econometrics

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econometrics

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1. What is optimisation?

a. Distinguish between maximum and minimum with a graphical representation. Give two

examples of maximising and minimising problems in economics.

b. Explain difference between constrained and unconstrained equality with two examples in

economics.

2. a. What are the necessary and sufficient mathematical conditions for a solution to

maximisation and minimisation problems in unconstrained and constrained equality functions

b. Finds the profit maximising output and profit for below given cost function of firm in the

perfectly competitive market where the of the product(Q) is 4 and total cost

TC=Q3-15Q2+31Q+100

3.The utility function of a consumer is given by U=5logX1+2logX2 subject to the budget constraint

4X1+2X2=28

a.Find out the combination of X1 and X2 which will maximise the above utility function subject

to the given constraint.

1)

a) Optimization:

It is reacting or attaining the best goal or destiny by the process of maximisation

or minimisation.

For Example:-

1. Cost

Cost should be minimum so that by the process of minimization can reduce the

cost and which will result to reach the optimal point of the extremum.

2. Revenue:

The revenue should be maximum. So by the process maimization we can

increase the revenue and which will result to reach the optimal point of the

extremum.

stage for the person/Organization which will yield maimum satisfication is

called optimization.

b) Unconstrained equality:

It is an function where there is no limit boundary.

Example:

V=x1 x2+ 6x2

In the above equation; the left equality is not given i.e. it is not limited

and it is dependent up on the values of the right equality i.e. x1 and x2.

This kind of equality is called as unconstrained equalit. It can take

any rance of value.

Here GDP doesnt have any limit i.e. the value GDP is

dependent up on variables C, I, G So the change in these variables will

result to the change in those variables will result to the change in the

GDP.

It is a function which has a boundary or limit which is called as

constrained equality.

U= x1 x2+ 6x2

It is an utility function of a consumer and which has a constraint

4x1+ 2x2=60

Here the consumer must change that quantities of x1 and x2.

Which must equal to the constraint and his utility depends upon the

quantities of x1 and x2.

Examples:

Consumption expenditure which has income constraint.

2)

a) The necessary and sufficient mathematical conditions for a solution are:

1st order condition i.e The first derivative which is also an necessary

condition:

=0

2nd order condition i.e the second derivative which is also an sufficient

condition:

2

( )= 2

2

If >0 Then the function is maximum

2

2

If <0 Then the function is minimum

2

Lagrange Method:

In this method we will first obtain the language function

Language function(l) = Objective function + (Constraint)

After that we will have first order condition which is also a necessary

condition

Where,

L1=0 => L1=

1

L2=0 => L2=

2

dL

L=0 => L =

d

Then we will follow Second order condition which is also called sufficient

condition when we will use Hessian matrix.

0 1 2

|2 | = |1 11 12 |

2 21 22

1 = () 2 = ()

1 2

The values of L11, L12, L21, L22 are obtained by the following formulas

dL1 dL1

L11 = ; L12 =

dx dx2

dL2 dL2

L21= ; L22=

dx3 dx3

Next the values an substituted in the Hessian matrix and we will find the

determinant of the matrix.

If the values of the determinant is greater than zero then it is maximum.

If the values of the determinant is less than zero then it is minimum.

b) TC = q3-15q2+31q+100

P=4

Profit maximizing output =?

Profit =?

Profit = Revenue - Cost

= TR TC ,When TR = Total Revenue

Revenue = Price Quantity

= Pq

TR = 4q ,When q is quantity

= 4 (3 15 2 + 31 + 100)

= 3 + 152 27 + 100

=0

3

= ( + 152 27 100)

= 3 2 + 30 27

d

As, =0

dq

3 2 + 30 27 = 0

3 2 30 + 27 = 0

q2 - 10q + q = 0

( 1)( 9) = 0

1 = 0; 9=0

=1 ; =9

Second order condition

d (32 + 30 27)

( )=

dq

2

= 6 + 30

2

At q=1; =6+30 = 24>0 Minimum

2

At = 9; = 54+30=24<0 Maximum

3. Utility function(u)= 5 + 2

Constraint 4xi+2x2=28

Maximization of utility

L=objective function + (constraint)

L=51 + 22 + (41 + 22 28)

= 51 + 22 + 41 + 22 28

= =0

1

= = (51 + 22 + 41 + 22 28)

1 1

5

1 = + 0 + 4

1

5

=

41

= (51 + 22 + 41 + 22 28)

2

2

= 0 + + 0 + 2 0

2

2

=> + 2 = 0

2

1

=

2

= (51 + 22 + 41 + 22 28)

= 0 + 0 + 41 + 22 28

=> 41 + 22 = 28 .(1)

5 1

= =

41 2

5 1

=

41 2

5x1=4x2

4x1-5x2=0 ..(2)

Solving 1 and 2

4x1-5x2=0

41 + 22 = 28

We get 7x2=28

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