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You are on page 1of 5

November 6, 2015

There are 3 questions. Use the attached blank pages to make calculations.

For Questions 1 and 2, enter your answers and any clarifications on the front 3

pages.

Question 1.) A consumer has the utility function

u(x1 , x2 ) =

1

1

+

x1

x2

k

A) What is the elasticity of substitution of this function?

f (x1 , x2 ) =

1

1

+

x1

x2

k

where 0 < k < 1. The price of its output is p and the firm faces factor prices

(w1 , w2 ). What is this firms cost function.

B) Suppose that for this firm, k = 1/2. Suppose also that the firm faces factor

prices w1 = 1 and w2 = 4 and the price it gets for its output is p = 90. What is

its cost function? How many units should it produce to maximize its profits?

Question 3.) The function f (x1 , . . . , xn ) is continuously differentiable and homogeneous of degree k. Let

fi (x1 , . . . , xn ) =

f (x1 , . . . , xn )

xi

fij (x1 , . . . , xn ) =

2 f (x1 , . . . , xn )

xi xj

and let

degree. Prove your answer.

B) Are the functions fij (x1 , . . . , xn ) homogeneous of some degree? If so, what

degree. Prove your answer

Pn

C) Let G(x1 , . . . , xn ) = i=1 xi fi (x1 , . . . , xn ). Given that f is homogeneous of

degree k, what can we say in general about the ratio G(x1 , . . . , xn )/f (x1 , . . . , xn ).

Prove your answer.

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