Tut8 Answers

Tutorial 8
1. Given the following marginal revenue functions:
(a) R’(Q) = 28Q – e0.3Q (b) R’(Q) = 10(1 + Q)-2
Find in each case the total revenue function R(Q). What is the initial condition used to definitize
the constant of integration?
Answer
(a) R(Q) = ∫(28Q – e0.3Q)dQ = 14Q2 – (1/0.3)e0.3Q + c = 14Q2 – (10/3)e0.3Q + c
The initial condition is: R(0) = 0. Setting Q = 0: R(0) = -10/3 + c → c = 10/3.
R(Q) = 14Q2 – (10/3)e0.3Q + 10/3
(b) R(Q) = ∫10(1 + Q)-2 dQ.
Using integration by substitution (not necessary): Let u = 1 + Q. Then du/dQ = 1,

or du= dQ.
R(Q) = 10∫u-2du = 10(-u-1) + c = -10(1 + Q)-1 + c. Since R(0) = 0, → c= 10, thus:
R(Q) = -10/(1 + Q) + 10 = 10Q/(1+ Q)
2. (a) Given the marginal propensity to import M’(Y) = 0.1 and the information that M = 20
when Y = 0, find the import function M(Y).
(b) Given the marginal propensity to consume function C’(Y) = 0.8 + 0.1Y-1/2 and the
information that C = Y when Y = 100, find the consumption function C(Y).
Answer
(a) M(Y) = ∫0.1dY = 0.1Y + c. From the initial condition:

20 = 0.1(0) + c → c = 20, and M(Y) = 0.1Y + 20.
(b) C(Y) = ∫(0.8 + 0.1Y-1/2)dY = 0.8Y + 0.2Y1/2 + c.

From the additional information:
100 = 0.8(100) + 0.2(100)1/2 + c → c = 18.
C(Y) = 0.8Y + 0.2Y1/2 + 18

3. Given a continuous income stream at the constant rate of $1,000 per year:
(a) What will be the present value Π if the income stream lasts for 2 years and the
continuous discount rate is 0.05 (i.e. 5%) per year?
(b) What will be the present value Π if the income stream terminates after exactly 3 years
and the discount rate is 0.04?
Answer
2 2
-it -0.05t -0.05(2) o
(a) Π = ∫1000e dt = ∫1000e dt = - (1000/0.05)e + (1000/0.05)e
0 0
= 20,000[1- e-0.05(2)] = 20,000[1 – e-0.10] = 1,904
(b) Π = 1000/0.04[1- e-0.04(3)] = 25,000[1 – e-0.12] = 2,827.5

4. Find yc, yp, the general solution and the definite solution given:
(a) dy/dt + 4y = 12; y(0) = 2 (b) dy/dt + 10y = 15; y(0) = 0
(c) dy/dt – 2y = 0; y(0) = 0 (d) 2(dy/dt) + 4y = 6; y(0) = 1.5
Answer
(a) yc = Ae-4t, yp = 12/4 = 3. So, yt = Ae-4t + 3. When t = 0, y(0) = A + 3 → A = -1

and yt = -e-4t + 3. Convergence to 3 over time.
(b) yc = Ae-10t, yp = 3/2. yt = Ae-10t + 3/2. y(0) = A + 3/2 → A = -3/2.

yt = -3/2e-10t + 3/2 = 3/2(1 – e-10t). Convergence to 3/2 over time.
(c) yc = Ae2t, yp = 0. y(0) = A → A = 0. Definite solution: yt = 0.

The value of y remains at 0 over time.
(d) Normalizing: dy/dt + 2y = 3. yc = Ae-2t, yp = 3/2. yt = Ae-2t + 3/2. y(0) = A +

3/2 → A = 0. Definite solution: yt = 3/2. The value of y remains stable at 3/2 over
time.
5. Let the demand and supply be:
Qd = α – βP + σ(dP/dt) Qs = -γ + δP (α, β, γ, δ >0)
(a) Assuming that the rate of change of price over time is directly proportional to excess
demand, find the time path, P(t) (general solution).
(b) What is the inter-temporal equilibrium price? What is the market clearing equilibrium
price?
(c) What restriction on the parameter σ would ensure dynamic stability?
Answer
(a) By substitution into dP/dt = j(Qd – Qs), we have:
dP/dt = j(Qd – Qs) = j(α + γ) – j(β + δ)P + jσ(dP/dt). This is simplified to:
dP/dt + [j(β + δ)/(1 – jσ)]*P = j(α + γ)/(1-jσ) [1 – jσ ≠ 0]
The general solution (Pc + Pp) is:
Pt = Ae-[j(β + δ)/(1 – jσ)]t + (α + γ)/( β + δ)
P will converge over time to its intertemporal equilibrium price if the

complementary solution tends to 0 over time.
(b) Assuming convergence, the inter-temporal equilibrium price (i.e.,
equilibrium price over-time) is: (α + γ)/( β + δ), which is the same as the market
clearing equilibrium price. To find the market clearing price, impose equilibrium
(dP/dt = 0) and solve the demand-supply model.
(c) Given that j, β, δ are > 0, the condition for dynamic stability is: 1 – jσ > 0,
or σ < 1/j.
6. Let the demand and supply be:
Qd = α – βP - η(dP/dt) Qs = δP (α, β, η, δ >0)
(a) Assuming that the market is cleared at every point in time, find the time path P(t) (general
solution.
(b) Does the market have a dynamically stable equilibrium price?
Answer
(a) Setting Qd = Qs, and simplifying:
dP/dt + [(β + δ)/η]*P = α/η
the general solution is:
Pt = Ae[-(β + δ)/η]t + α/ (β + δ)
(b ) Since -(β + δ)/η is negative the inter-temporal equilibrium is dynamically

stable.

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Tutorial 8

1. Given the following marginal revenue functions:

(a) R’(Q) = 28Q – e0.3Q (b) R’(Q) = 10(1 + Q)-2

(a) R(Q) = ∫(28Q – e0.3Q)dQ = 14Q2 – (1/0.3)e0.3Q + c = 14Q2 – (10/3)e0.3Q + c

The initial condition is: R(0) = 0. Setting Q = 0: R(0) = -10/3 + c → c = 10/3.

R(Q) = 14Q2 – (10/3)e0.3Q + 10/3

(b) R(Q) = ∫10(1 + Q)-2 dQ.

Using integration by substitution (not necessary): Let u = 1 + Q. Then du/dQ = 1,

R(Q) = 10∫u-2du = 10(-u-1) + c = -10(1 + Q)-1 + c. Since R(0) = 0, → c= 10, thus:

R(Q) = -10/(1 + Q) + 10 = 10Q/(1+ Q)

(a) M(Y) = ∫0.1dY = 0.1Y + c. From the initial condition:

(b) C(Y) = ∫(0.8 + 0.1Y-1/2)dY = 0.8Y + 0.2Y1/2 + c.

100 = 0.8(100) + 0.2(100)1/2 + c → c = 18.

C(Y) = 0.8Y + 0.2Y1/2 + 18

= 20,000[1- e-0.05(2)] = 20,000[1 – e-0.10] = 1,904

(b) Π = 1000/0.04[1- e-0.04(3)] = 25,000[1 – e-0.12] = 2,827.5

(a) dy/dt + 4y = 12; y(0) = 2 (b) dy/dt + 10y = 15; y(0) = 0

(c) dy/dt – 2y = 0; y(0) = 0 (d) 2(dy/dt) + 4y = 6; y(0) = 1.5

(a) yc = Ae-4t, yp = 12/4 = 3. So, yt = Ae-4t + 3. When t = 0, y(0) = A + 3 → A = -1

(b) yc = Ae-10t, yp = 3/2. yt = Ae-10t + 3/2. y(0) = A + 3/2 → A = -3/2.

(c) yc = Ae2t, yp = 0. y(0) = A → A = 0. Definite solution: yt = 0.

(d) Normalizing: dy/dt + 2y = 3. yc = Ae-2t, yp = 3/2. yt = Ae-2t + 3/2. y(0) = A +

5. Let the demand and supply be:

Qd = α – βP + σ(dP/dt) Qs = -γ + δP (α, β, γ, δ >0)

(a) By substitution into dP/dt = j(Qd – Qs), we have:

dP/dt + [j(β + δ)/(1 – jσ)]*P = j(α + γ)/(1-jσ) [1 – jσ ≠ 0]

The general solution (Pc + Pp) is:

Pt = Ae-[j(β + δ)/(1 – jσ)]t + (α + γ)/( β + δ)

P will converge over time to its intertemporal equilibrium price if the

6. Let the demand and supply be:

Qd = α – βP - η(dP/dt) Qs = δP (α, β, η, δ >0)

(a) Setting Qd = Qs, and simplifying:

dP/dt + [(β + δ)/η]*P = α/η

the general solution is:

(b ) Since -(β + δ)/η is negative the inter-temporal equilibrium is dynamically

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