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The document outlines an assignment for Mathematical Economics at Jimma University, covering topics such as the relationship between money supply and high-powered money, profit maximization for a two-product firm, and the analysis of a profit function. It includes mathematical derivations and conditions for maximum profit, as well as discussions on concavity and convexity of profit functions. The assignment requires students to solve equations and analyze the implications of changes in economic variables.

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2 views

maths lecture

The document outlines an assignment for Mathematical Economics at Jimma University, covering topics such as the relationship between money supply and high-powered money, profit maximization for a two-product firm, and the analysis of a profit function. It includes mathematical derivations and conditions for maximum profit, as well as discussions on concavity and convexity of profit functions. The assignment requires students to solve equations and analyze the implications of changes in economic variables.

Uploaded by

amanuel1706
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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JIMMA UNIVERSITY

CONTINUING AND DISTANCE EDUCATION

DEPARTMENT OF ECONOMICS

ASSIGNMENT FOR MATHEMATICAL ECONOMICS

Name:

ID.NO:

Center:

Department:

Term:
1. The total money M has two components, bank deposits D and cash
holdings C, which we use to bear an instant ratio CD < 1. The high-
powered money H is defined as the sum of cash holdings held by the
public and the reserves held by the banks. Bank reserves are a fraction
of bank deposits, determined by the reserve ratio z, 0 < z < 1.

A. Express the Money Supply M as a Function of High-Powered Money H


The total money supply M is the sum of cash holdings C and bank deposits D:

M=C+D

We are given that cash holdings C are a fraction of deposits D, with the cash-deposit ratio c =
C/D. Thus:

C = cD

The high-powered money H is the sum of cash holdings C and bank reserves, which are a fraction
z of deposits D:

H = C + zD = cD + zD = D(c + z)

Solving for D:

D = H / (c + z)

Substituting this into the expression for M:

M = C + D = cD + D = D(1 + c) = H(1 + c) / (c + z)

Thus, the money supply is:

M = H(1 + c) / (c + z)

B. How Would an Increase in the Reserve Ratio z Affect the Money Supply?
An increase in the reserve ratio z would reduce the money supply. Since:

M = H(1 + c) / (c + z)

An increase in z increases the denominator (c + z), thereby reducing M, assuming H and c remain
constant.
C. How Would an Increase in the Cash-Deposit Ratio c Affect the Money
Supply?
An increase in the cash-deposit ratio c would also reduce the money supply. In the formula:

M = H(1 + c) / (c + z)

While the numerator (1 + c) increases, the denominator (c + z) increases more rapidly if c


becomes larger. Therefore, the overall effect is a decrease in the money supply.

2. A two-product firm faces the demand and cost functions below:


Given the demand and cost functions:

Q₁ = 40 + 2P₂ + P₃

Q₂ = 35 - P₁ - P₂

C = Q₁² + 2Q₂² + 10

A. Write out the profit function Q1 Q2) and find output levels that satisfy the necessary
conditions for maximum profit.

B. Check the second-order sufficient conditions.

C. What is the maximal profit? Can you conclude that this is a unique absolute maximum

Problem Statement:
Given the demand and cost functions:

Q₁ = 40 + 2P₂ + P₃
Q₂ = 35 - P₁ - P₂
C = Q₁² + 2Q₂² + 10

A. Write out the profit function and find output levels that satisfy the
necessary conditions for maximum profit.
1. Total Revenue (TR):

The total revenue is given by:


TR = P₁ Q₁ + P₂ Q₂
Substituting the demand functions into the revenue function:
TR = P₁ (40 + 2P₂ + P₃) + P₂ (35 - P₁ - P₂)
Expanding this:
TR = 40P₁ + 2P₁P₂ + P₁P₃ + 35P₂ - P₁P₂ - P₂²
Simplifying:
TR = 40P₁ + P₁P₂ + P₁P₃ + 35P₂ - P₂²

2. Profit Function (Π):

The profit is the total revenue minus the total cost:


Π = TR - C
The cost function is given by:
C = (40 + 2P₂ + P₃)² + 2(35 - P₁ - P₂)² + 10
Expanding the cost function:
C = 4060 + 2P₁² + 6P₂² + P₃² + 4P₂P₃ + 4P₁P₂ + 80P₃ + 20P₂ - 140P₁

Thus, the profit function becomes:


Π = -4060 + 180P₁ + P₁P₂ + P₁P₃ - 2P₁² - 4P₁P₂ + 15P₂ - 7P₂² - 4P₂P₃ - 80P₃ - P₃²

3. First-Order Conditions (FOC):

To find the critical points, take the partial derivatives of Π with respect to P₁, P₂, and P₃, and set
them equal to zero.

With respect to P₁:


∂Π/∂P₁ = 180 + P₂ + P₃ - 4P₁ - 4P₂ = 0
With respect to P₂:
∂Π/∂P₂ = 15 + P₁ - 14P₂ - 4P₃ = 0
With respect to P₃:
∂Π/∂P₃ = -80 + P₁ - 4P₂ - 2P₃ = 0

These first-order conditions provide the necessary equations to find the output levels that
maximize profit. The system of equations is:

1. 180 + P₂ + P₃ - 4P₁ - 4P₂ = 0


2. 15 + P₁ - 14P₂ - 4P₃ = 0
3. -80 + P₁ - 4P₂ - 2P₃ = 0

B. Check the second-order sufficient conditions.


The second-order sufficient conditions (SOC) are verified by checking whether the Hessian
matrix of the profit function is negative definite. The Hessian matrix is formed by taking the
second-order partial derivatives of Π with respect to P₁, P₂, and P₃.

The second-order partial derivatives are:


∂²Π/∂P₁² = -4
∂²Π/∂P₂² = -14
∂²Π/∂P₃² = -2
∂²Π/∂P₁∂P₂ = -3
∂²Π/∂P₁∂P₃ = 1
∂²Π/∂P₂∂P₃ = -4

The Hessian matrix H is:

H=
[ -4 -3 1 ]
[ -3 -14 -4 ]
[ 1 -4 -2 ]

To determine if the Hessian is negative definite, check the leading principal minors:
1. H₁₁ = -4 (negative)
2. det([H₁₁, H₁₂; H₂₁, H₂₂]) = 47 (positive)
3. det(H) = 8 (positive)

Since not all leading principal minors alternate in sign, the Hessian is not negative definite.
Therefore, the second-order sufficient conditions are not satisfied, meaning we cannot confirm
whether the critical point is a maximum.

C. What is the maximal profit? Can you conclude that this is a unique
absolute maximum?
Since the second-order sufficient conditions are not met, we cannot conclude that the
critical point is a global maximum based on the Hessian test alone.

However, the critical point found from solving the system of equations in part A
corresponds to a stationary point. The exact maximal profit can be calculated by
substituting the critical values of P₁, P₂, and P₃ back into the profit function Π.

Further investigation (such as checking boundary conditions or global optimization


techniques) is needed to confirm if this stationary point corresponds to a unique absolute
maximum.

3. Given the profit function S(Q) = -40Q³ + 237Q² - 1314Q - 8000where s


is in tons, in dollars and Q is in tons
A. Find and characterize the critical value(s) of the function.

B. With the restriction that output is non-negative, is the profit function concave over it entire
domain? Is it convex over its entire domain?

C. if your answer to b above is "No" in both cases, find out the interval over which it concave, the
interval over which it is convex, and comment on the dividing line. If you Answer to b is
different, come up with your own function which has both concave an convex parts and describe
the situation.
A. Critical Values

To find the critical values, we need to take the first derivative of the profit function and
set it equal to zero:

[ S'(Q) = -120Q² + 474Q - 1314 = 0]

Solving this quadratic equation for Q:

 We can use the quadratic formula: Q = [-b ± √(b² - 4ac)] / (2a)


 Here, a = -120, b = 474, and c = -1314.
 Plugging in these values, we get:
o Q = [-(474) ± √((474)² - 4(-120)(-1314))] / (2(-120))
o Q ≈ 2.28, 4.78

B. Concavity

To determine if the profit function is concave or convex, we need to examine the second
derivative:

[ S''(Q) = -240Q + 474]

 If S''(Q) < 0 for all Q, the function is concave.


 If S''(Q) > 0 for all Q, the function is convex.

To find the intervals of concavity and convexity, we set G''(Q) = 0:

 -240Q + 474 = 0
 Q = 474 / 240 = 1.975

Now, we can test the intervals:

 For Q < 1.975, S''(Q) > 0 (convex)


 For Q > 1.975, S''(Q) < 0 (concave)

C. Intervals of Concavity and Convexity

Based on the analysis above, the profit function is:

 Convex for Q < 1.975.


 Concave for Q > 1.975.

The dividing line between the concave and convex regions is at Q = 1.975.
Conclusion

The profit function has two critical values: Q ≈ 2.28 and Q ≈ 4.78. The function is:

 Convex for Q < 1.975.


 Concave for Q > 1.975.

This means that the profit function has a local maximum at Q ≈ 2.28 (where it changes
from convex to concave) and a local minimum at Q ≈ 4.78 (where it changes from
concave to convex).

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