w2

3. u00 (w) =

4. As w tends to + innity eln w = w tends to + innity so ln w must also tend to innity. 5. As w tends to 0 from above eln w = w must tend to 0, implying that ln w must tend to - innity.

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2.5
2.5.1

The normal density function

The density function of the normal distribution with mean and variance 2 is ! (x )2 1 . exp f (x) = 2 2 2 2 What is df dx

! (x )2 (x )2 1. exp 2 2 2 22 ! 2 2 (x ) (x ) exp 2. 2 2 2 2 2 ! (x ) (x )2 exp 2 2 2 2 3. 2 ! 2 (x ) (x ) 4. exp 2 2 2 2 2 ! (x )2 (x )2 5. exp 2 2 2 2 ! (x )2 (x )2 exp 6. 22 2 2 Answer Using the chain rule df dx !# ! d (x )2 (x )2 exp = 2 2 2 2 22 dx ! 2 1 x (x ) = 2 exp 22 2 2 22 ! (x ) (x )2 = exp . 22 2 2 2 1 "

2.5.2

Quiz A question 13; the second derivative

The density function of the normal distribution with mean and variance 2 is ! 1 (x )2 f (x) = exp . 2 2 2 2 What is d2 f ? dx2

! 2 2 ( x ) 1 x2 exp 1. 2 2 2 2 2 12

! 2 1 (x )2 2 2. x exp 2 2 2 2 2 ! 2 ( x ) 1 2 2 (x ) exp 3. 22 2 2 2 ! 1 (x )2 2 2 4. (x ) exp 22 2 2 2 ! 2 (x ) 1 2 2 (x ) exp 5. 22 4 2 2 ! 2 ( x ) 1 2 (x ) 2 exp 4 2 2 22 6. Answer As ! (x )2 (x ) df exp . = dx 2 2 2 2 2 Using the product rule d2 f dx2 ! 2 d (x ) (x ) = exp dx 2 2 2 2 2 !# " d (x ) (x )2 + exp dx 2 2 2 2 2

so using the chain rule and then sorting out the algebra ! 1 (x )2 d2 f = exp dx2 22 2 2 2 !# ! " (x ) (x )2 d (x )2 + exp dx 2 2 2 2 2 2 2 ! ! 2 2 2 1 (x ) (x ) (x ) = exp exp + 22 2 2 2 2 2 4 2 2 ! 1 (x )2 = . (x )2 2 exp 2 2 4 2 2 1 )2 Graph sketching; the normal density function f (x) = exp (x2 2 2 2 1 )2 Assume that > > 0 and draw the graph of f (x) = exp (x2 . 2 2 2 2.5.3

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2.5.4

Drawing the graph of f (x) =

1 2 2

)2 exp (x2 2

+
x

(x ) f (x) = exp 2 2 2 2

1. f (x) > 0 for all x because exp y is positive for all real y . ! (x )2 df (x ) exp 2. As = dx 2 2 2 2 2 df > 0 and f (x) is increasing for x < . dx df < 0 and f (x) is decreasing for < x. dx df = 0 and f (x) has a maximum at x = . dx ! d2 f (x )2 1 2 2 3. As (x ) exp = dx2 2 2 4 2 2 d2 f < 0 and f (x) is concave if < x < + dx2 d2 f > 0 and f (x) is convex if x < or + < x. dx2 4. As by assumption > > 0 f (x) is convex and increasing at x = 0. 5. As x tends to + or - innity (x ) tends to innity so f (x) tends to 0. 2 2
2

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